Oil Boom Giving Putin a Smooth Ride

If Vladimir V. Putin rides to an easy victory in Russia’s presidential election in March, he will have been borne on a tide of oil.

To an extent little appreciated in the West, the Kremlin decisions that led to Boris N. Yeltsin’s resignation and Putin’s ascension were made possible by a surge in world oil prices last year that refilled the government’s coffers, eased its dependence on foreign loans and helped finance the new war in Chechnya.

Because of oil, the Kremlin had the money it needed to wage the war in the separatist republic that has made Putin, Russia’s acting president, a national hero. And because of oil, the Kremlin has been able to defy the West’s outrage over the large number of civilian casualties in Chechnya and shrug off Western threats to withdraw financial support.

Yeltsin was able to resign on New Year’s Eve confident that, in the weeks leading to the March 26 ballot, his chosen successor could run an election campaign with an economy buoyed by black crude.

“High oil prices have offered them a window of opportunity,” said Alex Garrard, in charge of monitoring Europe’s emerging markets at Warburg Dillon Read in London. “They knew it wouldn’t stay open forever.”

As this week’s dip in oil prices showed, it may already be closing.

Taxes from the energy sector provide at least half of Russia’s federal revenue, and oil companies alone are estimated to provide between 25% and 30%. Every increase of $1 in the price of a barrel of oil is estimated to earn Russian oil companies $1 billion.

It’s hard to tell exactly how much additional revenue the government has gained in recent months, but the figure has far exceeded Moscow’s expectations. The 1999 budget was based on an expected average price of oil of about $17 a barrel, which seemed unrealistic when prices dipped below $10 in February. Since then, the price has risen to around $25 a barrel.

The government clearly is feeling flush. In October, it boosted the military’s budget by $1 billion to pay for the Chechen war. Although Moscow didn’t receive $4.7 billion in loans that it was expecting last year from the International Monetary Fund, it managed not only to make up the difference but to pay back the fund as much as $8 billion.

“Rising oil prices do more for Russia than the IMF,” said Daniel Yergin, chairman of Cambridge Energy Research Associates in Massachusetts, which analyzes the oil industry.

The oil money also has helped the government make progress on bread-and-butter issues. In the past year, the Kremlin claims to have eliminated overdue pensions and paid down back wages. Putin pledged Thursday to pay off all remaining wage debt by April 15.

While it’s unlikely that Kremlin decision-makers were consciously tracking the price of oil when Yeltsin decided to resign, many of the factors they probably did consider--the course of the war, the state of the budget and the direction of the economy--are profoundly dependent on the oil market.

“Clearly they have the budgetary wherewithal they didn’t have a year ago,” Yergin said. “If Yeltsin was going to go, why not go now? Six months from now, who knows what they could expect?”

The oil boom is the latest in a number of positive economic trends for Russia.

The crash of the ruble in August 1998 destroyed the financial markets, Russians’ life savings and consumer demand. But the cheaper ruble also gave domestic producers a competitive advantage, and they have rebounded, fueling an industrial growth rate that may have reached 8% in 1999.

This week, the government announced that Russia’s gross domestic product grew 1.5% in 1999--a significant improvement over the drop of 4.5% the previous year.

The financial markets are beginning to rally. Volume and prices are up on the Moscow stock exchange, whose index has climbed more than 70 points in the last month to close at 185 on Thursday.

And Russia may be losing its status as a pariah on financial markets. Garrard said “risk appetite” is returning and investors are turning back to Russia. Even though the Russian government defaulted on its bonds just 16 months ago, Garrard said he expects Russia to be able to issue new ones by the end of the year.

“Investors don’t often have as long memories as you might think,” Garrard said. “In Russia’s case, even elephants can forget.”

Still, little of this has had an impact on consumers’ pocketbooks. Charles Blitzer, a former World Bank economist now with Donaldson Lufkin & Jenrette, pointed out that real wages are still 30% lower than before the ruble crash. And without strong incomes, Russian consumer demand will be unable to drive a real recovery.

Moreover, economic growth may be petering out even before it has picked up momentum. Most industrial growth occurred in the first half of 1999, Blitzer said, and there has been little since. The oil revenues are helping the federal budget but are not fueling the economy as a whole.

“The economy slipped, it recovered, but it’s not yet growing,” Blitzer said. “There have been no signs of growth since early summer.”

That may be one reason the Kremlin is taking steps to protect its oil revenue stream. After steadily cranking up export duties for oil companies throughout the year, Putin doubled them last month. On Thursday, his administration renewed a threat to cut off pipeline access to any oil company that is behind in its taxes.

“Access to the export pipeline for oil companies in the year 2000 will depend on one condition--complete absence of arrears in their payments toward the budget. This will be the only basis for oil exports,” said First Deputy Prime Minister Viktor B. Khristenko.

Putin also took steps Thursday to make sure that the Russian Central Bank gets full benefit of the oil boom, announcing plans to raise from 75% to 100% the proportion of exporters’ hard-currency earnings that must be exchanged into rubles. When exporters bring their profits home to Russia and exchange them for rubles, it buoys the currency as well as the central bank’s reserves.

Putin also pledged to tighten currency export controls to put the squeeze on capital flight--a major problem among commodities exporters, including oil companies.

While these measures are likely to make oil companies and foreign investors squirm, Putin presented them as commonplace and full of common sense.

“This is a step in the right direction,” Putin said Thursday, offering a curious rationale: “There are few countries in the world that leave their exporters with any currency other than their own.”

A dip in oil prices in recent days only underscores that Russia’s oil bubble could burst. The current high prices owe much to discipline by members of the Organization of Petroleum Exporting Countries, and many factors could erode the price further. Coincidentally, the next meeting of OPEC members is scheduled for March 27, the day after Russia’s presidential election.

Moreover, Putin knows that whatever benefits oil is bringing the government in the short run, oil alone will not be able to provide the kind of long-term growth Russia needs to thrive.

In a treatise he wrote just before taking over as acting president, Putin acknowledged that even at a feverish GDP growth rate of 8% a year, it would take Russia 15 years to reach the per capita GDP of Spain or Portugal. Catching up with Britain or France would take an unattainable annual growth rate of 10%.

But while Russia’s long-term economic health remains uncertain, its short-term vigor can only work in Putin’s favor.

Peter Boone, head of research for the Brunswick Warburg brokerage firm in Moscow, said oil may not be the cure-all for Russia’s ills. Nonetheless, he said, “what a great time to get elected and to ride this wave.”

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Oil Price Bonanza

In Russia, every $1 increase in the price of a barrel of oil brings about $1 billion to oil firms and $250 million to $300 million in tax revenue for government coffers.

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Source: Cambridge Energy Research Associates