USD 66.6082

+0.61

EUR 73.9484

+0.73

BRENT 60.24

+0.47

AI-92 42.23

+0.04

AI-95 45.97

+0.02

AI-98 51.74

0

Diesel 45.89

+0.11

20

Russia on the Path to 'Petrostate' Status?

RUSSIA'S future will be defined as much by geology as by ideology -- while leaders can pick their ideology, they don't have much of a choice when it comes to geology. Russia has a lot of oil, and this inescapable geological fact will determine many of the policy choices available to it.

RUSSIA'S future will be defined as much by geology as by ideology -- while leaders can pick their ideology, they don't have much of a choice when it comes to geology.

Russia has a lot of oil, and this inescapable geological fact will determine many of the policy choices available to it. Oil and gas account for 20 per cent of Russia's economy, 55 per cent of all its export earnings and 40 per cent of its total tax revenues.

Russia is the world's second-largest oil exporter after Saudi Arabia, and its subsoil contains about 30 per cent of the world's gas reserves. It supplies 30 per cent of Europe's gas needs.

And Russia's oil and gas industry will only become more important. No other sector has the potential to be as internationally competitive, or as profitable. Yet such growth is also dangerous. Russia risks becoming, and in many respects may already be, a "petrostate".

In the debate set off by the arrest of former Yukos Oil chief Mikhail Khodorkovsky, Russia's richest man, over what kind of country Russia is becoming, its characteristics as a petrostate deserve as much attention as the Kremlin's factional struggles.

Petrostates are oil-rich countries plagued by weak institutions, a poorly functioning public sector and a high concentration of power and wealth. The gulf between a petrostate's rich natural resources and the chronic poverty of its citizens often leads to political unrest and frustration. Nigeria and Venezuela are good examples.

That Russia is rich in oil is old news. What's new are the changes in politics, technology and markets in the petroleum sector.

Throughout the 1990s, privatisation and innovations in exploration and drilling brought into production oil fields that had hitherto been underperforming or were off limits. To energy companies worried about growing domestic instability among the major oil exporters of the Middle East, Russia became an attractive hedge.

Regardless of its political turmoil, Russia will continue to appeal to oil companies. They know how to operate profitably in countries with weak property rights and unstable politics, and sooner or later Russia's beguiling geology will attract companies that cannot afford to be left out of some of the world's richest oil reserves.

But what's good for the energy markets is not necessarily good for Russia. When oil revenues flood a nation that has a weak system of democratic checks and balances, dysfunctional politics and economics ensue.

A strong democracy and an effective public sector help explain why oil has not distorted Norway the way it has Nigeria or Venezuela. A lot of oil, combined with weak public institutions, fuels poverty, inequality and corruption. It also undermines democracy.

The economic effects are more noticeable. A country whose economy relies mostly on oil exports inevitably has an exchange rate that encourages imports and hinders exports. Such an imbalance favours oil at the expense of other sectors, such as agriculture and manufacturing, as their products become more expensive abroad.

And, while oil generates export revenues and taxes for the government, it creates few jobs. Despite its enormous economic weight, Russia's oil and gas industry employs just 2 million workers out of an economically active population of 67 million.

Also, since the price of oil is very volatile, petrostates suffer constantly from boom-bust cycles. The busts leave in their trail banking crises and public budget cuts that hurt the poor disproportionately.

Even the tax revenue generated by oil is a mixed blessing. Petrostates commonly suffer from a narrow tax base. In Russia, for example, the 10 largest companies account for about half of total tax revenues. The political consequences of all this are corrosive.

Thanks to the inevitable concentration of the industry into a few large firms, owners and managers acquire enormous political clout. In turn, corruption often thrives, as a handful of politicians and government regulators makes decisions worth millions to these companies.

In petrostates, bitter fights over the control and distribution of the nation's oil revenues become the gravitational centre of political life. It is no accident that the current crisis in Russia hinges on control of the nation's largest oil company, and the political uses of its profits.

But Russia is not Nigeria. It is a large, complex country with a highly educated population, a relatively strong technological base and an economy still somewhat diversified.

A strong and independent public sector, tempered by the checks and balances of a truly democratic system, will help Russia compensate for the economic and political weaknesses that plague all nations where oil is the biggest industry and the most potent political force.

Such institutions are essential if Russia is to overcome the crippling effects of its ideological past and its geological present.

Author: Sam Maxwell

Source : Neftegaz.ru