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Russia: How Are The Petro-Dollars Spent? --> An oil pipeline in the Russian Far East (ITAR-TASS) Russia is awash in oil and gas revenues, with tens of billions of dollars in energy windfalls pouring into the state coffers every year. Yet, at least every fourth Russian lives below the poverty line -- and the wealth gap is steadily widening. This is fuelling growing calls for the government to put more of the oil money into the hands of the population. But many economists say this is not necessarily a good idea.

MOSCOW, March 15, 2006 (RFE/RL) -- Russia is the world's largest exporter of natural gas and the second largest oil exporter, trailing only Saudi Arabia.

Over the past few years, Russia has been reaping the benefits of record-high oil and gas prices -- in 2005, its oil export revenues topped $100 billion.

But for the bulk of Russians, this wealth has failed so far to translate into higher living standards.

Various polls show that the gap between Russia's rich and poor is actually growing. While Russia's billionaires have considerably increased their fortunes in 2005, according to "Forbes" magazine, an estimated 25 to 30 percent of Russians continue to live below the poverty line.

The pressure is therefore growing on the government to spend more of its energy revenues on social needs such as education, housing, and welfare.

Stabilization Fund

More and more Russians are urging the government to reach into its stabilization fund, set up two years ago to store up some of the country's oil income. The fund is reportedly worth $55 billion.

But some economists warn against the dangers of freely tapping into these savings.

Yevgeny Gavrilenkov is a chief economist at Troika Dialogue, a Moscow brokerage firm: "I think that squandering this money is extremely inefficient and dangerous. This will push inflation even higher. Besides, the government has not come up with more efficient ways of distributing this money, and I'm not sure it will. So right now, in the current historical situation, it is therefore more advisable to accumulate these revenues than to spend them."

Russia's energy revenues certainly helped the country out of the severe economic slump of the late 1990s. But the government's reluctance to spend its new accumulated wealth suggests the Kremlin's economists are aware that these funds pose as much risk as opportunity.

After striking oil, many countries -- Venezuela and Nigeria for instance -- developed high inflation, economic overstimulation, and increasing dependence on the oil sector at the expense of other industries. In some cases, the per capita income actually dropped.

Norway Model

One nation, however, has been able to avoid the problems that have befallen all other oil-rich countries: Norway.

To avoid destabilizing its economy, Norway established a special Petroleum Fund for its oil revenues. It also set up a fiscal rule stipulating that no more than a few percent of this money can be spent every year. Norway is currently the second-richest country in Europe after Luxembourg.

In some respects, Russia is following in Norway's footsteps. It has created a similar oil fund and, like Norway, has channeled much of it into early repayment of international debt. Last year alone (2005), Russia paid off debts worth some $20 billion.

LUKoil President Vagit Alekperov (right) with ConocoPhillips CEO James Mulva in Moscow this week (epa)

But how, and in which quantities, Russia is planning to spend this fortune at home remains unclear.

Natalya Orlova, a chief economist at Alpha Bank, says Russia still lacks a clear strategy on how to convert the energy windfalls into higher living standards for the population.

The government, she says, is still wavering between two different approaches: "It [the money] can be used as in the Soviet Union in the 1970s, when this money from the sky was spent in the social sphere. There is another more complicated, lengthier option: finance investment and reduce the budget's [tax] income, temporarily replacing it with money from the stabilization fund, in order to give the economy more time to develop. All these strategies, in the end, correct social disparities and improve the social picture. But I would say that Russia has not yet chosen."

Russia has not taken any decisive steps in either direction so far. Spending in the social sphere has been sluggish. By contrast, expenditures for government, defense, law-enforcement, and security structures have increased sharply in recent years.

And while lowering the value-added tax (VAT) has been under discussion for about one year, talks have not materialized into concrete tax cuts.

Lacking Investment

The authorities have not done much either to develop investment -- both domestic and foreign.

At the beginning of the year, the government launched an investment fund that will directly finance a range of projects. But Orlova, despite applauding the move, says the sum allocated to the fund -- $2.5 billion -- is too small to bring significant change.

As for foreign investment, Russian President Vladimir Putin last year insisted he intended to retain -- and even extend -- the current policy of limiting foreign investment in a range of sectors, including natural resources.

Like Gavrilenkov, Orlova says Russia should focus on directing its oil savings towards consolidating the economy and generating stable, long-term benefits.

But she predicts that the government will not reveal its plans until the next presidential election campaign in 2008.

A homeless man in Moscow (epa file photo)

Being too cautious with the oil windfall also has its problems. It can become a source of public discontent -- even in Norway.

Bernt Aardal, the research director at the Institute for Social Research in Oslo, says Norwegians have been consistently demanding that more of the oil money flow their way: "There is a very heavy drive among Norwegians to increase the use of the oil money in order to solve a lot of social problems in Norwegian society, for instance in the health sector: improving hospitals, care for the elderly. There is widespread consensus in Norway that one should not use too much of it [the oil money], but the discussion is: what is too much?"

In Russia, the temptation to dig into the stabilization fund's tens of billions of dollars will likely be hard to resist.

Unlike Norway, almost all sectors are in dire need of funding, not least housing and health care, and the pressure to spend is already mounting from all sides.

Russia's Gas Strategy

Russia's Gas Strategy

RUNNING HOT AND COLD The crisis over Russian supplies of natural gas to Ukraine that erupted on New Year's Day has implications that spread well beyond these two countries and will impact both economic and political policymaking throughout Europe. On January 19, RFE/RL's Washington, D.C., office hosted a briefing the examined the ramifications of the natural-gas conflict.

CLIFFORD GADDY, a senior fellow at the Brookings Institution, outlined Russia's "grand energy strategy," in which Ukraine is perceived as merely an obstacle frustrating Russia's energy ambitions in Western Europe and therefore a nonentity in Russia's broader strategic planning. According to Gaddy, Russia's strategic goal regarding energy is to maximize the role of its own energy resources in the world energy markets, so as to increase its geopolitical influence. To do this, it must reduce competition and maximize dependency on its own energy resources, as well as ensure a stable supply.

TARAS KUZIO, a visiting assistant professor at George Washington University, rebutted Gaddy's argument, claiming that Russia's actions evidenced a complete lack of geopolitical strategy and resulted in strong denunciations by Western countries and a loss of political allies in Ukraine. According to Kuzio, Russian President Vladimir Putin's desire to have a deal signed by the January 4 European Union energy summit outweighed his hope of reinforcing opposition to Ukrainian President Viktor Yushchenko during the run-up to Ukraine's March 26 parliamentary elections.

RFE/RL Coordinator of Corruption Studies ROMAN KUPCHINSKY did not fully agree with Kuzio's assessments of Yushchenko or Ukraine. He outlined three major problems that are feeding the conflict between Russia and Ukraine. The biggest, he argues, is that the state-controlled Russian gas giant Gazprom holds a monopoly on natural-gas sales outside the CIS. Kupchinsky also decried Ukraine's consumption of natural gas, terming it "out of control." Corruption is also a major factor in the conflict, Kupchinsky said, although the extent to which it taints the deal struck between Russia and Ukraine remains unknown.


Listen to the complete panel discussion (about 90 minutes):
Real Audio Windows Media


Moscow's New Energy Strategy

Moscow And Energy Leverage

Russia's New Imperialism

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