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CIS States In Shadow Of Energy Revenues

  • Bruce Pannier

Azerbaijan's first oil boom dates back to the end of the 19th century.

Azerbaijan's first oil boom dates back to the end of the 19th century.

Soaring oil and gas prices have been a boon for energy-exporting countries, including Commonwealth of Independent States (CIS) members Russia, Azerbaijan, Kazakhstan, and Turkmenistan. But more recent events have prompted forecasts that decreasing demand could deflate those same countries' revenues from energy exports. How low do prices need to get before they significantly affect those same economies, and how soon might those effects start to show?

Russia, Azerbaijan, Kazakhstan, and Turkmenistan have vast deposits of oil and natural gas and sit between two of biggest energy consumer markets in the world: the European Union and China. Their fortunes are bright today, but is there a chance they may be relying too much on their hydrocarbon wealth?

Russia And 'Everyone Else'

Federico Bordonaro, Europe editor and senior analyst at equilibri.net, an Italian organization that provides conflict analysis, noted differences between the positions of Russia, on one hand, and countries like Azerbaijan, Kazakhstan, and Turkmenistan.

"These [latter three] countries are obviously dependent upon oil and natural-gas exports," he said, "so we can say that in the last few years their economies have performed very well, especially because of their revenues that are dependent on exports of oil and natural gas."

Bordonaro added that Russia differs from those other three in that it has other significant exports, like weapons, that bring in huge profits to the state.

But Charles Esser of the Brussels-based International Crisis Group stressed that energy exports remain one of the main foundations of all four economies.

"I'm looking at some figures here for the Russian state budget -- oil and gas revenue is still about [one-]third of the total revenue of the country, at least," Esser said. "So you still have an enormous dependence on oil and gas revenue. President [Dmitry] Medvedev has said that Gazprom contributes about 20 percent of the federal budget's revenue; he said that in May this year."

But Russia's one-third is small compared to the share of oil and gas revenues in the economies of Azerbaijan, Kazakhstan, and Turkmenistan. Azerbaijan's GDP increased by 26 percent in 2005, and the oil and gas sector accounted for 42 percent of the GDP that year, according to the Asian Development Bank. In 2006, the Baku-Tbilisi-Ceyhan oil pipeline started operating with an output of some 1 million barrels per day.

By 2005, Kazakhstan's oil and gas sector accounted for some 70 percent of that country's exports. And Kazakh fortunes have improved on the strength of oil revenues.

"Kazakhstan, in Central Asia, has a larger economy than the other four Central Asian republics combined," Esser pointed out.

Economic statistics from Turkmenistan have always been impossible to independently verify but the mostly desert country has few other exports that could account for the Turkmen government's reports of double digit GDP growth the last few years.

Tough To Plan

With oil prices hovering around $100 per barrel in mid-September and natural-gas prices expected to increase by up to 50 percent, the short term looks promising for Russia, Azerbaijan, Kazakhstan, and Turkmenistan.

But Esser said one needs to consider what the price of those commodities must be to ensure that their budgets are balanced.

"Azerbaijan had budgeted about $70 per barrel, Kazakhstan had it even lower, it was $61 per barrel. So depending on what the budget price is, there's certainly room for the oil price to fall from the recent highs and still for these countries to be in a good fiscal position," Esser said. "Looking forward, perhaps some of the more optimistic forecasts for the budget price, for example in Russia they were looking to have in 2009, a $95 per barrel price, that might seem to be optimistic now."

Bordonaro noted that "oil prices were so high that we could say it was an anomaly this last year."

"Let's not forget that in 1998-99, oil was between $9 and $10 per barrel and that when oil starts to climb above $40 [or] $50 per barrel, this is considered to be high by most experts," Bordonaro said. "And it is difficult to say what level it would have to [decrease] to before we start to really appreciate a strong and immediate impact upon the Russian economy especially, but certainly what happened these last two weeks is not enough to impact so much -- first of all, because oil is still high; and second because, at this moment, I think that oil prices are unpredictable. It is always one of the most difficult prices to predict, but at this moment it is particularly unpredictable."

Both Bordonaro and Esser emphasized that oil and gas prices are unlikely to fall abruptly anytime soon, although Bordonaro noted that in Russia's case the falling price of oil -- combined with other factors -- can lead quickly to economic problems.

"What is important, I think, is that we should look at the impact of the falling oil prices on stock markets; and I think that the Russian stock market has been caught between -- on one side, the political risk that was subsequent to the Russo-Georgian war of August, and on the other side, to the falling oil prices," Bordonaro said. "Now, this has done lots of damage to the Russian stock markets and I think that although the Russian authorities have displayed calm in the face of this dramatic drop in the Russian stock markets...the damage was a blow that should not be underestimated by Moscow."

Bordonaro and Esser pointed out that falling oil prices should be a call to CIS energy exporters to diversify their economies.

"The ruling elites in these countries are not the best people to diversify the economy because their very prosperity and their very success was based precisely on the strong insistence on this kind of energy-based economy and it is unlikely, in my view, that they will be able to diversify," Bordonaro said.

Some might argue that the real oil and gas boom has not yet arrived for those four CIS countries, and that that boom shouldn't start for at least five more years, when a series of new oil and gas exports pipelines should start operating toward both the West and the East.

Under that scenario, peak production is envisioned to be a decade away, when oil fields like Kazakhstan's Kashagan and gas fields like Russia's Shtokman and others start producing.
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