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Wall Street Journal
November 5, 2002
Russian Minister Says Economy Won't Stumble Amid Iraq
War
By JEANNE WHALEN and GUY CHAZAN
Staff Reporters of THE WALL STREET JOURNAL
MOSCOW -- After consultations with Western governments, Russia believes that a change of regime in Iraq wouldn't lead to an immediate flood of new oil to market that could seriously undercut prices and undermine Russia's economy, Finance Minister Alexei Kudrin said.
In an interview, Mr. Kudrin said there was no formal agreement on a price target, but added Russia and the U.S. shared a common "idea" of where petroleum prices should be. He predicted the price of a barrel of Russia's Urals blend crude wouldn't dip below an average of $21.50 (€21.57) next year, which would allow Moscow to meet all its budgetary obligations, including heavy foreign debt payments.
Russia's confidence that oil prices won't take a dive could help calm some of its anxiety over a U.S. strike. Russia, a member of the United Nations Security Council, has refused to support a U.N. resolution that would include an automatic trigger for military action against Iraq. Part of its concern is that a new U.S.-backed regime in Baghdad could ratchet up petroleum production and bring about a collapse in prices. Russia, the world's second-biggest oil exporter, collects about 40% of its budget revenues from petroleum and gas firms.
"Russia is against any sudden, sharp fall [in prices] that ... would create problems both for companies and various countries' budgets," said Mr. Kudrin, who also is deputy prime minister. He added that he had raised this concern in meetings with Western oil firms and finance ministers and come away confident that an immediate collapse could be avoided.
Kremlin watchers have speculated that Russia might try to cut a deal with the U.S. -- for example, agreeing not to use its veto against a U.S.-led Iraqi campaign in return for economic incentives including a pledge by Washington to keep a lid on oil output. Mr. Kudrin wouldn't comment on any such arrangement.
If prices do nose-dive, Russia may decide to trim its own petroleum exports to soften the fall, Mr. Kudrin said, though he added that the country's private oil firms would have the ultimate say about any cutback. Earlier this year, Russia said it would nominally trim exports in order to help the Organization of Petroleum Exporting Countries bolster prices, but few analysts believe that Moscow actually fulfilled its pledge.
Indeed, Russian oil producers have scrambled in recent years to boost exports to take advantage of high prices. The booming energy sector has helped fuel three years of economic growth and repair state finances. Foreign-currency reserves are at an all-time high, the budget is in surplus and foreign debt is being paid in full. Flush state coffers have helped create political stability under President Vladimir Putin and given him the confidence to push ahead with market reforms.
But the rosy economic picture could be jeopardized if oil prices crash. Last week, a World Bank report said Russia's economic performance remained "crucially dependent on natural-resource exports." The bulk of new investment in Russia is being plugged not into small business or manufacturing but back into petroleum and gas, the bank said, adding that Russia urgently needed to diversify its economy if it is to achieve sustainable growth.
Acknowledging this dependency, Mr. Kudrin said budget planners had taken steps to insulate Russia from oil-price shocks. Moscow has salted away windfall tax revenue in a special fund that it will use to make $17 billion in payments on its foreign debt next year. It plans to privatize stakes in big petroleum firms and could raise additional funds by selling precious metals and gems or by proceeding with a $1.25 billion Eurobond issue. As a last resort, Russia could dip into its foreign-currency reserves of $46.4 billion.
To help it meet its foreign debt payments, Russia hopes to collect on some of the money it is owed by former Soviet-client states like Iraq. Currently, Baghdad isn't servicing the $9.5 billion it owes Moscow. "The current leadership has for the last few years avoided talks on this debt, linking this issue to the removal of U.N. sanctions," Mr. Kudrin said.
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