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. Last Updated: 07/27/2016

Russia Right To Brush Off OPEC

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OPEC's attempt to dictate demands that Russian oil producers slash exports in order to shore up world oil prices has rightly been met with disdain across the board, from senior Russian officials to most of the oil majors.

As President Vladimir Putin's outspoken economic adviser Andrei Illarionov averred Wednesday, OPEC is "a historically doomed organization" and "an unreliable partner."

For Russia a great deal is at stake, as one-fifth of the budget is made up of revenues from oil and the 2002 budget currently approaching its third parliamentary reading is calculated on the basis of a worst-case scenario of $18.50 per barrel. With that lower limit already crossed, the government has little choice but to amend the budget or start looking for alternative sources of revenue. Already there is talk of recalculating the budget on the basis of oil prices between $10 and $15 per barrel.

However, Russia is defiant and opinion is almost unanimous that there is nothing to be gained and everything to lose from bowing to demands to cut output, even if that means entering into a price war with OPEC. The geopolitical and economic arguments in favor of this position do indeed carry considerable weight.

Russia has an opportunity to cement its improved relations with the United States and the West in general by stealing the mantle of reliable oil supplier of choice to the United States, European Union countries, and others.

Increased Western dependence on Russian oil and gas would do more than anything to stimulate Russian integration with the international community and to add real substance to the chummy rhetoric of late.

In fact concrete steps to develop a long-term energy partnership between the European Union and Russia (essentially guaranteeing long-term and greater demand for Russian energy products at preferential rates in return for assistance with foreign investments into the sector) pre-date the events of Sept. 11 by almost a year.

Also, as has been cogently argued, lower oil prices should help to stimulate growth in the rest of the Russian economy by slowing appreciation of the ruble and thus making manufacturers more competitive.

Prolonging the positive effects of the 1998 economic crisis and assisting the formation of a broader-based economy, as Illarionov puts it.

This boost may also cover some of the budget shortfall engendered by falling oil prices.

Very importantly, as we've argued before, lower oil prices should have a disciplining effect on the government, which is largely absent when the country and budget are awash with petrodollars; and stiffen the political will for pushing through further structural reforms. As Putin himself recently told U.S. journalists: "Declining oil prices [below the lower limit allowed for in the budget] would compel us to take additional action and to improve administrative practice, as well as other aspects of our work."

It's reassuring to know that the president has a solid grasp of policy detail that his predecessor sorely lacked.