Russia will cash in if oil prices continue to surge but any windfall
would likely mean the country suffering its corollary - rising
inflation.
Should the price hit $100 a barrel as oil analysts are
widely predicting - Tuesday Brent-blend benchmark was $92 - the
country's Stabilization Fund, which amasses windfall oil revenue, would
be boosted to more than 4 trillion rubles ($162 billion). While that
creates new wealth and strengthens President Vladimir Putin's hand on
the world stage, longer term the massive accumulation of windfall oil
money can create a lethal combination of inflationary pressures and
speculative capital that could threaten economic stability.
While Oleg Zasov, deputy director of the macroeconomic
department at the Economy Ministry maintains that "high oil prices
don't pose any risk to the country's economy in the short run," he does
add: "Agriculture, food processing, machinery and textiles might face
problems if oil prices remain high."
Agriculture illustrates the problem. According to Finance
Minister Alexei Kudrin, food prices have increased by 2.5 times in the
past seven years. However, domestic food production rose only 20% over
the same period. The rise in food prices is blamed for the country's
inflation by Economics Minister Elvira Nabiullina and President Putin
has announced price controls on food ahead of parliamentary elections
in December.
Wimm-Bill-Dann, Russia's leading dairy and juice producer
whose shares are listed in New York, said high oil prices in themselves
don't affect its business but confirmed that other expenses such as
transportation are on the rise.
Against an original government target of consumer prices
rising 8% by year-end that figure now looks set to leap by more than
11%, spurred by the worldwide rise in food prices and massive net
capital inflows into Russia of almost $67 billion during the first half
of the year.
The Federal Statistics Service, or Rosstat, said Tuesday
that consumer prices accelerated by 1.6% on the month in October,
double the rise registered in September and bringing total inflation
for the first ten months of the year to 9.3%. That compares with 7.5%
in the corresponding period last year.
GDP growth may be projected at 7.3% this year - every $10
added to the oil price boosts annual gross domestic product by 0.3% -
but salaries in real terms were up 14% in September from a year earlier
with even larger increases in retail, construction and the public
sector. With salaries rising faster than productivity more goods and
capital will likely be sucked into Russia.
High oil prices can also skew sound economic and political
management, says Konstantin Sonin of SEFIR, an independent economic
think-tank
"Oil revenues help destroy economic and political
institutions," he says. "Both the country's leadership and citizens
feel less need for checks and balances."
When the global credit crisis sent international investors
selling off ruble positions late summer, Russian monetary authorities
rushed to support banks with liquidity, giving up their efforts to tame
inflation.
"The main problem the central bank faces is that fighting
inflation threatens the stability of the Russian banking sector," said
SEFIR's Sonin.
Chris Weafer, chief strategist at UralSib in Moscow, sees
the danger in short-term speculative capital coming into Russia as
investors will increasingly trade and settle in ruble.
"Short-term inflows can very quickly become very distractive to the economy," says Weafer.
For now, however, the country can enjoy the increased rush of wealth.
"There is plenty of money to go around to satisfy both those
who want to spend and those wanting to put money in long-term funds,"
says Weafer.
Russia now plans to split the Stabilization Fund into two funds, the Reserve Fund and the National Wealth Fund in 2008.
An oil price of $100 per barrel would mean $700 million a day
in crude oil and oil products revenue, Weafer says. In November 2006,
that figure was $250 million a day.
About 65% of the daily revenue - or some $450 million - goes
to the federal budget, Weafer says. Then, the windfall is transferred
to the Stabilization Fund, which currently stands at around $148
billion.
The fund, which was established at the start of 2004,
collects a surplus portion of oil royalties and customs duties. These
are divided into two groups, with a percentage of revenue from oil up
to $27 a barrel transferred to the federal budget and a percentage of
revenue from oil above $27 a barrel put toward the fund.
Weafer reckons that after adjusting for tax exceptions and
technicalities, 80% of revenue from oil above $34 a barrel is amassed
in the Stabilization Fund. At the start of the year, this fund was
growing by no more than $5 billion a month. At $100 a barrel, that
monthly collection would double to $10 billion.