Russia : oil : Awash in Petrodollars


Richard Moore


November 15, 2005 

Awash in Petrodollars, Russia Frets About the Paradoxes of Bounty 

MOSCOW, Nov. 10  - A few years ago, Russia's finance
officials could only dream of the problem Aleksei L.
Kudrin described recently.

Thanks to bountiful revenue from oil exports, the Kremlin
is in a position to pay $15 billion in sovereign debt
ahead of schedule next year.

"We would be ready to pay the whole sum," Mr. Kudrin,
Russia's finance minister, explained recently to a group
of investors.  Other countries, however, are not
permitting Russia to accelerate repayment because of other
obligations tied to the debt.

Mr. Kudrin's comments illustrate an economic challenge -
and a fierce internal debate - novel for Russia, which
only seven years ago defaulted on its debt.

As the world's second-largest oil exporter, behind only
Saudi Arabia, Russia is taking in $500 million a day from
crude oil exports and the cash is gushing faster than the
nation can absorb it without causing inflation.

Russia is still a relatively poor developing country, and
with obvious needs to fix decades of accumulated
infrastructure problems and pull an estimated 25 million
Russians out of poverty, it has no dearth of things to
spend money on.

If it does not manage smartly, however, Russia's
embarrassment of new riches can turn into a classic
paradox of good times, one that economists call the Dutch
disease, afflicting energy-exporting countries.

The government is pulled in many directions.

"My pension is tiny," said Lina S. Martinyenko, 76, a
widow selling plastic bags of pickled cabbage on a Moscow
sidewalk to supplement her pension of $98 a month. "I have
to pay for my apartment. Groceries are expensive. What I
grow in my garden I haul out here to sell. Life is not
simple for us."

The challenge with Dutch disease - the name for what
happened in the Netherlands after the discovery of North
Sea gas in the 1960's - is that as more and more oil
dollars come back to Russia, they are converted to the
local currency, raising the value of that currency, along
with the threat of inflation.

For Russia, the threat is that its manufacturing will
decline as its goods become more expensive overseas, while
imports rise as they become cheaper at home, leading to a
de-industrialization of the economy. The problem is
exactly the reverse of Russia's chronic economic troubles
with a weak ruble in the 1990's.

"It always goes badly for Russia," Irina E. Yasina,
director of the Open Russia research institute, fretted.
"It's bad when we don't have money and bad when we do."

Still, Russia is better off with its current problem than
it was a few years ago.

Some of the impact is already surfacing, as Russia is
starting to rearm itself. For the first time in a decade,
the government is buying more of Russia's arms production
for the country's own needs rather than to resell as

Spending on military hardware will rise 50 percent next
year, Gen. Yuri N. Baluyevsky, the chief of the general
staff, told the government newspaper Rossiskaya Gazeta in
an interview published recently.  The 2006 budget includes
money for everything from new Sukhoi fighter jets to such
prestige-enhancing items as lambskin hats for Russia's
generals, an accoutrement abandoned by Boris N. Yeltsin
when he was president in leaner times, in 1993.

On Nov. 1, Russia's Stabilization Fund reached $38
billion. It is projected to exceed $50 billion by the end
of the year. Under the law that created it, the fund can
be used only to pay down foreign debt or top off the state
pension fund.

The World Bank, in a report released this month, said the
appreciation of the ruble had already harmed domestic
production. "Many industries are struggling," the report
said. The ruble appreciated by 7.3 percent against a
basket of currencies in the first nine months of this
year, the bank said.

Russia missed its 10 percent inflation target last year,
registering growth in prices of 11.7 percent. This year,
inflation is running about 11 percent, according to Andrei
N. Illarionov, President Vladimir V. Putin's economic
adviser. High inflation threatens domestic industry and
undermines gains in living standards.

Beginning in 2004, fears of inflation led Mr. Illarionov
and other liberals in Russia's government to isolate oil
revenue in the  Stabilization Fund, modeled on a similar
fund in Norway and the Alaska Permanent Fund. The money is
kept out of circulation. For a time, that settled the
question of what to do with the billions of dollars.

But Russia now intends to begin spending from its
specialized oil revenue accounts through the creation of a
second fund. The proposed new fund would invest in
infrastructure through loan guarantees or co-financing
backed by the oil tax income.

Even with inflationary constraints brought by the ruble's
floating on international markets, the Kremlin is
financially stronger than at any time since a similar
spike in oil prices in the early 1980's.

Back then, the Soviet Union threw oil revenue into the
final sprint of the cold war arms race, largely ignoring
the rest of the economy, and plunging into the reforms
begun by Premier Mikhail S. Gorbachev only after the
prices came back down.

This time, Mr. Putin has suggested completing the
Boguchansk hydroelectric dam in eastern Siberia, which was
begun in Soviet times but was abandoned half finished.
Russian news media floated the idea of finally completing
the Baikal-Amur railway, another epic Soviet-era
undertaking left unfinished.

Viktor B. Khristenko, the minister of energy and industry,
is pushing a plan to use the new investment fund, expected
to reach about $2.4 billion next year, to revive
production of the Ruslan cargo jet, a Russian aviation
behemoth able to carry 150 tons, the largest such jet in
the world.

The government Web site posted a strategy paper on
"measures intended to speed up growth and improve the
competitiveness of the economy." It encouraged the
creation of a government-owned venture capital fund for
high- tech companies.

For now, the money from oil-related taxes - which kick in
at oil prices above $20 a barrel - has simply been
stacking up in an account in the Ministry of Finance. The
money has not been invested in stocks or bonds and yields
no interest,  although it has appreciated along with the
ruble's oil-driven rise in value against the dollar.

In a change of policy, the Finance Ministry said last
month that it would invest the funds in foreign bonds and
currency under a plan developed by Russia's Central Bank ,
another institution brimming with petroleum cash these
days. The bank's foreign currency and gold reserves
reached $164 billion on Oct. 28. Mr. Kudrin, whose
ministry wants to tame inflation and use the funds mainly
to pay down sovereign debt, has his detractors. Just about
everybody else in government wants to start spending,
either on infrastructure, social needs or re-arming the
military, an option favored by a hard-line faction in the

Mr. Putin is moving cautiously.  He recently urged
restraint in spending, even as Russia faces many problems,
and suggested continued commitment to the Stabilization
Fund and large foreign debt payments even as domestic
spending rises. Mr. Putin's political image is that of the
guardian of stability; roller coaster exchange rates or
inflation set off by mishandling money from the oil boom
would hurt him politically.

Russia could "take advantage of the foreign economic
situation which today favors our country and become mired
in long-term projects," he said. But "in case the
situation changes we would again have to incur debts in
order to complete the projects started or cut spending

But then again, Mr. Putin also knows how to spend. At a
Kremlin meeting with lawmakers in September, he also
promised an additional $4 billion to raise doctors'
salaries and other social spending next year.

Copyright 2005 The New York Times Company 


"Apocalypse Now and the Brave New World"

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