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Table Incomes from exports of oil and oil products in 2000-2004, USD billion 2000 2001 2002 2003 Incomes from exports of oil and main types of oil 34.89 33.43 38.72 51.13 74.products Source: calculated according to the data of the Federal State Statistics Service.

As an analysis of the situation on the world oil market shows, a number of factors will contribute to maintaining of high level of world oil prices. According to expectations, the growth of world oil demand will be sustainable, despite high oil prices, but, possibly, lower because of slowing the demand growth in China, where in 2004 an increase of oil demand exceeded 1 million barrel a day. According to projections, an increase of oil production in the countries non-OPEC members, will not allow to satisfy the world demand. At the same time, it is expected that idle oil production capacities, which are noticeably reduced of late, will remain at a low level. Geopolitical risks, such as remaining instability in Iraq and political storms in Nigeria and Venezuela, will retain high-level of premium for uncertainty. Geopolitical conflicts and restriction of foreign oil companies access to the development of deposits (in the countries of Middle East, Russia and Venezuela) will prevent organizing new production facilities for oil production. Government regulation of the end prices for energy in China and India will reduce the potentially possible effect of high oil prices on demand.

According to the forecast of the U.S. Department of Energy (DOE), the world oil demand will increase on average by 2,2 million barrel a day, or 2,6% per year, in 2005-2006. Basing on the forecast, in 2005, the economic growth rates in OECD countries will go up to 2,9% (in 2004 they were 1,7%).

In the countries non-OECD members, the demand will grow in 2005 by 1,7 million barrel a day, or by 5,2 %, compared with previous year. More than a half of such gain will fall on China and other Asian countries, which are not OECD members. According to estimates, in 2005 the world oil production will increase, compared with previous year, by 2,2% (in 2004 rise in the world oil production amounted 4,5%). As is expected, in 2005 the oil production by OPEC countries (including Iraq) will be slightly higher than mean level of previous year (30,2 million barrel a day vs 29,1 million barrel a day in 2004). The entire increase of oil production outside OPEC will be achieved predominantly by an increase in production on the territory of CIS countries in Russia and the region of Caspian Sea.

As a result, according to the base-case scenario of the latest (April 2005) DOE forecast, the world oil price defined as the average oil price, imported into the U.S. until the end of 2005 will be at a very high level and will make, on average, USD 47.1 a barrel. With account of the actual ratios between the price of Brent, Urals and the average oil price imported into the U.S., the price of Brent this year will make USD 53.6 a barrel, while Urals USD 48.7 a barrel, or by 41,6% higher than the level of previous year (Table 6). It is forecasted that 2006 will see continuation of an extra high level of world oil prices. According to DOE forecast, the average world oil price will be USD 48.3 a barrel. In this case, the price of Brent will be in 2006, basing on DOE forecast, about USD 55 a barrel, while Urals USD 50 a barrel.

Some other institutions also expect that the world oil price will exceed in 2005 USD 50 a barrel.

According to the latest IMF forecast, published in April 2005, the average world oil price will make in 2005 USD 52.2 a barrel. The latest forecast of the European Commission says that the average Brent price will make in 2005 USD 50.9 a barrel, and in 2006 USD 48 a barrel. Many organizations predict lower prices oil prices, which are in most cases in the range USD 40-48 a barrel. For example, the investment bank Goldman Sachs forecasts the average Brent price in 2005 at a level of USD 47 a barrel, Centre for Global Energy Studies USD 44.9 a barrel.

Table Forecast of the World Oil Price in 2005, $/barrel 2002 2003 2004 (forecast) Average price of oil imported into the U.S.* 23.69 27.74 36.0 47.Price of oil Brent 25.02 28.83 38.2 53.Price of oil Urals 23.73 27.04 34.4 48.* Producers prices in deals with oil refineries.

Source: U.S. Department of Energy/Energy Information Administration, IEA, authors estimates.

Therefore, according to the latest forecasts of leading foreign organizations the world oil price will keep until the end of 2005 at a very high level and may be USD 45-55 a barrel. At the same time, there is mush room for uncertainty in the future dynamics of the world oil prices, concerned with a number of factors relating to both - demand (world economy growth rates, particularly, Chinas economy, weather conditions), and supply (oil production). A large part in the future world oil price dynamics belongs to policies of OPEC countries. In particular, it is possible that OPEC will officially expand the targeted price range margin. As the Secretary-General of OPEC stated in April, the price USD 50 a barrel may really be the upper bound for a new price range. Considerable increase in the supplies of Iraq oil to the world market could ease the world oil prices, but increasing such supplies concerned with the need of establishing political stability, rebuilding and expanding the oil-producing capacities of the country, that will take considerable amount of time.

In view of the above, we may expect continuation, in the near term, of favorable external environment for forming the revenue side of Russias state budget and the development of oil and gas sector.

130 10 ( ) 0 Source: calculated according to the data of the Federal State Statistics Service.

Fig.1. Average Producers Prices of Oil and Gas in 1992-2005, $/t, $/thou. cub. m Source: calculated according to the data of the Federal State Statistics Service.

Fig.2. Average Producers Prices of Automobile and Fuel Oil in 1992-2005, $/t Y. Bobylev Collapse of YUKOS and ownership rights protection The dominating trends observed in the 2000s were those towards the ownership expansion of the state authorities in strategic industries, attempts to establish (expand) control over major cash flows in the Russian economy and, more generally, state efforts to make the Russian business community dependant on state institutions in spite of decisions on economic deregulation, administrative reform, and the plans of further privatization.Although the said trends developed at the same time as the new order asserted itself, i.e. throughout the entire 2000s, the YUKOS affair of 2003 2005 became a point of reference for understanding the full picture of the ongoing processes. Obviously, this affair should be interpreted in more broad terms not only as the destruction of the empire of a fallen into disfavor oligarch (YUKOS), but also as the formation of state centers of power in the strategic industries (Gazprom Rosneft Yuganskneftegaz electrical power supply industry), public control over resources of the Eastern Siberia where YUKOS used to be quite powerful12, geopolitical aspects (selection of pipeline construction options between China and Japan), etc. In a certain sense, such interpretation provides a better picture of the real criteria to be relied upon in developing a concept of partnership between the state and the business which is currently so popular among senior public servants.

It is our opinion that the sale of Yuganskneftegaz, the basic YUKOSs oil producing asset, in December 2004 is one of the most alarming signs for the Russian business. As the analysis of the transaction involving Yuganskneftegaz reveals, the provisions of the RF execution legislation were quite sufficient to intercept the control over the company13. For instance, the RF Federal Law On execution proceedings stipulates no prohibitions as concerns the priority of execution upon property and sale of shares of a company integrated into a holding company. The order of recovery against debtors property is supposed be determined unilaterally by an officer of justice who is entitled to discretionary conceive debtors specification of the property to be recovered first. Altogether, this creates conditions for abuse of power by law enforcement officers in the framework of execution proceedings, as well as creates a situation where in fact a single person is empowered at his own or any other government entitys discretion (including the government itself) seal the fate of a major company.

The sale of Yuganskneftegaz had an ambiguous effect. At first, the stock market has responded by a certain growth. At the same time, empirical data provide no support for the prevailing opinion that the Russian stock market was driven to London by the risks caused by the YUKOS affair and political and economic uncertainty in Russia. Indeed, the conflict concerning the YUKOS oil company created concerns of non-residents about protection of their ownership rights with respect to their shares of Russian companies. This factor, however, caused no capital outflow from the MICEX to London because a share of non-residents trading in Russian shares at the MICEX is insignificant. More likely the YUKOS affair had an adverse impact on volatility of trade volumes of depositary receipts at the London Stock Exchange which fluctuated substantially on a monthly basis. However, almost all stock market analytics point out that foreign investors and business community at large have a more negative perception of Russia. In addition, the following aspects should be taken into account in this respect: first, the current situation in the Russian domestic stock market is commonly assessed as fairly speculative and poorly relying on the fundamental parameters of the Rus11 For more details please refer to Radygin . Rossiya v 2000 2004 godakh: na putyakh k gosudarstvennomu kapitalizmu (Russia in 2000 2004 : On the Way to State Capitalism) - Voprosy Ekonomiki, 2004, No. 4. p.

p. 42 65.

It was only in 2005 upon the sale of Yuganskneftegaz to a state-owned company when the government has brought up the issue of multifold increase of budget allocations on geologic exploration and the eastward reorientation of the industry from the Western regions of Russia. A series of license auctions on natural resource development in this region are expected to be held in the long term. However, it is public companies that are to be granted preferences at these auctions.

YUKOS still remains in business, as it was promised at the top governmental level in the autumn of 2004.

See: Abramov A. Ye. Rossiyskiy fondovyi rynok v perekhodnyi period (Russian stock market in the period of transition). In: Sotsialno-ekonomicheskaya transformatsiya v stranakh SNG: dostizheniya i problemy (materialy mezhdunarodnoi konferentsii) (Post-communist transformation in the CIS: achievements and challenges.

Proceedings of the 2004 IET international conference). M., IET, 2004, pp. 575 598.

sian economy; second, the fact that basic risks related to the YUKOS affair were created by investors as early as 2003. The latter fact is most illustratively supported by the data on comparative movement of stock indices. For example, the RTS index and the MICEX index grew by only 7 per cent at the background of a general growth by 18 per cent in the consolidated stock index of emerging markets in 2004, while in 2003 the consolidated stock index of emerging markets and the RTS index and the MICEX index showed nearly similar growth, respectively by 52, 58 and 61 per cent (see Table 1).

Table 1.

Changes in priorities of foreign portfolio investors 1997 1998 1999 2000 2001 2002 2003 Emerging markets consoli- - 13 - 28 + 64 - 32 - 5 - 4 +52 + dated stock index, % RTS stock index, % + 98 - 85 + 197 - 20 + 98 + 34 + 58 + MICEX stock index, % - - + 77,6 - 4,7 + 65,5 + 34 + 61,6 + 7,In 2004, incremental growth in the stock market in Russia came to be close to zero, while other countries raw materials exporters demonstrated different results: Venezuela + 52 per cent, Indonesia + 47 per cent, Mexico + 36 per cent, Republic of South Africa + 35 per cent. According to the data presented by the IIF (21 countries in January 2005), private investment inflow to the emerging markets grew by 32 per cent to reach its maximum in 2004 since 1997 (US $ 279 billion). Data sources: according to the data presented by the Vedi analytical laboratory (seminar on Changes in the Russian Economy, Higher School of Economics, January 26, 2005); Institute of International Finance (IIF); authors estimates.

Moreover, assessments of the contribution of the transaction with Yuganskneftegaz equity and the YUKOS affair in the investment processes at large observed in 2004 are quite ambiguous. This is apparently due to different approaches employed at various social and economic institutions. On the one hand, almost all liberals, including senior government executives, in different form expressed their negative attitude towards the transaction in terms of violation of ownership rights, creating unfavorable investment environment, collapse of confidence in the government, moving towards an autocratic regime, etc. The arrest and sales of the shares of Yuganskneftegaz were directly associated with a (drastic) deterioration of the investment climate in Russia and an increased outflow (export) of capital15 in 2004. A regular polling by the Expert analytical center of 50 top managers of the western investment banks, companies and funds operating in Russia, revealed less importance of such factors as investment attractiveness as compared with law enforcement, protection of ownership rights in general and those of minority shareholders in particular, enhanced administrative pressure upon the business community and corruption16. A monthly polling conducted by the Association of Managers of Russia (conducted in January of 2005)17 revealed the following distribution of answers to the question about the reasons for capital outflow from Russia observed in 2004: 47 per cent poor protection of ownership rights, 38.6 per cent the YUKOS affair, 14.5 per cent search for new investment objects, 1.per cent depreciation of the US $, 1.2 per cent the summer (2004) banking crisis.

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