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Russia removes itself from endangered list
International Eurasian Institute for Economic and Political Research ^ | Sabrina Tavernise

Posted on 3/17/2003, 2:32:46 PM by Stavka2

Analytic Data

Russia removes itself from endangered list
High oil prices bought time to regroup

Sabrina Tavernise

Two years ago, just about everyone from electric-company bosses to President Vladimir Putin was predicting catastrophe for 2003.

The year was to be Russia's own Y2K. A mass of foreign debt would push the country back into bankruptcy. Its infrastructure - the vast electricity grid, telephone networks, oil and gas pipelines and roads - would have aged to a critical point, creating a drag on the economy and even emergency breakdowns. And a shrinking population would reach the point where pensioners outnumbered the young. .In short, Russia had three short years to repair, rebuild, repay and reproduce. .Putin addressed his cabinet on the matter shortly after two seemingly preventable accidents: a fire in Moscow's main television tower and the sinking of the Kursk nuclear submarine. He set up a "2003 problem" commission of members of Parliament.

Now, with 2003 fast approaching, the danger seems to have faded. The economy is growing. Central bank reserves are at their highest level since the 1991 collapse of the Soviet Union and more than quadruple the level of four years ago. The budget is in surplus for the third straight year. Companies are investing, and worker productivity is up 7 percent this year. ."There is real restructuring of companies, and this is continuing to drive Russia," said Peter Boone, head of research at Brunswick UBS Warburg, an investment bank in Moscow. "Reserves are so large they are dripping out of the central bank."

What went right? Russia, politically and economically dysfunctional as little as four years ago, is evolving toward being a respected member of the world community.

Financial self-sufficiency has eliminated the danger of a government debt crisis. Helped by the high price of crude oil, a big export, the government has set aside extra cash to help it make debt payments this year and next. It has also bought back about a quarter of the foreign debt it owes next year.

As a result, Russia will be paying $15.5 billion in foreign debt in 2003, down from more than $20 billion. For a third straight year, the Russian government is set to meet all its debt payments without real risk of default or help from foreign lenders.

"All indications are that there is a lot of money coming into Russia," said Roland Nash, head of research at Renaissance Capital, an investment bank in Moscow. "The increase in central bank reserves this year is huge."

Concern about the 2003 problem did serve to propel a central economic reform: the reorganization of Russia's vast electricity industry. While predictions of the industry's collapse were overstated, international financial institutions such as the European Bank for Reconstruction and Development have said that Russian electricity needs investment to modernize.

But such changes have been slow to move through Parliament, bogged down in arguments over how the plan to split apart the world's largest electricity grid will be carried out.

Demographic worries have been eased by a recent census. A preliminary count showed that Russia's population shrank by 2 million over the last decade, even as Russians returned from republics of the former Soviet Union. But the decline, which brought Russia's population to 145 million, was less than originally feared.

Also, a recent report of an upturn in the birthrate gave cause for optimism. Economist say that as Russia emerges from a decade-long economic slump, the birthrate may continue to recover and the death rate to decline.

A danger is in the fluctuation of the price of oil, the lifeblood of Russia's budget, which receives a third of its revenue from oil and gas. The Russian economy is more diversified than that of the largest oil exporter, Saudi Arabia, but is still prone to boom-and-bust swings as the commodity price of crude oil rises and falls.

Boone of Brunswick UBS Warburg contends that as long as the price of oil is at least $19 a barrel, the government's budget will not need adjusting and large oil companies will continue investment programs that have been central to the current economic expansion.

Even so, Russia would feel the pinch if oil prices, which have averaged about $25 a barrel this year, fell. A prolonged period of low prices would slow growth. Every dollar in the oil price is equal to just over $1 billion in federal revenue. Yet few expect a debt crisis - from companies or government - as both have maintained low levels of borrowing since the damaging default in the summer of 1998.

In a move welcomed by economists because it would give Russia's federal budget a much-needed injection of cash, Moscow announced this month that it would once again try to sell a 5.9 percent stake in Lukoil OAO, the country's largest oil company.

Four months earlier the government called off the sale, deeming the prices offered to be too low, but the company's shares have since climbed significantly.

The Federal Property Fund, the trustee for the state's industrial shareholdings, said the sale would reduce the state's stake in Lukoil to 7.6 percent. It gave no details on the timing of the new sale. The shares are intended to be offered in the form of American depositary receipts but will be sold on the London Stock Exchange.

But many economists in Russia argue that a low oil price would be good for the economy because it would force the country to develop other leading industries. A more diverse economy would be stronger and less dependent on the fickle oil market.

"In Russia, our natural resources are our blessing and our tragedy," Grigori Yavlinsky, leader of the liberal Yabloko political party, said at an energy conference this autumn. "They help us to develop, but they keep us from developing."

"The International Herald Tribune", December 18, 2002

http://www.iht.com/articles/80659.html

 
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TOPICS: Business/Economy; Extended News; Foreign Affairs; Russia
KEYWORDS: russia; russian
For all those predicting Russia's demise, you're in good company of failed prophets...they were all disappointed and always will be.
1 posted on 3/17/2003, 2:32:46 PM by Stavka2
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Comment #2 Removed by Moderator

To: Stavka2
I wonder just how much it cost America to pull them through.

You can round it off the the nearest billion.

3 posted on 3/17/2003, 2:43:24 PM by DainBramage
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To: DainBramage
Kinda like the $6 billion laundered through the Bank of New York (half in IMF funds, half in other Russian funds) and when the story broke, Congress barely gave the bank a slap on the wrist...their excuse? An accounting error....yeah, billions, all flowing in the opposite direction.
4 posted on 3/17/2003, 2:54:44 PM by Stavka2 (Setting the record straight.)
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To: spetznaz; MarMema; FormerLib
bump
5 posted on 3/18/2003, 6:42:33 AM by Stavka2 (Setting the record straight.)
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To: Maximilian; saradippity; Francisco
ping
6 posted on 7/30/2003, 3:33:52 AM by MarMema
[ Post Reply | Private Reply | To 1 | View Replies]

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