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. Last Updated: 07/27/2016

Record Crude Prices Fail to Impact Russia

The record-high level of global oil prices currently making Russian oil exports ever-more profitable is expected to have little impact on the Russian economy, with the bulk of additional revenues being held back by the government's tight fiscal policies, analysts said.

World oil prices hit a second straight day of highs Tuesday, briefly jumping above $70 per barrel, following hurricane Katrina's rampage across the United States' Gulf Coast, which not only killed 55 people but also halted oil production in the Gulf of Mexico.

But Russia -- which currently produces close to 9.5 million barrels per day and is the world's second-largest oil exporter, after Saudi Arabia -- has such tight fiscal policies that "it no longer matters whether the world oil price is $50 per barrel or $70 per barrel," said Yevgeny Gavrilenkov, chief economist at Troika Dialog investment bank.

The rise of domestic prices by 20 percent in August, compared with July, will also have little effect, as they will be offset by growing budget expenditures, said Al Breach, head of research at UBS Brunswick in Moscow.

Domestic prices have risen to levels of 7,400 rubles to 7,800 rubles per ton, or $37 to $39 per barrel this month.

Nevertheless, Gavrilenkov and Breach agreed that the policy of not letting the windfall profits from the world oil fever seep too quickly through into the economy is not a bad one.

"What you really want to achieve from the macroeconomic and fiscal point of view is for fiscal policies to be countercyclical," Breach said, referring to very high taxation in the oil industry as a whole and particularly on oil exports at a time of high oil prices.

Money being siphoned from the surging prices is being stored in the government's stabilization fund, which became operational in 2002. It was created as a safety cushion for a time of financial instability, as would be caused by a sharp fall in oil prices or by some other unexpected crisis. Even before the oil prices hit another high this week, the fund was set to reach 1.5 trillion rubles ($52 billion) by the end of 2005, equivalent to nearly 7.3 percent of GDP, according to the Economic Development and Trade Ministry.

Gavrilenkov said that there was an argument for more of Russia's oil money to stay in the hands of the private sector for further reinvestment into the economy but that Russia is not ready for a policy like that.

"If only the effectiveness of the government here were similar to that of, let's say, Finland, then yes, siphoning off the money into state coffers would not be the best solution," Gavrilenkov said.

But Russia is no Finland, Gavrilenkov said, noting that Finland came out top on Transparency International's Corruption Perceptions Index of about 150 countries. Russia was 90th on the list.

On the other hand, Gavrilenkov said, taking the funds away from the private sector prevents them from leaving the country, which is a plus, given that the business community, which was seriously spooked by the Yukos affair, is still too scared to make any significant investment.

"Building up reserves is, in a way, similar to capital flight. ... But at least this way capital actually stays in the country," he said.

The Yukos affair, which resulted in the oil major being crushed under a massive back tax bill and in the imprisonment of company founder Mikhail Khodorkovsky, is generally thought to have had the most negative effect on business confidence in Russia.

The reserves the state has accumulated will seep down eventually, Breach said, pointing at planned increased budget expenditures next year. Total budget revenues in 2006 are expected to reach 5.46 trillion rubles ($191 billion), according to the draft, while the government forecasts that spending will rise to 4.27 trillion rubles ($149.3 billion), an increase of about 60 percent for both.

And this increase, if anything, should also compensate for hikes in domestic oil prices in Russia, Breach said.

Gavrilenkov added that higher domestic fuel prices could encourage Russia to adopt more energy-efficient technologies, which the country so far lacks.