Michael Bradshaw asks whether Russia, for all its economic growth, is too dependent on natural resources. Read the World Economic Forum’s report: Scenarios for the Russian Federation.
The Russian Federation’s economic growth story has had more twists and turns in it than a Danish thriller.
Almost two decades after transitioning from a planned to a market economy, and following a decade of buoyant growth, the country was hit hard by the financial and economic crisis of 2008 and 2009. Oil prices collapsed and Russia’s financial sector suffered greatly from limited international liquidity. Financial stimulus measures put it back on the path to growth, and in 2012 the economy was growing at more than 4%. But the question remains: Is Russia too dependent on its abundant natural resources, and can it maintain its current level of oil exports? What would happen if oil prices collapsed?
The answers could be determined in part by the country’s geology. According to the World Economic Forum’s Russia Competitiveness Report 2011, Russia has about 6% of the world’s proven oil reserves, and about 24% of the world’s proven gas reserves and it remains the world’s biggest exporter of natural gas. In 2012, Russia even overtook Saudi Arabia as the world’s largest oil producer, providing 12% of global oil production.
This rebound in production over the last decade has come about largely thanks to a combination of oil left in the ground during the 1990s when the economy was in crisis, and the application of enhanced recovery technologies that increased production in existing fields.
More recently, production gains have come from new fields, such as the Shell-Gazpromneft joint venture at Salym; Rosneft’s Vankor field; and new fields in East Siberia. These latter fields were facilitated by the construction of the Eastern Siberia Pacific Ocean pipeline.
But many of the legacy fields in West Siberia are now well past their peak. Maintaining Russia’s oil production at 10 million barrels a day is going to require a significant amount of new investment in West Siberia, East Siberia, and offshore in the Arctic, Black Sea and Sea of Okhotsk. Not only will substantial investment be needed to extend infrastructure, but also the demands of frontier production will require technology and experience that can only be acquired through collaboration with the International Oil Companies (IOCs).
So where is this money and expertise going to come from? The answer can be found in the Russian government’s recent change of heart in relation to the role of foreign investment in the domestic oil industry. Agreements have been struck with the likes of Exxon-Mobil, Total, ENI, and, most recently, between Rosneft and BP in relation to TNK-BP.
This new openness to foreign cooperation and investment is also evident in its recent accession to the World Trade Organisation. In December 2012 Russia also assumed the presidency of the G20.
However, these agreements are at the very early stages of exploration and only time will tell if they can deliver the production needed to sustain output such that Russia can continue to benefit from high oil prices, still over US$100 a barrel. Russia’s public debt to Gross Domestic Product (GDP) ratio is about 10%. But some economists believe that if the oil price collapsed, this ratio could spike to more than 60%.
The risks to Russia’s economy are still quite high.
Author: Michael Bradshaw is Professor of Human Geography at the University of Leicester.
Image: The Slavneft-YANOS oil refinery, Yaroslavl, Russia REUTERS/Maxim Shemetov
