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. Last Updated: 07/27/2016

Soaring Oil Prices Help But Won't Last




The dramatic rise in world oil prices in recent weeks is excellent news for the Russian economy, but these happy days of oil at $16 a barrel are not likely to last too far beyond the summer.


Almost every second dollar that comes into Russia is used to purchase either oil or gas, which is tied to oil in price. The recently privatized oil and gas companies are also major taxpayers.


So the Russian government - which is anxiously trying to bring in revenue in general, and dollars in particular - has been watching oil rise steadily in value over the past two months, from a low of $9.55 just a few months ago to a high of $16.65 on Tuesday. By Friday, it had slipped to $16.23.


Those are per-barrel prices for Brent Sea crude, and Russian export-quality oil, the so-called Urals blend, trades at comparable but slightly lower prices.


The Russian 1999 federal budget was drafted on the then-optimistic assumption that Brent would trade at $14. According to Konstantin Reznikov, an analyst with Alfa Bank, each $1 rise above that benchmark brings federal coffers an additional $1 billion annually, and the Russian balance of trade an additional $2 billion.


That helps strengthen the ruble, by reducing the demand for dollars - and Friday the ruble, which has gained 5 percent in a month against the dollar, again edged up a few kopeks, to 24.03.


It also helps Russia come up with the hard currency needed for the $8.2 billion in foreign debts it has committed itself to pay by year's end.


Of that sum, the International Monetary Fund, World Bank and others are only helping with about $3 billion, leaving the Cabinet scratching its head about where to find the other $5 billion. Oil at $15 or $16 a barrel would certainly help, and oil at, say, $20 a barrel could solve the problem entirely.


That, however, depends on factors entirely out of Russia's control. For example on OPEC, the Organization of Petroleum Exporting Countries, which produces a third of the world's oil.


In March, OPEC moved to cut production by 7 percent, or a total of 2 million barrels a day, in hopes of driving up prices. A big question is whether - and how long - the OPEC nations will stick to that pledge.


They have held firm so far. But analysts have been skeptical in recent days that they will continue to do so: As oil prices have risen, so has the temptation for OPEC nations to renege on their partners and crank production back up - as has happened before in similar circumstances.


On Thursday, Royal Dutch Shell stopped the soaring price of oil in its tracks with a published statement suggesting OPEC would not be able to resist that temptation and would break its embargo, Itar-Tass reported.


Alfa Bank's forecast for 1999 reflects this same skepticism: It estimates that annually Brent will average about $13.3 per barrel. If correct, that means that the Russian 1999 budget is indeed too optimistic.


There are other factors helping prop up the world oil price, and Yevgeny Khartukov, director of the International Center for Petroleum Business Studies, listed a few - ranging from the booming American economy and its seasonal summer increase in demand, to scheduled maintenance work on the North Sea oil fields that has scaled back production.


But America's appetite will wane with the summer and the North Sea fields will also come back on line.


Another big question was whether Iraq, which sells oil in one-off batches approved each time by the United Nations - the so-called oil-for-food arrangement - would dump enough crude on the market to dampen the price. Iraq recently won UN approval and began to pump 360 million barrels of crude into world markets. Prices have withstood the extra supply - so far - but Iraq will be knocking at the UN's door again in the fall to ask again for permission.


Russia is the world's third-largest oil producer after OPEC and Norway, but that is less grand than it sounds: Russia only exports 3 percent of the world's oil and in no way can drive the world price.


What it can do is try to wring every last drop of profit out of that price - but even that is far easier said than done.


Russia's oil companies have indeed tried to pump more oil onto the newly lucrative world market, and Interfax reported this week that exports were up 2.2 percent for the first quarter of 1999 over last year's figures.


Weak infrastructure at the nation's sea ports and railroads makes for a bottleneck, however, and Interfax reports oil piling up in traffic jams at those exit points.


More importantly, the Russian government controls the pipelines - and insists that oil companies sell much of their production domestically, at depressed prices.


As for the Russian government, it has a harder time in practice raising tax revenue on oil than it does in theory.


The easiest and quickest tax to collect is an export tax. The Foreign Trade Ministry, spokesman Igor Makurin says, has already submitted a proposal to Prime Minister Yevgeny Primakov to double the oil export tax to 5 euros ($5.37). Makurin said that would bring in an extra $25 million to the budget - which, though welcome, solves few of Russia's large problems.


Beyond that, other taxes are less easily collected - particularly in cash.


As of March Russia's 13 vertically integrated oil companies had together accumulated 8.93 billion rubles ($372 million) in debts to the budget, according to the Tax Inspectorate.


Some of this sum, racked up over years, will be paid eventually - but often in barter arrangements where the oil companies supply oil to state-run agencies and companies for free.


In January and February, for example, the oil companies were supposed to pay 3.93 billion rubles in taxes. Of that, the tax authorities say, the companies paid 1.65 billion rubles - and only half of that in cash.


The Fuel and Energy Ministry can simply cut oil companies off from the pipelines if they refuse to pay their taxes - but this rarely happens. Oleg Rumyantsev, a spokesman for the ministry, says some pipeline access was reduced this year for some companies - but only to force them to deliver more oil to the agricultural sector, not over taxes.


The IMF has demanded that oil companies and the government drop all barter deals and move to a cash-only relationship. But the oil companies say that they fear the government will try to have it both ways - taking cash for taxes, but demanding cheap oil for agriculture.