RUSSIA CONFIDENT OF MANAGEABLE FISCAL SITUATION DESPITE LOWER OIL PRICES.

The Russian government has sought to reassure the public and foreign investors on several fronts. Despite the dire warnings of OPEC that a failure to coordinate the recommended production cutbacks could bring world market oil prices to as low as US$10 per barrel, the Russian Ministry of Economic Development and Trade has stated its confidence that on average, the price would not drop below US$18.50 per barrel in 2002 and thus spending and revenue targets in the 2002 budget will not be endangered. Russia has agreed to cut oil production and exports by 50,000 barrels per day in the fourth quarter of this year and will agree to cut back further in the first quarter of 2002 as well in support of OPEC’s efforts to support oil prices (OPEC had implied that Russia should be expected to cut back 200,000 barrels per day, or 2.8 percent of its current daily production). Nonetheless, the Ministry of Economic Development and Trade spokesman indicated that production cutbacks will not be considered after the first quarter of next year. The government has made it clear that attracting investment in the oil sector and boosting oil production are key objectives.

The Kasyanov government had deemed it important to give the impression that Russia would share some of the burden of the attempt to stabilize the world market price of oil. Some of the oil majors, notably LUKoil, shared that position. YUKOS, on the other hand, has been wary of such an agreement, arguing that the Russian oil sector needs to cultivate an international image as a stable business partner. In the first eight months of this year, production of crude oil and gas condensate by LUKoil has increased only 1.6 percent relative to the same period in 2000, while the comparable figure for YUKOS was 17.9 percent growth.

The Finance Ministry gave public assurances that substantial financial reserves had been built into the 2002 budget so that expenditures would not have to be cut to avoid a cash deficit even if the average price of oil were to sink to US$18.50 per barrel. In September-October 2001, according to the Ministry of Economic Development and Trade, the weighted average price of Urals crude was US$160.90 per metric ton or US$22.02 per barrel. The price of Urals crude is typically US$1.50 per barrel below that of Brent, the marker crude whose price is typically used as representative of the world market price of oil. The price of Urals crude peaked at US$31.24 per barrel in November 2000. When the budget for 2001 was drafted, the assumption was for US$21 per barrel oil. Thus, the Finance Ministry has a record of conservative assumptions on oil revenues in the budgetary process. With the prospect of further deceleration of economic growth worldwide and in light of OPEC’s inability to orchestrate a round of oil production cutbacks shared proportionally by non-member producers, however, oil prices could fall even more sharply in coming months.

The 2002 budget had its third reading in the Duma on November 30. Prime Minister Mikhail Kasyanov went even further than the Finance Ministry, stating that with the changes introduced into the budget legislation for 2002, there should be no problems in meeting planned expenditures out of anticipated revenues even if the price of oil were to fall to an annual average of US$12 for next year. The legislation is scheduled for its fourth and final reading in the Duma on December 13 and should be sent on to the Federation Council for its approval (PlanEcon Report, vol. XVII, no. 20, November 2001; Interfax, December 3).

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