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Can Russia Become an Oil Paradise? Vladimir Milov China-Russia Conference: "The Role of the State in the Economy in the 21st century“, October 14, 2006 I. A Petro-State Russia? Russia ranks 1st in the world in the total hydrocarbon production Russia Saudi Arabia Iran Norway Venezuela UAE 2005 Total hydrocarbon (oil + gas) production Algeria Nigeria Kuwait Libya Iraq Qatar Oman 0 200 400 600 mln ton of oil equivalent per year Source: BP Statistical Review of World Energy 2006 800 1000 Why aren’t we Norway yet? Norway UAE Qatar Kuwait Saudi Arabia Oman Libya Malaysia Russia GDP (PPP) per capita in oil and gas producing countries Iran Kazakhstan Algeria Venezuela Azerbaijan Ecuador Iraq Indonesia Angola Vietnam Nigeria 0 20000 GDP (PPP) per capita, 2004 Source: the World Bank 40000 “Norway is a country of triumphant socialism” Sergey Stepashin, Head of the Audit Chamber of RF What is the secret behind socialism triumphing in Norway? Qatar Kuw ait Oman Population in oil and gas producing countries in 2004 UAE Norw ay Libya Saudi Arabia Venezuela Algeria Iran Nigeria Russia 0 50 100 mln peopleк Source: the World Bank 150 It is much easier to build socialism in a country with less than 5 mln inhabitants compared to a country with almost 150 mln people. …which is confirmed by data Qatar UAE Kuwait Norway Saudi Arabia Oman Libya Venezuela 6.84 Russia Algeria Kazakhstan Annual per capita of hydrocarbons (oil+gas) in 2004 Angola Iran Iraq Malaysia Azerbaijan Ecuador Nigeria Indonesia Vietnam 0 50 tons of oil equvalent per capita, 2004 Source: BP Statistical Review of World Energy 2006, the World Bank 100 The situation is further complicated by the fact that Russia mainly produces oil and gas not for export but for internal consumption. Annual per capita hydrocarbon export in Russia amounts to 3 tons. Qatar Norway UAE Kuwait Oman Saudi Arabia Libya Venezuela Algeria Angola 3.01 Russia Annual net exports of hydrocarbons (oil+gas+oil products) per capita in 2003 Kazakhstan Iran Iraq Malaysia Azerbaijan Ecuador Nigeria Indonesia Vietnam 0 20 40 ton of oil equivalent per capita Source: International Energy Agency, the World Bank 60 Energy-inefficient economy in Russia prevents from an increase in revenues from oil and gas exports Norway Angola Nigeria Oman Kuwait Algeria Libya Saudi Arabia Qatar UAE Venezuela Kazakhstan Iraq Ecuador Iran 0.47 Russia Indonesia The ratio of hydrocarbon exports to internal consumption (2003) Malaysia Azerbaijan Vietnam 0 0.5 Source: International Energy Agency, the World Bank 1 Can Russia become rich only due to oil and gas? 40000 Norway GDP (PPP) per capita, 2004 35000 UAE 30000 Qatar 25000 Russia Kuwait 20000 Saudi Arabia 15000 Oman 10000 5000 0 0 10 20 30 40 50 Net hydrocarbon exports per capita, mln tons of oil equivalent per year Source: Vladimir Milov, ‘Can Russia become an Oil Paradise?’, http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=18500 60 70 Some Conclusions • The key problem of a petro-state is sufficiency of resources rather than institutions • Only petro-states with small population (up to 5 mln people) and low internal energy consumption can successfully use revenues from oil and gas exports to improve living standards in the country • The scale of oil and gas production and, more importantly, exports in Russia do not permit to consider oil and gas as a significant factor in accumulating national wealth II. “A left-hand petro-turn” What determines popularity of Russian presidents? 70 A weighted average of Urals Oil price in recent periods, USD/bbl (in nominal terms) 62.18 60 50 40 30.86 30 20 16.73 10 0 22.08.1991-31.12.1999 Source: The Wall Street Journal 01.01.2000-31.12.2005 Jany-July 2006 Timeline of recent Russian political history A weighted average of Urals Oil price in recent periods, USD/bbl (in nominal terms) 62.18 7 mo 2006 Large-scale dismantling of political liberties, transition to paternalistic economic policy 50 2005 Economic reforms abandoned. Control over Yuganskneftegas established, regional governors’ elections abolished 34.39 2004 Beginning of scaling down economic reforms. “Yukos affair” initiated, M. Khodorkovsky arrested 27.29 2003 A period of half-hearted attempts to carry out reforms, an obvious lack of consensus on economic policy issues among the authorities 24.82 2000-2002 Definitive departure from the reformist agenda. Establishing of tough foreign policy 16.73 1991-1999 0 10 20 30 Source: The Wall Street Journal 40 50 60 70 “A budget maneuver”, 2002-2007 Non-interest expenses of the federal budget, as % to GDP, 2002-2007 18 16 14 12 10 8 6 13,5 13,5 2002 2003 16,7 17,0 2006 2007 14,3 12,3 4 2 0 2004 2005 Source: the Federal Budget of the Russian Federation (2007 –draft budget submitted to the State Duma) How big are Russia’s available funds? A comparison of the reserves in the Stabilization Fund and the most important expenses envisaged for modernization and social programs, bn, current USD Current Reserves in Stabilization Fund 80 70,5 Transportation Strategy Annual Investments as Specified in Some Key Priority Programs 20 12 20.5 18 State Energy Programs (RAO UES, federal power networks, Yamal, East Siberia, etc) State Program of Arms Modernization Annual deficit of the Pension Fund 0 20 40 60 80 100 Source: Russian Ministries of Finance, Transport, Energy, Defense, and the Pension Fund Excess revenues from oil and gas exports look impressive only at the first glance. If compared with the size of the country, they look dramatically deficient. So far, projects financed from the Investment Fund, can be hardly regarded as truly of federal importance Allocation of funds from the Investment Fund of RF, per project, as of September 20, 2006 Regional projects around St Petersburg Access ways to Bazel and NorNickel indistrial facilities in East Siberia Petrochemical facility in Tatarstan Other projects 0.63 0.38 2.16 2.96 Source: Russian media Some conclusions • Despite warnings, the government has already embarked on the course of paternalistic policy and inefficient spending of excess revenues from oil and gas exports • The Investment Fund expenditure pattern shows that the funds are being allocated to regional projects and the most successful lobbyists and not to federal projects • In doing this, Russia is slowly but surely returning to the 1980s course