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Russia's Oil Industry Is Doing Fine, Which Is Great News For The Kremlin

Jan 3 2014, 8:46am CST | by

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Russia's Oil Industry Is Doing Fine, Which Is Great News For The Kremlin
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Russia's Oil Industry Is Doing Fine, Which Is Great News For The Kremlin

Russia’s economy had a pretty bad 2013 and there’s simply no point in arguing otherwise. The economy decelerated sharply and is likely to end up with somewhere between 1.3 and 1.4% overall growth. That’s not the apocalypse (heck, it’s not even a recession) but it’s clearly sub-par. Such low growth will quickly  become an enormous problem for the authorities if it continues for much longer.

But among all the (justified!) doom and gloom there was a bit of a silver lining: Russia’s oil production just hit another post-Soviet peak. This obviously doesn’t fix Russia’s large and growing number of economic difficulties, nor does it “justify” the policies of the Russian government. But considering the importance of oil to Russia’s political, economic, and social stability, it’s worth taking a look at a few charts to put the country’s current situation in context.

The first is a chart of both Russian oil production and the average price of Brent Crude. This chart is nice because it gives a pretty good indication of the magnitude both of the run-up in oil prices since the late 1990′s and also of the increase in Russian production. Yes it’s true that the pace of production increases in Russia has tailed off, something which people usually associate this with the jailing of Mikhail Khodorkovsky and the re-assertion of state control in the energy sector. Nonetheless, Russia has still managed to achieve annual increases in oil production for 13 out of the past 14 years, a real-world performance that was much better than most estimates.

The next chart worth considering shows the total amount of money that Russian earns through selling oil, an estimate I developed using historical production and price data from the incredibly useful website of the Energy Information Administration. When you combine the huge increase in crude oil prices that has taken place since the late 1990′s with the substantial increase in Russian oil production, you get a truly spectacular rise in earnings. When Putin first came to power Russia earned about $41 billion from oil sales. Last year it earned about $415 billion. That’s a lot of petro rubles.

Russia’s economy is obviously about a lot more than pumping black stuff out of the ground: at market prices only about 20% of Russia’s GDP comes from oil production. So even if the oil sector performs well, the performance of the other 80% of the economy matters a lot more. Russia’s overall economy can continue to perform quite poorly even if oil production continues to grow and oil prices stay high.

But oil is important because, to use a bit of a crude turn of phrase, it essentially functions as a Kremlin slush fund. The Russian oil sector faces some of the highest taxes in the world, and the Russian government captures a staggeringly high percentage of the cost of each barrel. This money then courses through the veins of the Russian economy: some of it is used to pay pensions, some of it is used to subsidize other inefficient industries, and some of it, of course, simply disappears down the black hole of corruption.

My point is not that the Kremlin is a particularly efficient or astute allocator of oil wealth, merely that it now has such enormous resources at its disposal that it will likely find a way to keep itself in power. A government with access to hundreds of billions of dollars of oil money seems like a government that will be around for awhile, particularly given how robust oil prices have been in the face of sustained economic weakness in the developed world.

Follow me on Twitter @MarkAdomanis or on Facebook 

Source: Forbes


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