High Oil Prices Open “Window of Opportunity” for Russian Economy

© RIA Novosti . Alexandr Gutshin / Go to the mediabankHigh oil prices open “window of opportunity” for Russian economy
High oil prices open “window of opportunity” for Russian economy - Sputnik International
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IMF experts believe that high oil prices will allow the Russian government to take measures to strengthen, protect and reform the economy.

IMF experts believe that high oil prices will allow the Russian government to take measures to strengthen, protect and reform the economy. Russia is benefiting from the rising tensions in the Middle East, which are driving up the price of a barrel of oil, but experts believe this geopolitical factor will soon subside. Moreover, expensive oil is slowing down Russia’s economic growth, and without economic reforms even expensive oil cannot guarantee economic stability.

Iran to the rescue

Speaking at a news conference at RIA Novosti on Thursday, Odd Per Brekk, senior resident representative of the IMF office in Russia, said that high oil prices have opened a “window of opportunity” for Russia to take measures to strengthen and protect its economy.

To take full advantage of this opportunity, the Russian government must undertake a complete economic transformation – keeping inflation at 3%-5%, cutting budget expenses, improving the financial sector, creating an attractive investment climate and eventually reducing the dependence of its economy on the export of raw materials. In other words, Moscow must pursue comprehensive economic modernization, funded by its oil and gas revenues.

Global circumstances will aid Russia along in this process. IMF experts predict that suspension of oil exports from Iran to OECD countries caused by U.S. and EU sanctions will increase oil prices by 20%-30%, whereas closing the Strait of Hormuz, as Iran has threatened to do, would cause even bigger hikes in oil prices.

Russian experts are skeptical about the prospects of this kind of commodity-based modernization.

First, this same “window of opportunity” was open for Russia during the entire 2000s, but no economic reforms have been carried out to date.

Second, these favorable circumstances may prove fleeting. Vitaly Bushuyev, general director of the Energy Strategy Institute, emphasized that the price of oil is based on many factors. It is determined by global demand, speculative pressure on financial markets, and geopolitical circumstances. Out of these three factors, two – global demand and speculation – currently suggest that oil prices will go down.

Igor Nikolayev, director of the FBK strategic analysis department, explains: “A slowdown of the world economy causes demand for energy to decline. The IMF has lowered its forecast for the world economy – its experts are expecting growth rates to slow from 3.8% in 2011 to 3.3% in 2012. In other words, demand for oil in the world economy is unlikely to grow.”

Experts have varying opinions on the financial side of oil prices. Bushuyev insists that speculators do not have any free money and so we shouldn’t expect increased investment in oil futures. Boris Kagarlitsky, director of the Institute of Globalization and Social Movements (IGSO), agrees, noting that “if the current value of money is preserved, oil prices will peak at $80 per barrel.”

However, Vitaly Kryukov, an analyst with IFD Kapital, notes that the money supply will increase through emissions to stimulate the economy, which will eventually make raw materials more expensive.

True, there is a risk that this will result in the devaluation of money. Kagarlitsky makes a gloomy prediction: “The price of a barrel may rise to $200 or $300 but the dollar would be paper in that case.”

Can oil will save us?

Geopolitics is the only incontrovertible factor in the growth of oil prices. “Currently geopolitical events are supporting high oil prices,” Nikolayev said. “If it had not been for the events in Libya and the escalation of tensions around Iran, prices would have been different.”

Iraq is also contributing to high oil prices. As Kryukov explains, “The American troops have left, security there is extremely bad, and many companies that came to Iraq are now saying they are ready to quit Iraqi projects.”

But let’s not overstate the influence of geopolitics on the price of oil. IMF experts, who are predicting a 30% increase in the event of sanctions against Iran, have said that increased supplies from other countries will mitigate the loss of Iranian oil.

Russian experts believe that the Iranian factor will produce only a short-term 10%-15% increase in oil prices. As Bushuyev explains, “When the Europeans made a decision to boycott Iranian oil they thought about the sources they would use to meet their needs. Some of the oil will come from the Saudis, who have reserve capacity; Libyan oil will be supplied in the near future; and they will import oil from other parts of Africa. These sources will make up for the 1.5 million of barrels a day that currently come from Iran to Italy and Greece.”

As for Iran’s threat to close the Strait of Hormuz, Bushuyev thinks the market has already factored in this risk.

To sum up, there is no reason to expect a serious rise in oil prices, but they will remain at a level that will allow our economy to preserve stability in the medium term.

The experts polled by RIA Novosti unanimously attributed the absence of economic reforms in Russia to a lack of political will rather than a shortage of funds. According to Kryukov, “Russia had all these chances during more than a decade of high oil prices. Everything depends on political will. It is already obvious that excessive dependence on oil prices may lead us into an abyss at some point.”

However, the IMF predicts that the Russian economy will grow, albeit at the modest rate of 3.3%, in 2012. The question is for how long Russia can keep up this economic development by inertia.

Nikolayev point to an alarming fact – the pace of economic growth is slowing despite high oil prices. “At $70-$75 per barrel we were growing at 7%-8% annually four years ago. Now our growth rates are much slower despite the higher oil prices.”

The expert noted that this year the Russian government was aiming for 4% GDP growth given that oil price stands at $75 per barrel, but this growth rate would have required an average annual price of $109. There were several reasons for this – the budget was overburdened with social commitments, military spending and massive public projects. Moreover, Kagarlitsky observes, during the last five years there was a decline in the effectiveness of government management in many spheres. Meanwhile, the key sectors of the Russian economy, such as the fuel and energy complex, are under government control. Nikolayev sums up: “Expensive oil is no longer enough. We are approaching the point where it will no longer guarantee relatively stable economic development.”

The views expressed in this article are the author’s and may not necessarily represent those of RIA Novosti.

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