Russian Economy Rebounds

[Lilly]

After four months of economic slowdown, the Russian economy started growing, said Russian Deputy Economy Minister Arkady Dvorkovich at a conference on attracting bank capital to Russia’s economy. According to preliminary statistics, “industry and crediting revived” in February of 2002, he said.

Mr. Dvorkovich pointed out that Russia’s economy relied heavily on big businesses, which spoke of its low level of development. He said urgent measures should be taken to boost the tax and financial environment for small businesses in Russia. “However, government departments controlling different economic sectors pursue different strategies. As a result, there is no single economic strategy in Russia,” the Deputy Economy Minister stressed.

Mr. Dvorkovich believes it is necessary to develop the banking sector as a whole. “Midsize and small banks should remain in Russia, because they are the cornerstone of market competition,” he said. “However, these banks should be stable. Our priority now is to reform state-controlled banks, because it is these banks that harm competition,” Mr. Dvorkovich said.

Western economists also made optimistic forecasts for the development of the Russian economy at the conference. The First Deputy Managing Director of the International Monetary Fund, Anne Krueger, said the Russian economy would grow faster in 2003 than this year. She said Russia’s GDP growth would fall four percent in 2002, and the Russian economy would accelerate in 2003 due to the revival of the world economy.

Ms. Krueger said Russia should become a developing economy over the next ten or fifteen years, and its GDP should grow by 5-7 percent annually. To achieve that goal, it was necessary to increase the share of investment in the country’s GDP from the current 12 percent to 20 percent, she said.

Ms. Krueger also said that Russia should continue reforming its financial sector. Some aspects of banking reforms remained uncertain, and the Russian government continued giving guarantees to large banks, she stressed. Ms. Krueger said it was important to make the Central Bank of Russia to work on the commercial basis. On the whole, she said Russia’s economic performance in recent years gave grounds for optimism on the future of Russia.

[Lilly]

Russia has beat out Saudi Arabia to become the world's biggest oil producer -- for the month of February, at least.
According to estimates compiled by the Paris-based International Energy Agency, Russia pumped 7 million barrels per day last month compared to Saudi Arabia's 6.9 million barrels per day.

Such an upset in the rankings hasn't been seen since the 1980s, when the Soviet Union led the world in oil production.

While the plunge and recovery in oil production mirrors the country's economic health since 1990, Russia's possession of the top spot may be short-lived. And oil production isn't exactly what gets politicians excited: Most oil companies get the bulk of their revenue from exports, not domestic sales.

"While production is important, it's the exports that we look at," said Timerbulat Karimov, an oil analyst at the Aton brokerage. "And a month-to-month change doesn't really mean much, because oil production also varies according to seasonal swings."

Russia and Saudi Arabia were producing at the same levels in January before Russia surged ahead.

Last month, the United States came in third after Saudi Arabia with 5.8 million bpd. Iran and China followed with 3.3 million bpd each. In February 2001, the rankings were the same except for the No. 1 and No. 2 spots. At that time, Saudi Arabia pumped 7.9 million bpd against Russia's 6.5 million.

Saudi Arabia has led the Organization of the Petroleum Exporting Countries, of which Russia is not a member, in cutting its oil output to stabilize world oil prices. Prices had dropped as a result of the Sept. 11 attacks and the doubt the attacks cast over a speedy recovery from the global recession. If it wanted to, Saudi Arabia could increase its oil flow by up to 50 percent with the turn of a valve. Russia's oil industry, on the other hand, is working at full capacity.

"Saudi Arabia can step up output if it wants to, while Russia can step it up only if it continues investing," said Stephen O'Sullivan, head of research at United Financial Group. "Investment requires profits and cash flow, elements which are under threat."

On Tuesday, the Russian government decided to extend export curbs until the oil price strengthens. An initial agreement to cut exports was struck last year and came into effect from Jan. 1. Oil prices have already risen 27 percent during the past two months, and the benchmark Brent blend was trading at $24.66 at midday Thursday.

"International prices remain very firm, and the market has clearly priced in Russia's adherence to its quotas," O'Sullivan said.

But production numbers don't tell the whole story.

While Saudi Arabia exports almost all the oil it produces, more than half of Russian oil stays in the country, mainly because state pipeline monopoly Transneft has a limited capacity that has not grown as fast as the nation's production.

This has caused a glut on the domestic market, where crude sells for a mere $4.25 per barrel.

While Russia pumps more oil than its Arabian rival, it exports half as much -- 3 million bpd compared to Saudi Arabia's 6 million. But if exports of refined petroleum products are taken into account, Russia beats out Norway to become the world's No. 2 exporter behind Saudi Arabia, according to the U.S. Energy Department.

With a possible war brewing in the Middle East, some officials from the United States -- the world's largest oil consumer -- are evaluating the possibility of importing crude oil from Russia if supplies from OPEC countries are cut off. Transportation costs currently make such an arrangement unfeasible, but U.S. Commerce Secretary Donald Evans has voiced the possibility of tankers carrying oil from the Sakhalin-1 offshore fields to the United States' Pacific coast. That is, once oil production at Sakhalin-1 -- a consortium led by ExxonMobil -- gets started.

"The production numbers are weird if they're true," said a U.S. Energy Department official who wished to remain anonymous. "But that's not a big deal. Where Russia is going is a big deal."

Russia as the land of opportunity!!!
Where there's good news, there's bad news, and where there's bad news, there's good news.

Suffice it to say, this is very good, and it definately is a wake-up call to the world to throw aside their decade-old misperceptions about Russia.