Accessibility links

Breaking News

Russia: Economy Faces Test As Oil Prices Weaken

Russia has issued a series of conflicting statements on its oil exports as OPEC struggles to maintain prices during the terrorism crisis and fears of an economic slump. The outcome could determine the course of Russia's own economy.

Boston, 2 October 2001 (RFE/RL) -- Russia may be facing a major economic test as oil prices weaken in the wake of the 11 September attacks on the United States.

A subsequent meeting of the Organization of Petroleum Exporting Countries in Vienna decided to keep production unchanged for fear of tipping economies into recession and further dampening the world demand for oil.

Prices firmed only after Saudi Arabia on 27 September said it would do whatever is needed to prevent a price collapse. Still, prices spent most of the week below OPEC's band of $22 to $28 per barrel, prompting fears that producers could soon suffer the effects of an uncontrolled slide.

The problem may be especially risky for Russia, which has made the most of its observer status in OPEC by boosting production while member nations make cuts to keep prices high. Russia has earned huge profits from the practice, while OPEC producers have been tightening their belts.

In the first seven months of this year, Russia's crude-oil exports jumped 20 percent, giving it an extra $2 billion in revenue, the Interfax news agency reported. In the same period, OPEC nations cut production by 3.5 million barrels per day to prevent prices from falling too far.

Russia has repeatedly pledged cooperation with OPEC policy since the price plunge of 1998, but it has steadily raised its output and exports to fuel its own recovery instead.

But there are signs that OPEC has now had its fill of this practice.

On 29 September, the "Financial Times" reported that, "OPEC is showing increasing exasperation at non-member producers getting a 'free ride' on the back of its efforts to prop up oil prices." The paper quoted Nigeria's senior oil adviser, Rilwanu Lukman, as saying that members "cannot be expected to go on cutting production and reducing market share to have prices from which all producers benefit."

The result of this tension could prove crucial for Russia, which produces more oil than any OPEC country except Saudi Arabia.

In an RFE/RL interview, Julia Nanay, a director of Petroleum Finance Company, a Washington-based consulting group, said: "The Russian budget depends on oil. The lower the price is, the worse it is for them."

Early drafts of Russia's 2002 budget were based on oil prices of $17 per barrel for Urals crude, but later versions have included an "optimistic scenario" of $22 per barrel.

Urals crude for delivery to the Mediterranean spent much of the week of 24-28 September around $20 per barrel. It finished on 28 September just 22 cents below the budget target.

In August, Anton Siluanov, head of the Russian Finance Ministry's macroeconomic department, said the government had based its spending on $18 per barrel as a "safeguard," the Reuters news agency reported.

But Finance Minister Alexei Kudrin recently gave assurances that the government was right in assuming that oil prices would remain at $23 per barrel, according to RIA Novosti.

No matter what the assumption, it is far from clear that officials have planned for a drop in both prices and production. An output cut could be unavoidable if world demand suffers a decline.

Russia's Economic Development and Trade Ministry recently forecast that the country's oil exports would grow by 3 percent next year, according to figures reported by Interfax. The ministry also assumed that world prices would range from $24 to $25 per barrel, a level that has already been breached.

The projections suggest that Russia has no plans to cooperate with OPEC, despite its assurances.

Speaking in Vienna, Russian Energy Minister Igor Yusufov said that Russia's growing economy could absorb some of its increasing oil production, the industry newsletter Petroleum Argus reported.

Yusufov said, "We hope that will be reason to reduce Russian exports." The statement seemed to contradict the forecast of the Economic Development and Trade Ministry.

In an apparent contradiction, Deputy Prime Minister Viktor Khristenko announced on 28 September that Russia would cut oil exports to non-CIS countries by 1 million tons in the fourth quarter of this year, the "Moscow Times" reported. But it was unclear that the token decrease, equal to only about 80,000 barrels per day, would keep exports from hitting record levels.

Russia may be betting that the world security crisis will have more effect than its economic troubles, causing oil prices to rise rather than fall. So far, the opposite has been the case.

President Vladimir Putin has offered to use Russia's oil production to offset any problem with supplies. But OPEC's worry is that there may already be too much oil.

Russia seems to be hoping that it can keep on reaping rewards from OPEC's struggles. But its fortunes may quickly follow those of other oil producers if prices fall.