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Russia: Oil Companies May Profit From Changes In World Market

After a year of political turmoil and economic depression, Russia may be poised to benefit from profound changes in the world market for oil. In this report, RFE/RL correspondent Michael Lelyveld explains why.

Boston, 8 September 1999 (RFE/RL) -- In recent months, it has become evident that two major trends have been reversed with the rise in world oil prices and the recovery of Asian economies. In 1998, slumping oil prices and the Asian currency crisis were blamed for the ruble collapse of August 17.

The doubling of world oil prices this year and the expected return of Asian demand are already being reflected in the statements and planning of Russian oil companies. Last week, a top Lukoil official told the Financial Times that Russian domestic oil prices will soon rise to world market levels as a result of the tightening market.

If such an increase takes place, Lukoil and other oil giants could reap enormous profits. The companies are already enjoying a dramatic drop in domestic costs, thanks to a 400 percent decline in the ruble's value since the August 17 crash. Lukoil has been taking advantage of world market prices of over $21 per barrel, while its costs are only $3 to $4. Some Russian oil companies have actually used their improving fortunes to pay their taxes to the government, a welcome change from the past.

But the interview with Lukoil Vice President Leonid Fedun also contained another remarkable prediction. Fedun said that despite government pressure, Russian oil companies would increase their exports, now that technical problems with pipeline capacity limits have been overcome.

Oil producers have been operating since July under a "gentleman's agreement" to supply the subsidized domestic market after the government initially threatened to hike export duties because of rising gasoline prices.

But the Lukoil statement suggests that Russian companies now expect to play by the same rules as their Western counterparts, seeking the highest available prices for their products on the open market. The prediction of increasing exports is remarkable on at least two counts.

First, it shows a willingness to resist the government at a time when it is particularly eager to keep domestic prices in check because of approaching elections. Although low by European standards, Russian gasoline prices have already more than doubled this year.

The Russian producers are also ready to take advantage of increases in world prices that have been engineered by the Organization for Petroleum Exporting Countries and cooperating governments.

When OPEC agreed last March to cut production by 2.1 million barrels per day to lower excess inventories, Russia pledged only a token reduction of 100,000 barrels per day. It is now apparent that it has not lived up even to that promise. Instead, Russia has profited from the cuts that other countries have made.

Last week, the Russian energy ministry said that the country delivered 31.6 million tons of crude outside the Commonwealth of Independent States in the third quarter, the same amount as in the second quarter of the year. The figures are 10 percent to 17 percent higher than the export targets set by Russian Fuel and Energy Minister Viktor Kalyuzhny in June to comply with pledges to OPEC.

OPEC has so far refrained from public criticism of Russia, perhaps to avoid calling attention to the lack of compliance with its cuts. Lukoil's plans to increase exports even further could lead to conflict with both the Russian government and OPEC nations, unless both are willing to keep looking the other way.

Ordinarily, the Russian economy might be expected to improve as a result of the better external conditions. But reports suggest that although Russia may be poised to benefit, there may be little effect on the economy as a whole.

While the ruble could be expected to strengthen after two consecutive quarters of higher oil exports and prices, it has in fact fallen because of lower reserves to support it, amid pressure brought on by the alleged money-laundering scandal at the Bank of New York. The scandal also gives little confidence that higher profits in the oil industry will find their way into the economy or help the average Russian.

Instead, the resources which Russians once regarded as their own may now come back to them in the form of higher-priced oil that they cannot afford. If the ruble keeps dropping, relative oil prices will rise on the domestic market beyond the reach of consumers. The oil industry may enjoy even lower costs, but it will also seek prices equal to those available abroad. The problem may provide a rich issue in the coming elections. Populist parties may ask what happened to the benefits from allowing Russian oil companies to operate like private companies. Considering the concern over corruption and privatization, many reformers may be asking the same thing.