World - Oil Revenues,Bonanza for Russia

The mind-boggling oil revenues have driven Russia’s impressive economic growth. Ten years ago, it was a $200-billion economy; this year it has crossed the $1.4 trillion mark.


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As India and other energy importing countries struggle with runaway oil prices, Russia is basking in an unprecedented windfall of petrodollars. Hold your breath: while you read this story, Russia will earn $2 million from the export of oil and gas. This year, hydrocarbons are expected to bring Russia more than $300 billion in export earnings.

The mind-boggling oil revenues have driven Russia’s impressive economic growth. Ten years ago, it was a $200-billion economy; this year it has crossed the $1.4 trillion mark. Russia’s per-capita gross domestic product has quadrupled to nearly $7,000. Today Russia is the eighth largest economy in the world in Purchasing Power Parity (PPP), according to the World Bank. By the end of the year, it will overtake France to become the world’s sixth largest. Last year, foreign investment surged by a factor of 2.5, touching $100 billion — a record growth for any of the world’s 15 leading national economies.

However, not all Russians have been rolling in the oil wealth. The oil industry was the prime target of a sweeping privatisation drive launched by former President Boris Yeltsin after the break-up of the Soviet Union. Economically, it made little sense to sell off the country’s most profitable industry but the urge to get rich was overwhelming. Hydrocarbons and other mineral riches were instrumental in transforming Russia from being the world’s first and largest land of socialist equality into a nation of glaring capitalist contrasts.

A crooked scheme was concocted in the mid-1990s to hand out the most lucrative oil and other extracting assets to Kremlin-connected insiders for a fraction of their real value. The financially strapped Russian government placed the most valuable state companies under trust management with oligarch-affiliated banks and financial institutions in exchange for loans to the state. Then the government defaulted on these loans to enable the creditor-trustees to buy the mortgaged assets at rigged auctions. Would-be Russian oligarchs Boris Berezovsky and Roman Abramovich, for example, gained control of the Sibneft oil company for $100 million. Three years ago, Mr. Abramovich sold Sibneft to Gazprom, the state-controlled natural gas monopoly, for more than $13 billion. Another Russian oligarch, Mikhail Potanin, acquired the Sidanko oil major for $130 million. Ten months later, he sold a 10-per cent stake in the company to British Petroleum for $571 million.

Even though oil prices in the 1990s were one-tenth of what they are today, hydrocarbon exports brought Russia revenues comparable to what the Soviet Union used to earn at the peak of the oil boom in the late 1970s — about $30 billion a year. It was an awful lot of money for Russia, considering that its population was half the size of the Soviet population. Yet, a majority of Russians did not benefit from the oil windfall. The Russian government failed to do for its people even a small part of what the Soviet Union did with its petrodollars. The Communist leadership of the Soviet Union was justly criticised for misusing oil revenues to prop up its Eastern Bloc satellites and ideologically-friendly regimes elsewhere but it also spent the oil funds to improve the social sphere and to buy grain and foreign-made consumer goods for selling in the domestic market at heavily subsidised prices. Post-Soviet Russia rejected socialism and embraced the brave new world of free-for-all capitalism in which petrodollars enriched only the new tycoons and corrupt government officials.

Oil tycoons in Russia made huge fortunes faster than anywhere else in the world, pulling strings to win tax breaks and using the gaping loopholes in the tax legislation to pay far below the standard 24 per cent corporate rate. According to the Forbes 2008 list of the world’s wealthiest people, Russia has 110 billionaires; only the United States has more. Russia’s chief auditor admitted that the country had too many billionaires. “Russia has the world’s second largest number of billionaires; this does not measure up to the size of the economy and the level of the country’s development,” Audit Chamber Chairman Sergei Stepashin told a news conference earlier this year.

The Russian superrich have emerged as the new leaders of conspicuous global consumption. Oil magnate Abramovich, who is worth over $24 billion, owns the Chelsea football club, an armada of mega-yachts, including the world’s largest privately owned yacht, “Eclipse”, and a string of multi-million-dollar castles and housing estates in Britain, the U.S. and other parts of the world.

It took President Vladimir Putin four years to consolidate his grip on power to take on the oil oligarchs. In 2004, Russia introduced a stiff tax regime in which the government takes about 80 per cent of the oil revenues. The arrest of Russia’s richest man, oil tycoon Mikhail Khodorkovsky, on tax evasion charges in 2004 helped to improve tax collection further .

With the oil wealth trickling down to the other sectors, about 30 million people have been lifted out of poverty in the last 10 years. Average earnings grew by about 20 per cent a year recently, fuelling an unprecedented consumption boom. Mega-malls crammed with goods from all over the world are mushrooming in Russian cities. Russia has overtaken Germany this year as Europe’s biggest car market, and demand outpaces supply: Russians sometimes have to wait for 12 months and more to get a car of their choice.

However, the oil-driven gap between the rich and the poor continues to widen despite the general improvement in living standards. About 19 million Russians still live below the official poverty line. Ten per cent of the richest Russians today earn 16 times more than the poorest 10 per cent. In fact, social contrasts appear starker today in Russia than in India: the global Gini Index places Russia 13 positions behind India in the inequality of wealth distribution.

The Russian government now plans to use petrodollars to bridge the glaring rich-poor gap that they created in the first place. This year, it has split the oil fund which has amassed $160 billion since it was set up in 2004 to sterilise excessive cash. A Reserve Fund, to be maintained at 10 per cent of the gross domestic product, will cushion the budget from a possible fall in oil prices, while a National Wealth Fund (NWF) will be earmarked for investment and for beefing up the federal pension fund.

Petrodollars are to play a key role in overcoming Russia’s “oil curse” — overdependence on energy and other commodities. More than 60 per cent of the federal budget revenue today comes from oil and gas taxes. Over two-thirds of the value of exports is earned from the products of extractive industries, which generate a quarter of the nation’s gross domestic product.

Under an ambitious programme of economic modernisation unveiled earlier this year, Russia is to be transformed from a resources-dependent to a science-based economy by 2020. Billions of petrodollars are already being funnelled into the establishment of “national champions” — vertically integrated state-controlled holding companies that will spearhead growth in high-tech industries, such as nanotechnologies, aviation, shipbuilding and nuclear energy. A network of technoparks, largely modelled on India’s Silicon Valley in Bangalore which Mr. Putin visited in 2004, is being set up across Russia. The government has also announced plans to sharply raise budget allocations to upgrade basic infrastructure. Describing outdated transport networks as a “brake on the economy,” Mr. Putin ordered a whopping $570 billion to be spent until 2015 on building road, rail, air and port facilities.

At the same time, Mr. Putin has announced major tax cuts for the oil industry to sustain production. Russia last month overtook Saudi Arabia as the world’s biggest oil producer but the government warns that output could suffer its first decline in a decade this year because of low investment in developing new fields — Russia is one of the few places in the world with significant unexploited or unexplored reserves of oil.

The biggest challenge is to manage this huge spending programme without fuelling the already rapidly rising inflation. Driven by global food and energy prices, the Russian inflation rate rose to a more-than five-year high of 15.1 per cent in May although the government hopes to bring it down to 10.5 per cent by the end of the year. The Russian Central Bank has raised key interest rate four times this year in an effort to keep down the inflation.

Finance Minister Alexei Kudrin said there were “strong signs” that the economy was overheating, and vowed to take a series of measures, including curbs on spending, to bring the inflation rate down to 6 per cent before 2011. However, Prime Minister Putin champions the idea of pouring more money into the economy while the going is good in order to lay a solid foundation for dynamic growth in the future when the oil price boom comes to an end.