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RUSSIA


  
  

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 433,491 346,520 310,000 16
         
GNI per capita
 US $ 2,610 2,140 1,750 97
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 383 (26/01/13)

Russia's economy looks set to dip in the next couple of years as the country's elite resist investment in non-renewable energy and continue to rely on well-tapped oil and gas discoveries made during the Soviet era.

The expectations for change that came with the protests in Russia last year against the re-election of Vladimir Putin's party into government and the man himself as President for a third term are fast dwindling. While the hunger for change is unabated among some sections of society and those in power remain undecided about how to move forward politically, the opposition remains fractured and is struggling to present a viable alternative. "I don't think we are at the end of the Putin era, but we are at the beginning of the end," says Edward Lucas, international editor of The Economist. Time will tell!

With the political system stagnant, it's likely that Russia's main concerns this year will centre on economics. The health of the Russian economy relies on oil and gas production and sales, and Russia is working within much narrower margins than it used to. Energy experts and economists say that Russia can only balance the books if oil prices remain between $100 and $110 per barrel, double the price that Russia needed to maintain its national budget five years ago. At the moment world oil prices are shifting between $90 and $100 per barrel and oil analysts forecast the price of Brent crude, the global benchmark, to reach $109.3 a barrel by December 2013, with the most optimistic, Barclays, anticipating $125 and the most pessimistic, independent consultant PK Verleger, expecting $75 a barrel. Colin Fenton, head of commodities research at JPMorgan in New York, says, “Be prepared for rising [oil] price volatility.”

Russia's oil production figures are impressive, yet misleading. Rosneft and Gazprom helped push Russian crude oil production to a post-Soviet-era high last year, with average production increasing by 0.1m barrels a day from 2011 levels to 10.4m barrels, placing Russia among the world’s largest crude producers, alongside Saudi Arabia. However, some analysts have questioned whether new oil fields are being developed fast enough for this increase in production to continue. Thane Gustafson, an expert on Russia’s oil industry at Georgetown University in the US, says that virtually all new Russian production has come from fields that were discovered during the Soviet period and a drop in Russian oil production is predicted for 2015 if more money is not put into exploration. At the same time, domestic consumption of oil is rising, meaning that Russia is exporting less, generating less revenue.

Meanwhile, increasing investment in shale gas by the US and some European countries is beginning to challenge Russia's dominance in the gas market. Demand for both oil and the kind of natural gas that Russia supplies is unlikely to increase, thereby preventing prices from rising. "The decoupling of gas and oil prices, the large quantities of liquefied natural gas on world markets, the growth of shale gas have all [diminished the regime's] ability to collect natural-resource rents," Edward Lucas says. "And the collection and distribution of those rents is central to its model."

The days when oil and gas revenue could drive Russia’s economy and strengthen Putin's political prowess are drawing to a close. Eminent Russian economists such as Deputy Prime Minister Arkady Dvorkovich and former Finance Minister Aleksei Kudrin have stressed the need to diversify the economy away from its dependence on non-renewable energy. But while Putin and Prime Minister Dmitry have openly agreed, nothing significant has been done about it. This is partly because modernising Russia's economy would mean decentralising the country's power base and allowing large corporations a greater degree of independence than Putin or the Kremlin is inclined to allow. Instead, Russia's political and economic elite are bullishly following the old model.

In early December, Gazprom said that construction had begun on the underwater section of its South Stream pipeline, which will carry natural gas beneath the Black Sea and into the European Union. However, Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, says Gazprom hasn't yet ordered pipe or organised the lay barge for the pipeline and "cannot start laying the offshore section until 2014 [at the] earliest."

It seems that Russia is blowing hot air. EU officials say a final route has yet to be submitted to Brussels and won't be approved for at least another year. Marlena Holzner, spokesperson for the EU energy commissioner, said: "To the European Commission, it has never been communicated that there is a final route – where South Stream starts, where it ends, and which countries the exact route goes through. We don't regard this as a final investment decision."

The proposed South Stream pipeline route, according to Gazprom, will pass through Turkish waters to Bulgaria, then continue on through Serbia, Hungary, Slovenia, and Austria. EU legislation requires mountains of red tape involving agreements between participating countries, environmental and social impact studies in each country, task completion forms and allotted time periods in which interested parties can raise any concerns. Those requirements are nowhere near being fulfilled and full construction of South Stream can't happen as fast as Gazprom says it will. By the time it gets going (2014 at the earliest), the shale gas revolution may mean that the new pipeline proves to be a poor investment.

It's possible that Russia was bluffing about the construction of South Stream in order to give the appearance that the project is progressing faster than the Nabucco pipeline, a rival US-backed project aimed at reducing Europe's dependence on Russian gas by linking the Caspian region and the Middle East to EU markets. Indeed, Europe is desperate to boost competition on the European market. On December 21, Putin met European leaders in Brussels to try to resolve their differences over Gazprom's dominance. Despite assurances from both sides that the talks had been "constructive," the European Commission angered Moscow by launching an investigation into alleged price-fixing by the state-owned giant that could potentially result in billions of euros in fines and renegotiations of contracts.

Russia needs all the cash it can get. Not only does it continue to have a demographic problem – too few births, not enough workers to power the economy – it also has expensive plans to revamp its military to better counter any potential threat to Central Asia's security (which would in turn affect Moscow) and to deal with the ongoing conflict in the North Caucasus.

On December 23, General Viktor Bondarev, the chief of Russia's Air Force, said that the military will modernise all the country's air bases by 2020, announcing that more than 20 facilities will be rebuilt in the next few years and "the entire air base network" will be enlarged and upgraded. The navy is due for a makeover, too. On January 10, Russia inaugurated the first of a new class of nuclear-powered submarine and Putin pledged to strengthen other areas of the force, emphasising that Russia sees nuclear arms as crucial to security and will continue to rebuild its sea power.

"The development of a powerful, effective navy is one of Russia's chief priorities," Putin said. "We will only increase the pace, the renewal and development of the fleet.”

The Kremlin has allocated more than 4 trillion roubles ($82 billion) until 2020 to upgrade naval forces and is likely using that cash as further investment in the oil and gas sector given that on the same day Putin unveiled the new submarine, he also presided over the inauguration of a new icebreaker that will service oil platforms in the arctic regions. While he and the powerful elite in Russia's largest energy companies continue to throw cash at oil and gas, the health of the Russian economy could flounder.

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