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. Last Updated: 07/27/2016

Russia Drifts Aimlessly in a Sea of Petrodollars

Russia is drowning in dollars as prices for oil -- its main export -- soar, forcing government policymakers to rethink assumptions that the bonanza would be short-lived.

With international investment banks such as Goldman Sachs predicting that crude oil prices could stay above $60 per barrel for years to come, analysts say Russia does not have a coherent plan for what to do with such an embarrassment of riches.

"This country is set up for $30 dollar oil. That's roughly where the budget balances," said Al Breach, an economist at UBS in Moscow, who estimates that annual oil and gas receipts will rise to $200 billion if prices stay above $60.

"The difference for Russia between $30 oil and $60 oil is an extra $100 billion in receipts," he added.

More worryingly, Russia may be saddled with a policy of taxing oil companies to the hilt, which analysts say is ill-suited to the new circumstances and could slow the growth of its oil-exporting capacity.

Until now, the main thinking behind the government's strategy for dealing with the oil windfall was to put aside as much money as possible in the stabilization fund, which is now set to reach $50 billion by the end of the year.

"I think the debate has shifted. Before, the thinking was that prices are high now and you have to find a way to gear macroeconomic policy to prepare for a fall," said John Litwack, the World Bank's chief economist in Russia. "In the last year, expectations of a high long-term oil price have grown. The risk of a fall below $20 a barrel seems remote."

Russia has already dipped into the fund to pay off $15 billion of debt owed to Paris Club sovereign creditors and is likely to make more early debt redemptions next year.

The government, whose draft budget for 2006 is based on a forecast oil price of $40 per barrel, is forecasting the stabilization fund will rise to nearly $80 billion next year, but economists say that figure is conservative.

"We are talking about a stabilization fund which could rise to $100 billion," said Yevgeny Gavrilenkov, chief economist at Troika Dialog. "They definitely don't know how to spend all this money."

One of the key challenges facing the government is that since the introduction of a stringent tax regime for oil profits last year, nearly all the proceeds of the windfall flow straight into state coffers.

Liberals in the government, led by Finance Minister Alexei Kudrin, have so far fought off attempts to use the fund to bankroll a spree even though next year's draft budget calls for more spending on pensions, health care and education.

There also seems to be little prospect that the Kremlin will ease the tax burden on the oil industry, still mostly in private hands despite the nationalization of most of Yukos, which in its heyday was Russia's biggest oil firm

"They [the government] want to keep these flows under their control. The idea of increasing the tax burden on oil was part of a change in attitudes to business," said Gavrilenkov.

Private oil companies, as a result, are unable to make full use of the oil price boom to plow back profits into expanding the industry.

"With these prices, oil companies should have funds to pay for the bulk of their investments. But they are not getting the extra revenue. The tax system is punitive," said Zsolt Papp, an emerging markets economist at ABN AMRO.

"The feeling is Russia won't fully exploit the benefits of high oil prices. It has to increase export and production capacity but at the moment it cannot bring its additional production as fast to the market as the Gulf states."