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Low oil prices may help Russia shrug off dependence on raw materials export

November 28, 2014, 16:24 UTC+3 Alexandrova Lyudmila

MOSCOW, November 28. /TASS/. The continuing oil price slump may spell an eon of problems for the Russian economy, but even through the veil of current uncertainty screening the future some Russian analysts manage to see at least one bright side of life. They argue that the current trend may serve as a powerful argument in favour of abandoning the current raw materials export-dominated model of the economy and force the government into reconsidering many priorities.

Shortly after Thursday’s meeting of the world oil cartel OPEC, which declared it was leaving output quotas unchanged for the time being, thereby sending the prices to a four-year low, Russian Finance Ministry officials declared that Russia should revise its budget benchmarks and consider 80 dollars per barrel not as a pessimistic, but moderately optimistic expectation.

Infographics Oil prices over 30 years Oil prices over 30 years
Year-average inflation-adjusted oil price. Infographics by TASS
The director of the Finance Ministry’s long-term strategic planning department, Maksim Oreshkin, has said “Russia’s budget policies should be adjusted to new oil prices which, may remain (at a rather low level) for quite a while,” which will require “a harsher approach to public spending and its likely optimization.”

Earlier, Finance Minister Anton Siluanov said that in the near future the government will have to revise the budget and budget policies, optimise spending or at least avoid their growth at the current pace.”

Siluanov warns that 500 billion roubles may have to be taken out of the 3.9-billion-rouble Reserve Fund. Also, the Finance Ministry is going to tap the anti-crisis reserve, which next year will total 120 billion roubles.

“One has to be pretty honest: we have overlooked the shale revolution. The oil market has made a dramatic turn, and this is not a short-term fall,” the director of strategic analysis at the FBK company, senior lecturer at the Higher School of Economics, Igor Nikolayev, has told TASS. “The era of low oil prices is quite serious and it is bound to last.”

The expert believes that in a situation like this the government should refrain from building up tax pressures on businesses and reconsider federal budget priorities. “We are unable to reduce social spending, so we shall have to refrain from the fast increase in defence expenditures, although this decision will be rather hard to make.”

Also, Nikolayev points to the need for revising priority projects being financed from the National Welfare Fund to shift the emphasis on those promising the greatest multiplicative effect.

“The situation is a no easy one, of course, but there is hope it will prove a factor for new economic growth, and in the long term contribute to replacing the economic model,” the chief of the budget policies laboratory at the Gaidar Institute for Economic Policy, Arseny Mamedov, has told TASS. He recalled the old saying: "If it weren’t for bad luck there would be no good luck at all."

“This time the oil prices will not fall as low as they did during the 2009 crisis, but there will be no fast recovery, either,” the analyst warns. The ensuing problems should help Russia “shrug off its dependence on the raw materials’ based economy, give thought to the effectiveness of the budget, and the need for institutional reforms, for achieving real independence of the judicial system and for improving the conditions for doing business.”

As far as budget spending is concerned, Mamedov believes that it would be wrong to try to cut spending on the health service and education, because effecting reforms would require human resources. He agrees that it would be expedient to restrict the pace of spending on defence. It is worth taking a closer look to what extent they may promote innovations and create dual use products. Lastly, says Mamedov, all major infrastructure projects should be re-examined from the standpoint of their effectiveness.

A deputy chief of the public finance department at the Higher School of Economics, Dmitry Kamnev, has told TASS he is “moderately optimistic.” He believes that the prices of oil at the moment are at a very low level and may start growing before long.

“World economic growth is expected in the first or second quarters of 2015. It will encompass the United States and the BRICS group. As a result oil prices will develop an uptrend,” he believes.

Also, the expert predicts diversification of the hydrocarbons export routes from Russia to China and India. The size of the markets will increase accordingly.

“The export of hydrocarbons will be growing. So will the revenues,” he remarked.

As for the idea of cutting public spending, Kamnev argues that it would be wrong to reduce the real sector of the economy and infrastructure projects. At the same time he believes it is impossible to go ahead with financial injections into the social sphere.

Kamnev believes that this is the right movement for getting away from the raw materials export-oriented model of the economy: “Life itself is sending us a clear message - get away from that, develop industries and advanced technologies and put to use the National Welfare Fund for this purpose.”


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