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Table Cumulative Foreign Investments across Major Investors Cumulative as of 01.01.2010 mln USD Adjustment to 01.01.2009, % Total Direct Portfolio Other Total Direct Portfolio Other Ireland 9 212 415 5 8 792 95.3 86.5 1250.0 95.Germany 19 226 7 834 14 11 378 110.3 107.7 53.8 112.France 8 622 2 182 29 6 411 90.4 113.2 2900.0 84. mln USD In % to total RUSSIAN ECONOMY IN trends and outlooks Cumulative as of 01.01.2010 mln USD Adjustment to 01.01.2009, % Total Direct Portfolio Other Total Direct Portfolio Other Great Britain 23 585 3 625 2 327 17 633 76.5 78.0 99.5 74.Cyprus 49 128 33 547 1 835 13 746 86.3 82.4 106.2 953.Netherlands 48 619 29 065 4 280 15 274 104.9 80.9 10439.0 147.Luxemburg 37 157 1 185 273 35 699 108.0 97.4 100.0 108.Other coun- 72 677 31 169 1 495 40 013 120.3 113.5 268.4 88.tries Total 268 226 109 022 10 258 148 946 101.4 89.1 182.3 109.Source: Federal service of state statistics.

In the structure of foreign investment accumulated at the end of 2009 other investments prevail. They constitute 55.5%. The same parameter for foreign direct investment constituted 40.6%.

In 2010 according to projections of the RF Ministry of Economic Development the upward trend in foreign investments in the Russian economy will continue. For instance, at the end of December 2009 S&P revised its projection of the credit rating of Russia from negative to stable, thus confirming the currency rating at the level BBB. At the end of January 2010 Fitch has also preserved Russias rating at the level of BBB revising projection on rating from negative to stable.

3.4. Oil and Gas Sector Oil and gas sector remains the backbone of the Russian economy and produces the lions share of the state budget revenues and of the trade balance. Acute oil price fluctuations which took place on the free market, reduction in demand for gas, as well as objective fall in the oil and gas extraction in Russia, cuts in their production on the old existing oil deposits and significantly larger costs required for the development of the new deposits especially in the undeveloped regions which lack any type of infrastructure had main impact on its development in 2009.

3.4.1. Dynamics of the World Prices for Oil and Gas in 2008In 2009 the world prices for crude oil remained under the effect of the global financial and economic crisis. In 2008 world prices for crude oil reached an exceptionally high level which exceeded 100 USD/bbl. In July 2008 average monthly price for crude oil exceeded USD/bbl and reached its historical maximum both in the nominal and real terms. As a result of slump of prices at the end of the year, average price for oil constituted 97.7 USD/bbl (Brent) in 2008. Comparable level of prices in real terms was noted only in 1979-1980 when the average annual price for Brent in real terms (2008 prices) soared to 94.1-96.6 USD/bbl under rated value of 31.6-36.8 USD/bbl. For comparison it is possible to note that in 1998 the average annual price for Brent in real terms (2008 prices) constituted only 17.3 USD/bbl (12.7 USD/bbl in rated value) and on average in 1990s 26.9 USD/bbl.

Principal drivers for price growth were: incremental demand for petroleum due to high rate of growth of the world economy, in particular, of the economies of China, India and other countries of Asia, conservative policy of OPEC in relation to the increase of oil production by its member countries, as well as sluggish growth of oil production of non-OPEC producers.

Serious factor which contributed to the increase of the world prices for crude oil was a considerable inflow of speculative capital in the futures markets. Profound effect on the dynamics of the oil production during recent years was produced by the fall of growth rates in the oil production in Russia and fall of production volumes from oil deposits in North Sea. In September-December 2008 slowdown of growth rates of the world economy, reduction in deSection The Real Sector mand for oil by the industrially developed countries and outflow of the investment capital from the futures markets determined a slump in the world oil prices (Table 1). According to the data provided by the International Energy Agency of OECD, in the fourth quarter reduction in demand for oil in the OECD countries reached 5.1% against the corresponding period of the preceding year (Table 2).

Amid sharp reduction in the world oil prices in the second half of 2008, OPEC took a number of decisions aimed at cutting petroleum production in order to preserve oil prices at the stable level. In September 2008 OPEC took a decision to stick to the oil production quota at the level of September 2007 adjusted by the incorporation of Angola and Ecuador to the cartel but without Iraq and Indonesia1 which would have resulted in the cut of production volumes by 520 thousand barrels per day in comparison with July 2008. In October 2008 OPEC took a decision to further cut its production by 1.5 million barrels per day in relation to the level of September 2008 starting with November 2008. However, amid a reduction in demand for oil by the industrially developed countries and due to onset of the economic recession, as well as failure to fully meet commitments taken by the OPEC member countries regarding production cuts, these decisions failed to exert any influence on the free market. In December OPEC took a decision to cut production from 1 January 2009 by further 4.2 million barrels per day in relation to the level of September 2008.

In 2009 contraction in demand for crude oil by the industrial countries due to the global financial and economic crisis was compensated by the growth in demand by the developing countries, first of all by China2, as well as by the production cuts by the OPEC member-states and by some other oil producing countries (Norway, Great Britain and Mexico). In the following months of the year positive effect on the dynamics of crude oil prices was produced by the recovery of economic growth posted by the leading industrially developed nations. As a result, world prices for crude oil went up from 40 USD/bbl in December 2008 to 73-USD/bbl in November-December 2009. In these circumstances at the conferences of OPEC which took place in March, May, September and December 2009 decisions were taken aimed at preserving production quotas for oil determined by the member-states and effective from January 2009. In 2009 average price for Urals on the free market (European) averaged 61.0 in 2009 or 65% in relation to the average price level of the last year.

Table World Prices for Oil in Nominal Terms in 20002009 (USD/bbl) 2000 2001 2002 2003 2004 Price for Brent, Great Britain 28.5 24.4 25.0 28.8 38.2 54.Price for Urals, Russia 26.6 23.0 23.7 27.0 34.5 50.OPEC reference basket of 27.6 23.1 24.3 28.1 36.1 50.crudes 2006 2007 2008 2008 2008 2008 I quarter II quarter III quarter IV quarter Price for Brent, Great Britain 65.2 72.5 96.7 122.5 115.6 55.9 97.Price for Urals, Russia 61.2 69.4 93.3 117.5 113.2 54.1 94.OPEC reference basket of 61.1 69.1 92.7 117.6 113.5 52.5 94.crudes Indonesia has recently become net exporter of crude oil. In 2008 Indonesia announced about its withdrawal from OPEC and from 2009 it is no longer a member of this organization.

Crude oil consumption by China in 2009 went up by 7.2% in comparison with RUSSIAN ECONOMY IN trends and outlooks 2009 2009 2009 2009 I quarter II quarter III quarter IV quarter Price for Brent, Great Britain 45.0 59.1 68.4 75.0 61.Price for Urals, Russia 43.7 58.1 68.0 74.3 61.Source: IMF, OECD/IEA, OPEC.

Table World Petroleum Consumption in 2008 (in % to the same period a year ago) 2008 2008 2008 2008 I quarter II quarter III quarter IV quarter World total 1.1 0.9 0.5 2.7 0.OECD countries 1.6 1.8 4.6 5.1 3.Of which:

North America 3.3 3.6 7.5 5.9 5.Europe 0.4 0.7 0.4 1.6 0. R 0.0 0.6 4.9 8.9 3.Countries outside OECD 4.7 4.4 4.7 0.4 3. Of which:

Asia (exclusive of the countries of 5.7 2.8 3.5 1.5 2.Middle East) 2009 2009 2009 2009 quarter II quarter III quarter IV quarter World - total 3.4 2.5 0.7 0.4 1.OECD countries 4.9 6.2 3.5 3.0 4.Of which:

North America 5.1 6.2 1.3 2.4 3.Europe 2.5 5.6 6.8 5.0 5. PR 8.6 7.2 3.5 0.7 5.Countries outside OECD 1.4 1.8 2.7 4.7 2. Of which:

Asia (exclusive of the countries of 1.3 4.6 6.1 9.2 4.Middle East) Source: OECD/IEA.

Monthly dynamics of the world price for crude oil in 2008 was marked by its sustainable growth right down to July 2008 when the crude oil price maximum was reached and by a slump of prices starting from August 2008. By the end of the year the price for Russian crude oil on the free market dipped to 39.9 USD/bbl, i.e. it declined by more than threefold in relation to the July level. In 2009 monthly dynamics of the world oil price was defined by rather stable growth. At the same time, during last months of the year crude oil price steadily exceeded 70 USD/bbl (see Table 3 and Fig. 1). Depreciation of the US dollar exchange rate in relation to other currencies affected the dynamics of crude oil prices.

Revival of the world economy holds out a hope for maintaining of rather favorable for the Russian oil producers level of crude oil prices in the future. For instance, according to the latest IMF forecast the world crude oil price in 2010 will constitute on average 76.5 USD/bbl, and in 2011 82 USD/bbl. The US Department of Energy provides similar forecast. The RF Ministry of Economic Development and Trade is expecting a lower level of world crude oil prices (Table 4). Scenario with crude oil prices below 60 USD/bbl (conservative scenario) is considered, however, as less feasible one.

Section The Real Sector Table World Prices for Crude Oil in 20082009 (USD/bbl) 2008 2008 2008 2008 2008 January February March April May June Price for Brent, Great Britain 92.0 95.0 103.7 109.0 122.7 132.Price for Urals, Russia 89.4 91.4 99.2 105.7 118.8 128.2008 2008 2008 2008 2008 2008.

July August September October November December Price for Brent, Great Britain 133.2 113.0 98.1 71.9 52.5 40.Price for Urals, Russia 130.1 111.9 97.5 70.8 51.5 39.2009 2009 2009 2009 2009 2009.

January February March April May June Price for Brent, Great Britain 43.6 43.1 46.5 50.3 57.5 68.Price for Urals, Russia 43.2 42.5 45.3 48.9 57.1 68.2009 2009 2009 2009 2009 July August September October November December Price for Brent, Great Britain 64.6 72.8 67.4 72.8 76.7 74.Price for Urals, Russia 64.6 72.2 67.2 72.7 76.3 73.Source: OECD/IEA.

Source: the RF Ministry of Economic Development and Trade.

Fig. 1. Price for Urals in 20082009 (USD/bbl) Table Forecasts of World Prices for Crude Oil (USD/bbl) Date of publication of forecast 2010 IMF: average world price for crude oil 26.01.2010 76.5 82.US Department of Energy: average price for oil imported to 12.01.2010 76.9 80.the US RF Ministry of Economic Development and Trade: price for 30.12.2009 69 Urals 65 58 Source: IMF, U.S.DOE/EIA, the RF Ministry of Economic Development and Trade.

RUSSIAN ECONOMY IN trends and outlooks Prices for Natural gas on the free market, as a rule, are determined on the basis of the alternative to gas energy products such as gasoil/diesel oil and heating oil, which price levels depend on the level of world oil prices. That is why world prices for natural gas follow the world oil prices with certain lag. Price for Russian gas on the European market and the oil price reached its peak in 2008 and in 2009 also dipped (Table 5).

Table World Prices for Crude Oil and Natural Gas in 20022002 2003 2004 2005 2006 2007 2008 Average world oil price, USD/bbl 24.5 28.89 37.76 53.4 64.3 71.1 97.0 61.Price for Russian gas on the European 96.0 125.5 135.2 212.9 295.7 293.1 473.0 318.market, USD/thousand cubic meters Source: IMF.

3.4.2. Dynamics and Structure of Production and Processing in the Oil and Gas Sector in 20082009 and during Preceding Period Growth of oil production in Russia in the first half of 2000s was due to the extension of its export capacity, and in particular due to construction of the Baltic pipeline system and the use of the railway transport system, and to the intensification of the development of existing oil deposits and capital expenditure expansion by the oil companies due to growth of world oil prices. In the following years rates of growth of crude oil production declined sizably. Where in 2002-2004 increment in oil production reached 8.9-11% annually, then in 2006-2007 annual increment constituted only 2.1%, and in 2008 for the first time over recent years there was a cut in oil production. This is an obvious sign of depleted resources needed for production enhancement by means of intensification of development of existing oil deposits and indicates the need to undertake urgent measures at developing new oilfields.

In 2009 growth in oil production in Russia recovered, although its increment was relatively low: in relation to a year ago increment in crude oil production averaged 1.2% (Table 6, 7).

Positive effect on the dynamics of the oil production was produced by several new large oil deposits which were put into operation (in the north of European part of Russia and in Eastern Siberia), devaluation of the exchange rate of the ruble and coming into effect of a number of amendments to the RF Tax Code designed to reduce tax burden in the oil sector, stimulation of enhanced development of existing oilfields and development of the new oil deposits.

In the first half of 2000s intensive growth of production (on average by about 9% of annual increment) against the background of sluggish growth of primary processing (about 3% annually on average) has resulted in reduction in the refined oils share of its production volume (from 53.5 to 42.5%). On the contrary, in 2005-2008 rates of increment of primary oil refining constituted 3.2-6.2% annually under the rates of increment of oil production at 2.1-2.1% in 2005-2007 and its decline by 0.7% in 2008. As a result, the share of refined oil in its production volume went up from 42.5% in 2004 to 48.4% in 2008. The volume of refined oil somewhat dipped (by 0.4%) in 2009. At the same time, processing depth of the crude oil during recent years was growing exceptionally slowly and in 2009 constituted only 72%; meanwhile in the leading industrially developed countries it comes up to 90-95%. Effectiveness of oil refining and quality of oil products produced in Russia as before remains significantly lower the world level.

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