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Central Asia/Russia: Analysis From Washington -- Falling Oil Prices Affect Politics

Washington, 20 March 1998 (RFE/RL) -- The dramatic decline in world oil prices has had a dramatic economic impact on current and potential petroleum exporters in several post-Soviet states.

And these economic consequences seem certain to have some serious political consequences both for Russia which is a major exporter already and for countries in Central Asia and the Caucasus which hope to pay for their national development by exporting petroleum.

Russian oil companies have been hard hit by the decline in world oil prices from $22 to under $13 a barrel in recent months. Moscow energy ministry officials reported this week that their losses as a result of the fall in the price of oil were now on the order of $500 million.

This price slide has hit many regions of the country hard, forcing First Deputy Prime Minister Anatoly Chubais to announce on Wednesday that the Russian government is considering special relief programs for the petroleum sector.

Even more, it has cost Moscow significant tax revenues. In the past year, more than half of all taxes paid came from the previously profitable oil business. And it has led to predictions that the privatization sail of the country's giant Rosneft oil conglomerate will bring in far less income than had been predicted only a few months ago.

But as great an impact as the oil price slump has had on the Russian Federation, its impact on those countries in Central Asia and the Caucasus that hope to become major exporters may prove to be even greater both economically and politically.

Since the collapse of the Soviet Union in 1991, Western firms have been interested in developing the enormous oil reserves of the Caspian basin because high oil prices meant that they could expect to make a handsome profit even if the costs of moving the oil from the region to Western markets remained very high relative to other sources of oil.

As the price of oil has declined, however, the ratio of costs to benefits has shifted. And at least some of the major western oil companies are contemplating reducing their efforts to develop fields whose oil would cost far more to export.

And Western governments have supported these efforts by private firms in order to have an additional source of oil not subject to the vagaries of the politics of the Middle East. But the current oil glut has led many of these governments to focus on other issues.

For the countries of the region, any decline in Western interest corporate or political has both economic and political consequences.

On the one hand, such a decline in attention costs them money both for the development of their economies and for the support of the development of their independent statehood. That by itself both weakens them politically and reduces their standing internationally.

And on the other, any decline in Western interest and attention, a trend likely to accelerate if falling oil prices lead Western companies to turn away from the region or to slow their investment programs inevitably leaves them more subject to Russian influence.

Not only would such expanded Russian influence have an impact on the political development of these countries and Russia as well, but it would almost certainly change the balance of geopolitical power in this region away from the West.

In the short term, that might not matter to many in the West. But in the longer term, when oil prices inevitably rise again, such a shift could have dramatic consequences for Western countries as well, leaving them more exposed to pressures from oil suppliers in the Middle East or in Russia.

Because the lead time for the development of oil resources is very long, most Western firms and the governments that back them are unlikely to completely turn away from their current petroleum development projects in the Caucasus and Central Asia.

But even small shifts, driven by the desire of companies to show continued high profitability to their shareholders, are likely to affect the peoples and governments of the countries of this region in ways that a renewed commitment to developing Caspian basin oil sometime in the future may not be able to reverse.