INTERNATIONAL DEVELOPMENTS INCREASE UNCERTAINTY FOR RUSSIA’S BUDGET AND ECONOMY.

Publication: Monitor Volume: 7 Issue: 176

International political developments are likely to have a significant effect on Russia’s economy and public finances because the prices of oil, gas and other commodities may change significantly in the short- to medium-term. The draft 2002 federal budget is based on the assumption of an average oil price of US$22 per barrel. The Finance Ministry has been hoping that in reality world oil prices will be about US$23.50 a barrel next year. Extra revenues are to be accumulated in a reserve fund to help Russia pay its foreign debts in 2003. Until now, the situation on the world oil market has been favorable for Russia’s budget as oil prices have been at relatively high levels. However, the worldwide economic slowdown and the terrorist attacks on the United States have introduced a greater degree of uncertainty into the picture. Oil prices have become less predictable, leaving Russia exposed to substantial downside risks as well as the possibility of an additional windfall. Although energy prices tend to rise substantially during wars and periods of heightened international tensions, the U.S. administration has already started pressuring OPEC countries to increase oil supplies to world markets in order to reduce oil prices. Reportedly, the most acceptable price for Washington is US$20-$22 a barrel. OPEC has not yielded to U.S. pressure so far, and has not increased oil extraction. However, if world oil prices do fall to US$20-22 a barrel next year, the Russian government will have no money for the reserve fund (Nezavisimaya Gazeta, September 19). Moreover, it may have to reconsider the main parameters of the draft budget for 2002 and return to international capital markets sooner rather than later. Nonetheless, Finance Minister Aleksei Kudrin is confident that the 2002 budget will be approved on its first reading as scheduled on September 28.

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