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22 Jan, 2007 06:50

Oil prices decline could affect Russia

Oil prices decline could affect Russia

The sharp decline in oil prices in recent weeks has caused concern that Russia's economy which is the world’s second-largest oil producer and exporter, could be seriously affected.

Over the past week the price for Russian Urals oil fell under the important psychological $US50 per barrel mark.

This is significantly less than the average price for Urals-grade oil of $US61 dollar per barrel assumed in the Russian budget for 2007.

Although the current price level does not create any immediate threat to the budget, because the threshold price for the Stabilisation Fund transfers remains at $US27 dollars, many economists believe that further significant reductions in oil prices may later create problems for the Russian economy.

But, they say, only if Urals falls under the $US40 dollars mark, Russia's private sector, especially banks, construction and real estate could suffer.

However, others say that the decline will only help the economy, because it would force the government to push forward with structural reforms, which have stalled lately, due to a surplus of petrodollars.

“The positive effect of the prices falling will result in a well thought-out economic policy and reforms and, hopefully, decrease dependency on state and state-owned companies,” Nikolay Valdul, Deputy Editor-in-Chief of Gazeta newspaper believes.

International Energy Agency experts say that the price drop will not affect production of oil in Russia.

“I think, that's highly unlikely. At current prices Russian oil production is still very comfortable. In actual fact, we've seen a better performance than expected over the last couple of months from Russian output, and we still see growth in Russian output continuing throughout next year and beyond,” Lawrence Eagles, Head of IEA Oil market Division noted.

Most experts agree that even if today's drop in oil prices becomes a plunge, Russia will be safe because it has made strides to be more than just a producer of oil. They say the country is not solely dependent on oil prices, because it is moving into marketing, building more refineries, and producing high value products.

According to Peter Halloran, President of Pharos Russia Fund in Moscow, “with oil prices at $US50, Russia has 7% GDP growth, one of the fastest in the world. It has a 3.5% budget surplus – one of the best in the world. There's a 30% money growth, which means huge liquidity. So if you are running a business in Russia and oil is at 50, it is not a problem, it is a great environment.”

Still, while lower oil prices may have an upside, this comes at a cost and the realms of business and government are forced to live with a volatile price situation.