THE RUSSIAN ECONOMY: NOT BY OIL ALONE


25.08.06
MOSCOW. (RIA Novosti economic commentator Vasily Zubkov)

A reader recently asked me, “Could Russia live without oil?” This counterfactual question requires hypothetical answers.

Russian oil is not an abstract entity. Oil is transport, electricity, petrochemicals, and many other things. There are oil-dependent sectors, such as pipeline transport and the production of steel pipes. Let’s try to view this hypothetical situation in three dimensions: exports, influence on GDP, and budget receipts.

Let’s consider exports first. This year Russia plans to produce 479-484 million metric tons of oil, up 2%-2.5% against last year. In the first half of 2006, 276.7 million metric tons of oil were produced. Crude oil exports are growing and totaled 126.7 million metric tons in the same period.

Russia is the world’s No. 2 oil supplier. Oil accounted for 34.6% of Russian exports last year, and 32.1% in 2004. Where does the rest, equivalent to $160 billion worth of oil exports, come from?

The answer is natural gas, armaments, defense technology, ferrous and non-ferrous metals, metal products, fertilizers, petrochemicals, products of oil and gas refining, grain, timber and timber products, coal, electricity, steel pipes, machine building, etc. The list makes it clear that apart from oil the country has other reliable sources of foreign exchange earnings. The International Bank for Reconstruction and Development has calculated that if not for high oil prices, economic growth in Russia would be 4%-4.5%. There would not be any Stabilization Fund, or it would be much smaller. Yet money from the huge Stabilization Fund is saved to provide against an unfavorable global situation for Russia.

Russia exports what is in demand overseas and what remains after it satisfies its own needs. The range of Russian exports also indicates how well its industries have developed.

Take ferrous metallurgy. Last year, 50 million metric tons of metal worth some $20 billion were sold overseas. Export revenues grow 5%-6% annually. Russia is becoming a serious player on the global metals market.

Production modernization, the most up-to-date technologies and innovative materials for metallurgy give cause for hope that metallurgical companies have a big potential for growth, the more so as the government is doing its best to support the sector. That is why rivals from the U.S. and Europe have been imposing limitations on Russian exports through the introduction of quotas and other protectionist measures. In turn, owners of Russian steel factories are actively buying new assets abroad to bypass customs restrictions. Russia and the EU are expected to review their commercial agreement next year to fix Russia’s new metals quotas.

Or take Russian chemical production. The export component in the sector determines the efficiency of chemical and petrochemical companies. Certainly, new plants should be built, the newest technologies introduced and tens of billions of dollars invested. Yet the sector is quite lively now. According to a recent report by the Industry and Energy Ministry, in the past three years there has been an annual 11% increase in the export of chemicals, the aggregate value of which has already exceeded $10 billion.

The Russian timber industry also has a large export potential. Only Brazil can rival Russia which has 25% of global wood resources. Experts have calculated that if more finished timber were exported, it could yield hard currency proceeds equivalent to the country’s revenues from crude oil sales.

According to expert estimates, the export potential of Russia’s timber industry is $120 billion. So far, round timber exports have barely exceeded $10 billion. And the fact that Russia accounts for 22% of global rough timber sales is not something to be proud of. The government intends to encourage sales of finished timber products and restrict the export of round timber.

This is how things stand with non-oil exports. Without liquid hydrocarbons Russia would still be ranked among the top twenty countries in foreign trade volume. Things are not bad in the economy at large, either. Nobody dares call Russia the “Upper Volta with rockets” now. The country’s GDP was some $600 billion four years ago, while this year it will reach $900 billion. Russian President Vladimir Putin’s wish to double GDP by 2010 may come true. And the U.S. is considering removing Russia from the Generalized System of Preferences (GSP) allegedly because the rich Russians no longer need privileges.

What would Russia’s GDP be like without oil? According to official reports, the share of the oil and gas sector in GDP has remained within 9% in the past few years, and the entire industry accounts for 31% of GDP. Experts with the Development Center believe that official statistics diminish the role of industries, in particular the oil and gas sector, on purpose to promote trade. They believe oil and gas, including pipeline transport, account for 25% of GDP, while the country’s industrial sector apart from oil and gas for 15%. If we take the figure of 17% as an average we will see that Russia’s non-oil industry contributes significantly to GDP.

Let’s consider the effect of hypothetical factors (a lack of oil) on the Russian budget. Certainly, the budget would be smaller, for it is funded by real money. The less the financial returns, the less the spending. The hypothetical budget would be 25% smaller without oil.

Today, half of the revenue side of the budget comes from oil and gas proceeds. Four years ago the index was 23.4%, half what it is today. Oil and gas proceeds consist of revenues from tariffs and taxes, including on the profits of oil and gas companies, oil companies’ dividends on state-owned shares and proceeds from state-controlled oil companies active abroad. Excess profits are channeled into the Stabilization Fund and have almost no direct influence on the economy.

Last year, according to Russian Finance Minister Alexei Kudrin, 70% of oil revenues went to the Stabilization Fund. This year 74.4%, and in 2009 67.1% will be channeled there. The minister proposes cutting the use of oil revenues to 2.8% of GDP. Some Russian economists like the idea, others oppose it, but it is very hard to predict the future now.

A thesis could be written on the “Russia-without-oil” topic. One conclusion seems to be that Russia is one of the world’s few self-sufficient countries. In the transition period, Russia managed to retain government control of key spheres by creating effective state monopolies and laid a foundation for a powerful private sector. The setback in production resulting from economic reform is over, and the country is on the rise now. Today, the Russian economy can survive without oil, and the country’s great intellectual potential gives rise to the hope that the commodities giant can transform itself into an exporter of high technologies.

Of course, there will come a time when oil deposits will be exhausted, but hopefully the Russian economy will then be driven by nanotechnologies, robot automation, space technologies and new materials. -0-