Russia: Problems Rise With Falling Oil Prices

The Russian economy is plunging into a crisis as oil prices fall and the government digs deep into its reserve fund.

"Persistent and for a really long time low oil prices will likely lead to currency devaluation and in the long run may eventually lead to budget deficit," Maria Gorban, senior researcher at the Centre for Economic and Financial Research at Moscow's New Economic School told IPS.

"As for private sector bailouts, my understanding is that a lot of this has taken place recently - including banks, retail economic networks and other sectors, but the big question is what can be the negative impact of this policy in the near future if the trend continues."

Windfall oil and gas profits have been a major source of revenue into the national reserve fund. But with oil prices down 70 percent since July last year, Russia is spending more than it earns. A significant part of the government's 215 billion dollar stabilisation fund will be spent to cover the budget deficit this year. The country is facing a budget shortfall of 124.6 billion dollars, or 5.4 percent of its gross domestic product (GDP).

The reserve fund came down from a peak of 597 billion dollars last year to less than 400 billion dollars at the beginning of this month, according to the Finance Ministry. The ministry is diverting the stabilisation fund into the reserve fund, designed to cushion the federal budget against a plunge in oil prices, and into the national welfare fund, designed to help Russia carry out pension reforms.

While reserves fall, spending commitments mount. The crisis means Russia's once-bulging state coffers are melting fast - with almost one-third gone as of January.

Karen Kostanyan, head of the Russia research department at Merrill Lynch, is tracking the level of Russia's fiscal reserves, and looking out for what she calls the capitulation threshold.

"We see that level at 300 billion dollars, which is basically the reserve fund and also some foreign currency reserves which are going to be six months of imports recommended by the IMF (International Monetary Fund) because the reserve fund is probably going to be necessary next year to cover the impending budget deficit."

Sergey Guriev, head of the New Economic School in Moscow, is pushing the idea of covering the budget deficit with borrowed money. Having cleared all sovereign debts in recent years, it is time now for Russia to tap foreign markets for funding, he says.

"Russia has paid off all its debts when oil prices were high, and now when oil prices are low, it will be able to borrow in the market because everybody knows once oil prices go up again Russia will repay."

Merrill Lynch's Kostanyan says Russia may be better off with lower oil prices if it wants to move away from the boom-bust of commodities suppliers. "Maybe in the long run it's better for Russia that oil prices stay low so that we diversify away from a commodities based economy, because otherwise the commodities cycle is going to hit us hard and hit us again and again."

Commodities - mostly oil - provide 40 percent of budget revenues through taxes and export duties, despite government efforts to diversify the economy from its dependence on crude.

"When the state spends money bailing out companies, especially those in the public sector, as a way of saving them from total collapse, this implies that the Russian government is simply substituting for foreign lenders which had previously funded capital expenditure by the Russian corporate sector," Eric Kraus, director of Otkritie Financial Corporation, a Moscow-based financial brokerage, told IPS. "Russian reserve funds were deposited with foreign banks and in G7 assets - primarily dollar bonds. That money is now being used to repurchase Russian corporate debt."

Kraus says that the private sector is also benefiting, but the problem is one of allocation of capital, the transparency of this process and the choice of beneficiaries, very much like the situation in the west. And in Russia too the difficulty is in getting banks to resume crediting the productive sector.

Anton Tabakh, an economist from Troika Dialog, an investment company in Moscow, told IPS that the reserve fund is declining due to capital flight from Russia and debt payments by companies. "Economic implications are obviously negative, even as fast growth of reserves was a temporary boom from oil prices. But now, after devaluation it is likely that decline would be halted."

Oligarchs in Russia as elsewhere get their "fair share" of support - at the expense of workers, consumers and especially disadvantage groups, Tabakh said. "Moreover, I think nationalisation is not a goal – the goal is for more enlightened government officials to promote growth and for the corrupt ones to take control of property and enrich themselves."

Russia had been growing economically with oil prices - but with low living standards, he said. A new option will be more attention to domestic development and less reliance on exports, he said.

[Fuente: By Kester Kenn Klomegah, IPS, Moscow, 25Feb09]

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