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Philadelphia Inquirer: Even Putin concedes: ‘This golden era… can’t last.’: Spending spree in Russia is fueled by its oil and gas

Posted on Sun, Dec. 03, 2006
By James Brooke
Bloomberg News

In central Moscow, construction cranes loom over the Kremlin, as hotel and office towers rise to accommodate Russia’s newly minted companies and the flood of foreign business visitors. Downtown apartments that cost $100,000 a few years ago now go for $1 million.

On weekends, shoppers by the thousands line up behind cash registers at the 150,000-square-meter Tyoply Stan suburban mall, loading up on home furnishings, televisions and cell phones. Stockholm-based Ikea, which owns the mall, reported it welcomed 52 million shoppers in 2005, making it the most-visited shopping center in Europe. Moscow is adding 100,000 cars to its roads every year.

Across Russia, consumer loans doubled in the first nine months of 2006 to $80 billion. The country has seen eight straight years of economic growth, with expansion for 2006 estimated at 7 percent, according to Economy Minister German Gref. Bankrupt a decade ago, Russia wrote $23.7 billion in checks Aug. 21 to repay government debt run up during the 1998 ruble crisis, in which it defaulted on loans and bonds.

Much of Russia’s new prosperity can be traced to a single source. “Russia’s economy is about oil,” says Natalia Orlova, chief economist at Moscow-based Alfa-Bank. Oil and gas account for 65 percent of Russia’s exports and 60 percent of federal tax receipts. “Consumption is financed by oil revenues,” she says.

Russian President Vladimir Putin is the first to point out that this golden era of energy can’t last. “The main task of the government in the near term is to diversify our economy,” Putin said Oct. 25 in a three-hour, nationally televised question-and-answer session.

Russia is the world’s largest gas exporter and second-biggest oil exporter, after Saudi Arabia. The 92 percent rise in petroleum prices in the last three years has swelled the coffers of the big oil and gas companies and of the government.

The Kremlin’s hard-currency reserves jumped more than 65 percent in the year ended Nov. 17, to $279 billion, more than the reserves of the entire euro zone. Russia has also profited from high prices for aluminum, gold and copper. Oil, gas and other commodities now account for 80 percent of Russia’s exports.

The price of oil Wednesday, at $62, was down 19.5 percent from its Aug. 7 high of $77. “If oil went down into the $30 range, there would be a lot less cash in the economy, a lot less money flowing into equities,” says Kim Iskyan, co-head of research at Moscow-based investment house MDM Bank. “And consumer demand would trail off significantly.”

The government has tried to protect itself against such an event by setting up an offshore “stabilization fund” that held $77 billion as of Nov. 1, Iskyan says.

Putin says his government is striving to expand job opportunities in manufacturing, technology and other fields. By the end of this decade, Russia’s car production will double to two million units a year, and up to 70 percent of parts for the cars will be produced in Russia, he predicts.

Putin believes the government has a strong role to play in creating economic diversity. In his national Q-and-A, he called on the nation’s state- and privately owned aircraft-makers to unite into one state-owned holding company.

One week later, the company he proposed, OAO United Aircraft Corp., was established in Moscow.

Putin’s government has also sought to cement a dominant role in the gas and oil industries for state-controlled gas giant OAO Gazprom and OAO Rosneft Oil Co. State-aligned companies in steel, aluminum and other commodities have received similar support.

In mid-November, government environmental inspectors vowed to revoke the licenses of oil giant Royal Dutch Shell P.L.C. that allow it to participate in an oil-exploration venture called Sakhalin 2, in which Shell has a 55 percent stake. Iskyan says the government’s motive is to win a controlling stake in the project for itself.

In mid-October, former U.S. Federal Reserve Chairman Alan Greenspan criticized Russia’s swing back to big state companies. “National champions, by definition, are those that don’t maximize profitability,” Greenspan, 80, told an annual investors’ conference in New York sponsored by Moscow-based investment bank Renaissance Capital. “Competition is critical.”

Elections could further swell the government’s outsize role in the economy. A parliamentary vote is scheduled for next December, and a presidential poll for March 2008. In the run-up to the votes, the Kremlin is pushing through a 26 percent increase in the federal budget for next year. Among planned projects: a $2 billion highway linking Moscow and St. Petersburg, and $24 billion in rail improvements, including the purchase of eight German-built high-speed trains.

“Russian fiscal discipline has been exemplary in recent years,” says Vladimir Gersamia, a fixed-income strategist and Russia expert at Merrill Lynch & Co. in London. “Now, with elections coming up, the general political impetus is to spend this money.” and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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