|THE RUSSIAN ECONOMY: NOT BY OIL ALONE
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
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 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
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
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
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
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
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-