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Russia watches oil crest $100 barrel

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mendeleyev:
Friday, January 11, 2008. Issue 3818. Page 7.

Don't Wait for a Rainy Day to Spend

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Even those in this country who do not follow the markets should know by now that global oil prices recently climbed past $100 per barrel to an all-time high. It was hard not to notice the development, which occurred Jan. 3, even though all newspapers were closed for the extended New Year's holiday. The national television channels offered thorough coverage, and some even led their evening bulletins with the news. They were not discouraged that the price fell back to less than $100 the same day. After all, the important psychological barrier had been crossed.

Several investment banks, including Troika Dialog and Aton, believe that oil will be traded for more than $100 this year. Moreover, futures traders on the New York Stock Exchange are already speculating that the price could reach $200 by 2009.

The high price -- and the breaching of the $100 mark -- is indeed good news for Russia, which is looking to use its windfall oil revenues to raise salaries and pensions and invest in high technology, as Moscow Times reporter Anatoly Medetsky wrote on Jan. 9.

The authorities' reaction to the oil price was monetarist. Deputy Prime Minister and Finance Minister Alexei Kudrin said the government, which channels most of its oil revenues into its Reserve Fund and National Welfare Fund, would refrain from additional spending for the time being to prevent a surge in inflation. The Reserve Fund will remain a safety net against a drop in oil prices, while the National Welfare Fund will focus on helping people boost their retirement savings, he said.

 
It is, of course, a good idea from Kudrin's perspective to sterilize the money flow and stash away cash for a rainy day. But what if the rain lasts for years? This is what will happen if the economy contracts due to a long-term fall in oil prices, a global economic crisis, or a combination of both.

The economy, which remains too dependent on the export of hydrocarbons, is in need of faster and further diversification, especially as production costs keep rising because of an increasing labor shortage, the appreciation of the ruble and growing energy tariffs.

In addition, much of the infrastructure, including transportation lines and generating capacity, is aging beyond safe use and needs to be replaced.

The government's response to all these long-term challenges seems to be short-sighted. It has set aside funds to support innovative technologies, the infrastructure, and the overall diversification of the economy, but the amount of earmarked money is insufficient.

Another problem is that the government seems to be far less interested in the long-term challenges than in creating state-owned national champions across entire sectors, which stifle competition and decrease overall market efficiency.

As for the labor shortage, not only is nothing being done about it, but the government has toughened labor migration laws.

President Vladimir Putin and his successor should awaken to the realities of these challenges and tackle them by restarting systemic reforms and pouring investment into the infrastructure. At least part of the financing should come from the continuing windfall generated by high oil prices.

These changes would focus on promoting market efficiency and the diversification of the economy, including the liberalization of the labor market and the reform of the bloated and corrupt public administration system. These and other measures, if devised now and implemented in the next several years, would prepare the economy to ride out a possible storm and provide the government with a more reliable guarantee

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