A rchive Date
[ 18-08-2005 ]
Category
[ International Relations ]
sub-Categoy
[ Russia ]
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[http://money.canoe.ca/News/TopPhoto/2004/10/29/692137.html
Those oil rich Russians
By ALEX NICHOLSON
2004-10-29 08:21:05
MOSCOW (AP) - Six years of economic growth fed by high oil prices have given President Vladimir Putin's government a pleasant but crucial dilemma: how to spend its windfall.
While Russia's treasury was already filled thanks to the economic boom, soaring oil prices this year have swelled it even further with taxes and duties levied on the oil industry's hefty profits. On Wednesday, Russia's parliament approved the latest oil-driven amendments to the 2004 budget, revising its estimated surplus to the equivalent of $17.6 billion, up more than 500 percent from $2.9 billion in the original budget.
The government has said $695 million would go toward propping up Russia's flabby and inefficient military as well as bolstering state security in the wake of a series of terror attacks this year.
But the bulk of the government's budget surplus isn't being spent - yet. It's being absorbed by a rainy-day stabilization fund created from windfall oil profits, and government officials and executives are tripping over themselves to try to get a piece of the fund.
Economists estimate that the fund, which was created in December, takes some 90 percent of oil companies' profits over $25 per barrel. Oil is currently trading in the mid-$50 range.
As of the beginning of October, the fund contained $13.7 billion, according to the Finance Ministry; once it swells to $17.4 billion at the start of 2005, the excess can be used.
The government's decision to save its oil money is at odds with the increased spending by millions of Russians. Oil has raised the standard of living, particularly in Moscow, where Mercedes and Jaguars dart among the Ladas and Volgas and new designer boutiques and upscale restaurants spring up daily.
Throughout Russia, retail sales have grown at a phenomenal rate of about 30 percent per year, according to Renaissance Capital data, with Moscow accounting for one-third of total sales countrywide. Not surprising, sales of premium goods and assets - be it of cars, clothes, apartments or even beer - are soaring.
The government has used its surplus - money that hasn't gone into the oil fund - to make payments to teachers, doctors and pensioners on time. That's a big change from the past - during Boris Yeltsin's years in power, federal and regional administrations around Russia regularly delayed public-sector salaries and pensions for weeks or months on end, something Putin has vowed to correct. But there's debating rather than spending when it comes to the money in the oil fund.
While Finance Minister Aleksei Kudrin has said the fund should only be used to pay down external debt - Russia is set to pay between $3 billion and $4 billion by the end of 2004 - and finance a gap in the country's pension fund, pipeline operator Transneft, national electricity utility Unified Energy Systems and others are hungry to dip in for their own projects. Transneft, for example, wants to expand its pipeline capacity.
Peter Westin, economist at Aton investment bank, says the government should keep accumulating cash for now.
"Until you have a good cushion, the bear should keep its hands out of the honey pot," he said.
Westin said the beneficiaries of any excess funds should be the industries that suffer most from having to pay the higher oil prices, such as agriculture and the transport sector.
One problem with the oil money fund is that there are no rules yet for how the fund can be spent. Observers fear that there could be opportunities for massive embezzlement.
"If you are going to spend it, you need to put a mechanism in place to ensure that it doesn't just get stuffed in officials' pockets," said Al Breach, economist at investment bank Brunswick UBS.
Other analysts are concerned that the fund is draining money away from the Russian economy. Yevgeny Gavrilenkov, chief economist at Troika Dialog, said the fund was slowing growth and he suggested that reducing the flow of revenue into the fund - by cutting oil taxes and duties - would help to accelerate the economic expansion.
As well as encouraging investment in the sector, lowering taxes would increase the volume of funds oil companies keep in the banking sector, adding liquidity to the economy as a whole, he said.
Business confidence in Russia has been rattled after the yearlong, politically charged clampdown on its biggest oil company, Yukos; a banking crisis of confidence earlier this year and a perception that the government's economic policies are hazy.
While the Kremlin casts an ongoing tax case against Yukos and its jailed billionaire owner Mikhail Khodorkovsky as a battle against corruption and shady business practices, observers fear the apparent drive to neutralize Khodorkovsky's perceived political ambitions could lead to production interruptions as the company's prize assets are sold to cover multibillion dollar tax claims.
In a report released earlier this week, the International Energy Agency said Russia must boost investment in its oil sector $900 billion over the next 25 years if it is to compete in the long term with Saudi Arabia, the world's No. 1 oil producer. Higher taxes in the sector have reduced this incentive, the report said.
As long as oil prices remain high, investors will continue to pile into the Russian market. But while the good times roll, economists say, more should be done to overhaul and diversify the economy by weaning it of its reliance on oil.
"Clearly, we've had a slowdown on reform over the past year," said Westin of Aton. "But really a high oil price means government should be pushing through tougher reforms."
 World Fact Book (CIA)]
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