Russia Agrees to Curb Oil Output

Russia yielded to OPEC pressure Wednesday, announcing a significant cut in oil exports--150,000 barrels a day--in a bid to stabilize falling prices.

The news was welcomed by the oil-producing cartel, which is expected to announce its own cuts today. U.S. oil prices initially rose on the news, but soon fell as traders questioned Russia’s commitment to end the glut of supply. If the cuts are made, it could raise gasoline prices, which have been as low as 99 cents a gallon for regular at some Los Angeles-area stations.

Possible price increases would be bad news for the U.S. and Europe, which are fighting their way out of a global economic downturn. A further drop in prices might have revived hopes of a global recovery but would have hit Russia hard in 2003 when it faces a big debt crunch.

After the fall of the Soviet Union in 1991, the Russian oil industry was in decline because of shoddy technology and inefficient production. But its production recovered in recent years, and the nation gradually gained clout as the world’s second-largest oil producer and exporter and the largest non-OPEC producer, with a total production of 7 million barrels a day.

Other non-OPEC producers, such as Mexico and Norway, have already announced they will heed the call for a cut in production to reduce a global oil glut. Russia’s cut is to take effect Jan. 1.

Oil prices have fallen more than 50% in the last year, with prices driven lower after the Sept. 11 attacks in the United States.

The Organization of the Petroleum Exporting Countries, which accounts for 40% of world production, this year has already cut production by 3.5 million barrels a day to try to prevent prices from falling. Today, it is expected to announce a cut of 1.5 million barrels a day beginning Jan. 1.

The Russian announcement came after Prime Minister Mikhail M. Kasyanov met with oil executives from nine top Russian companies in Moscow. Although Russia’s oil companies are privatized, they are still highly sensitive to Kremlin pressure in a country where business oligarchs fear falling out of official favor.

It also comes after a recent visit by U.S. Secretary of Energy Spencer Abraham, who reportedly pressed Russia to maintain production levels, a move which would have undercut OPEC’s global power and lowered oil prices for the U.S. and Europe.

Russia initially showed reluctance to cut production by more than 50,000 barrels a day, suggesting it was eager to further improve relations with the U.S. and to prove itself as a supply alternative to OPEC.

Although Russia’s budget next year is predicated on an oil price of $18.50 a barrel, the government wants to stabilize the price at between $20 and $25. In New York futures trading Wednesday, near-term crude oil futures eased 16 cents to $19.49 a barrel.

Russia owes about $143 billion in foreign debt. Oil prices have a huge effect on government revenue and its ability to service the debt, its biggest budget expenditure item.

Oil companies provide 25% to 30% of tax revenue in Russia. Oil accounts for 25% of exports and about 40% of hard currency earnings.

While Russia is expected to meet its debt obligations without difficulty next year, 2003 is a different story. Then it will have to find $19 billion to make debt payments.

Russian analysts believe that, given the coming crunch, a sustained fall in global oil prices would force their nation to plead with the West to reschedule the debt payments.

Andrei V. Ryabov, economic analyst at the Carnegie Moscow Center think tank, said Russia was afraid of OPEC’s threat to drop the oil price to $10 a barrel.

“Today’s decision demonstrates that the Russian government has realized that while the budgets of countries like Oman or Norway could easily withstand such a serious attack from OPEC, for Russia it would be, if not a catastrophe, then a crushing blow to domestic stability.”

He said a collapse in the oil price also would be a blow to Russian President Vladimir V. Putin, “who has made too many attractive social promises for 2002.”

Ryabov said even with higher oil prices, Russia would have to renegotiate its debt payments in 2003.

“Even with high oil prices it would be hard for Russia to meet its 2003 foreign debt obligations in full,” he said, “but the fact that Russia’s revenue is going to drop as a result of the oil exports reduction will aggravate Russia’s situation even further.”

“As matters stand now, Russia should already be considering backup plans for paying its foreign debts.”

Russia’s big producers have been split over the question of a production cut.

Yukos, the country’s second-biggest producer, whose production has grown sharply recently, argues that Russia could offset lower prices by expanding the volume of oil sold, giving the country a bigger share of the world market.

The company has warned that if Russia cuts exports it will lead to massive layoffs while competitors such as Kazakhstan and Azerbaijan could steal Russia’s market share.

A Yukos spokesman, Hugo Erikssen, said the company favored expansion of production from 7 million to 9 million barrels a day. But he said Yukos would comply with the cut, despite its opposition.

Russia’s largest producer, Lukoil, which increased its production by only 1% last year, argued strongly in favor of the cut.

“We believe it is a wise and correct decision dictated by the government’s concern for the federal budget and the good health of the national economy,” Lukoil spokesman Dmitry Dolgov said.

“Today’s decision instills hope that Russia will be able to pay its foreign debts in 2003, that it will not have to slash its social spending and cut back on social programs and that the national budget will not have to be trimmed so severely.

“If oil prices are above $22 a barrel, that means the national budget is doing fine,” he said.

The only question is whether producers will stick to their promise. Prime Minister Kasyanov said Wednesday the government will do its best to ensure the pledge is fulfilled and he hopes other countries will adhere to the new limits.

“We count on the fact that other oil suppliers that have taken a decision will in fact carry them out,” he said.