Russia refuses to cut oil production at its own risk


	November 27, 2001	atimes.com

Central Asia/Russia

Russia refuses to cut oil production at its own risk
By Sergei Blagov

MOSCOW - Unstable oil price is threatening Russia's economic growth, warns a top government official.

Russia's Minister of Finance Alexei Kudrin has urged the country's entrepreneurs to prepare themselves for "serious economic risks". Kudrin told the State Duma, the Lower House of parliament, last week that if the price of Russian Urals crude drops to US$15 per barrel, export duties will also fall. Economists fear that next year's gross domestic product growth (GDP) may fall below government projection of some 4 percent, and well below last year's unprecedented 8 percent growth.

Russia, which is the second-largest exporter after Saudi Arabia, depends on oil for nearly two-fifths of its budget revenues. Oil price has fallen by a third since the September 11 terrorist attacks on New York and Washington. To stabilize oil prices, the Organization of Petroleum Exporting Countries (OPEC) and other producers have failed to persuade Russia to cut production and exports. "No-one can make any demands of us," Prime Minister Mikhail Kasyanov said.

Russia's second-largest oil producer YUKOS also opposed output cuts. YUKOS chief Mikhail Khodorkovsky said that it is out of question to reduce production. But Russia's top oil producer LUKoil agreed to support bigger cuts. Company vice president Leonid Fedun said that his company is ready to curb output by closing unprofitable wells. Although Russia exports more than 100 million tonnes of oil yearly, Moscow has declined to join OPEC, which has repeatedly indicated that it would welcome Russian membership. Moscow prefers to retain its current status of "an independent producer".

Oil revenues account for 40 percent of the country's hard currency earnings. In recent weeks, Russia offered to cut 30,000 barrels per day out of its production of 7 million barrels per day. OPEC is far from satisfied with this symbolic gesture and indicated that Russia's position is unreasonable. Russia currently exports 3.3 million barrels per day (bpd).

Since earlier this year, OPEC has cut production three times by a total of 3.5 million bpd in a bid to stabilize oil prices. Earlier this month OPEC announced that it will cut 1.5 million bpd as of January, but only if non-OPEC producers support the move with a total output reduction of 500,000 bpd. Mexico reportedly pledged to cut 100,000 bpd and Norway indicated to slash 100,000, only if Russia joined in the cuts.

During a meeting in Moscow on November 19, Russian Energy Minister Igor Yusufov offered Mexican Oil Minister Ernesto Martens no new reductions. But Russian officials also hinted that Moscow might submit to pressure from OPEC, Mexico and Norway and cut exports. "Russia mulls further steps in order to stabilize the world oil markets", Deputy Prime Minister Viktor Khristenko said.

Every dollar drop in the price of oil translates into roughly $1 billion of losses for Russia's state coffers. Alexei Miller, the head of Russia's natural gas monopoly Gazprom, stated that unstable crude prices may also push gas prices down and could cost the state budget billions of dollars in gas revenues. Even a 10-percent fall in the price of natural gas may cost Russia nearly $2 billion a year, he said.

Despite Khristenko's pledges, a price war looms, should Russia continue to refuse OPEC's demands to cut production. "We need to salvage [the] international oil market," said Yevgeny Samoilov, head of Russia's Union of Oil Exporters. He said that Russia is likely to offer a 60,000 bpd cut of its exports, which is still below OPEC's demands. Sliding oil prices could weaken the ruble and force Russia to press for the restructuring of its $140-billion foreign debt.

When oil prices slumped below $10 per barrel in the late 1998, OPEC took enough oil off the market to lift prices. In August 1998, low oil prices sparked Russia's financial crisis, making it impossible for the country to service its debts. Some Russian officials see silver linings in the bumpy oil market. President Vladimir Putin's chief economic advisor, Andrei Illarionov, for example, said that Russia can make end's meet even if oil goes down to $12 per barrel. Illarionov also claimed that lower oil revenues will allow the economy to become less dependent on fuel exports.

(Inter Press Service)