OPEC oil output boost could slam Russia hard

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WIRE:03/29/2000 13:21:00 ET OPEC oil output boost could slam Russia hard MOSCOW (AP) _ High oil prices helped tug Russia out of years of recession and bring modest economic growth over the past year. But now prices are set to dip _ and policymakers have no other medicine for Russia's anemic economy. With OPEC's decision to increase boost crude oil output by up to 7.5 percent, prices are expected to drift down from their stunning highs of the past year.

Coping with shrinking oil revenue and reducing Russia's reliance on oil exports could prove one of the first major challenges for newly elected President Vladimir Putin. His popularity has been helped by the largely oil-spurred economic growth of recent months after a decade of recession.

Russia depends on its oil reserves perhaps even more than the Arab world. Oil is Russia's largest single industry, its main export commodity and a crucial source of tax revenue.

"Things are very volatile," said Chris Weafer, an oil analyst at Troika Dialog investment bank in Moscow. "We can't forget that Russia has billions of dollars in debts to pay this year and (non-oil) sources of financing are quite low."

Russia is not a member of the Organization of Petroleum Exporting Countries, so it did not have to adhere to OPEC's decision last March to cut production to bolster rock-bottom oil prices, which had sunk to $10 a barrel.

Russia kept pumping oil, and reaped revenues when prices soared, hitting a nine-year high of $34 this month. The money didn't solve Russia's economic problems, but it gave the government enough cash to pay pension debts, help stabilize the ruble and cover the costs of the war in Chechnya.

Analysts estimate Russia took in $4 billion more from oil taxes and tariffs than had been projected in last year's budget. The entire annual budget was about $25 billion.

Russia can't just pump more oil, or export more, to make up for falling prices. It's already exporting as much as it can _ about 40 percent of output.

"To increase exports one needs to increase output. To increase output one needs investment in the oil sector," said Vladimir Merkushev, an economic analyst with Centre-Invest in Moscow.

Alexander Shokhin, head of the Russian parliament's committee on foreign debt, said Russia may be forced to print more money if oil prices drop too low. The move would stoke inflation and could seriously weaken the economy.

Other Russian officials played down the OPEC decision.

"We aren't scared that the economic situation may deteriorate," First Deputy Prime Minister Mikhail Kasyanov said Tuesday. He said the government has prepared for a drop in oil revenues, but didn't say how.

The government has some cushion: Its 2000 budget assumed an $18-19 per barrel oil price, well below current levels, Weafer said. But the budget also figures in a $2.6 billion International Monetary Fund loan. That loan is now frozen.

Meanwhile, Russia owes the IMF $8 billion this year.

"If oil prices drop too far and the IMF doesn't resume lending, Russia may have to reschedule the debt," Merkushev said.

Russia and the United States were on opposite sides in the fight over OPEC production levels. The United States, the world's biggest oil consumer, had exerted heavy pressure to boost output. But Russian Fuel and Energy Minister Viktor Kaluzhny urged no increase in world output.

Despite the appeal, ministers of the 11-nation cartel said that as of Saturday, OPEC would begin pumping an additional 1.45 million barrels of oil a day above current official output levels.

"Russia's leverage is very small over OPEC," Merkushev said.

Some say the increase may not make much of a difference in world supply or prices because of cheating by OPEC members on the old output ceiling. The daily newspaper Izvestia said Wednesday that Russia had little to fear.

But, it added, "the government shouldn't relax. Any responsible strategy for Russia's development should definitely be aimed at reducing the country's economic dependence on oil prices."

http://abcnews.go.com/wire/World/ap20000329_900.html

-- Martin Thompson (mthom1927@aol.com), March 30, 2000


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