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Russia: Moscow Takes Advantage Of OPEC By Increasing Oil Production

As OPEC announces plans to cut production, Russia is preparing to boost its oil output this year. The move continues Moscow's strategy of taking advantage of OPEC prices without paying the cost of observing the cartel's quotas. But Russia's increase could offset 20 percent of the OPEC cuts and affect its relations with member nations. Our correspondent Michael Lelyveld reports.

Boston, 22 January 2001 (RFE/RL) -- Russia's increase in oil production last year and its plans to raise output in 2001 are signs of the benefits that the country enjoys from OPEC policies without the burdens of membership.

In the past week, Mikhail Zadornov, deputy chairman of the State Duma budget committee, said Russia plans to boost crude oil production by 5 percent this year. The projected rise follows a 6 percent increase in oil output last year, topping analysts' estimates.

Rising oil prices have been given much of the credit for Russia's gains since the country's economic crisis in August 1998. The higher oil prices, in turn, were the result of the decision by the Organization of Petroleum Exporting Countries to cut production sharply in March 1999.

Russia's latest plan to raise oil output even further comes despite the recent OPEC move to cut production by 5 percent in order to support sagging prices. Zadornov is quoted as saying that Russia is not a member of OPEC and should not abide by its decisions.

Russia's oil output last year averaged nearly 6.5 million barrels per day, a level that would make it the second-biggest OPEC producer after Saudi Arabia, if it were a member of the 11-nation cartel. By raising production to the target level this year, Russia would offset more than 20 percent of the OPEC cut of 1.5 million barrels per day that the group has announced.

When OPEC imposed its original round of cuts in 1999, Russia pledged a token reduction of 100,000 barrels per day to support the action. Instead, it increased its output in 1999. Although its exports outside the CIS dropped by a slight 2 percent that year, its oil export revenues soared over 37 percent, thanks to OPEC-inspired prices.

It now appears that Moscow is ready to follow the same strategy this year of reaping the gains from OPEC decisions without bearing the pains of production cuts.

News of the plan comes less than a week after Deputy Foreign Minister Viktor Kalyuzhny visited Tehran and voiced Moscow's support for Iran's stance in OPEC. Iran has been arguing to keep even more oil off the market. Russia's move to increase output means that it has offered nothing more than moral support.

The effect of Russia's policy is unlikely to be lost on OPEC nations like Iran. While the OPEC members are decreasing their production, they are sacrificing some oil revenues in order to keep prices high. When Russia raises its output, it gets the double-benefit of higher prices and greater volume. The result is essentially a transfer of wealth from OPEC countries to Russia and an increase in its market share.

Last September, Venezuelan President Hugo Chavez said after meeting with President Vladimir Putin that Russia was "seriously studying the possibility of becoming a member of OPEC." A day later, Prime Minister Mikhail Kasyanov said Russia was only studying whether such a move would be in its interest. Two weeks after that, Energy Minister Alexander Gavrin dashed the idea, saying there were no plans to join OPEC. Membership would mean having to observe production quotas.

Russia's free ride on OPEC policies was downplayed in 1999 because of the country's fragile economic recovery from the 1998 crisis. Last year, it could be argued that higher production was driven by economic growth, which leads to higher energy demand.

But it may be hard to make that case in light of Russia's export figures. The country's oil exports rose some 15 percent while production was up 5 percent. Russia's gas exports rose even though production fell.

In other words, Russia's efforts were aimed primarily at taking advantage of higher export prices, not at fueling the Russian domestic market. The profit motive is much the same for Russian and Western oil firms.

The difference is that Russia has tried to establish a uniquely favorable position for itself. While voicing support for OPEC decisions, it has pursued its own interests as a non-member. At the same time, it has reaped higher earnings from selling oil to industrialized nations and then delayed debt payments to those same nations, arguing that the cost is too high.

Moscow could soon find that its strategy of gaining maximum advantage has reached a practical limit. One such sign in the past week is the warning issued by German Deputy Finance Minister Caio Koch-Weser that Russia might not be allowed full membership in the Group of 8 industrialized nations unless it pays its debts. The statement seems to have brought a quick response from President Putin, who ordered the government to reassess its position.

OPEC nations could also come to the end of their patience with Russia, if it appears that its plan to take advantage of the oil market also means taking advantage of them.