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The estimates of the reserves of oil and gas are nearly as unreliable as the forecasted prices of hydrocarbon raw materials. In the 1960s it was estimated that by the present time these reserves would be exhausted. Such forecasts have proved to be untrue. But the exhaustible nature of hydrocarbon resources is a real ity that cannot be overlooked. Some tell tale examples have been provided by the experiences of countries faced with the consequences of falling hydrocarbon pro duction. According to the official forecasts, the growth potential of oil production in this country will be exhausted by the early 2020s5. This has to do with the percep tions of the Russian authorities concerning the future of the extracting industries in this country. When discussing the long term prospects of the Russian budget, this perception can by no means be ignored.

The influence of the revenues from the oil and gas sector on Russian finances was estimated by the RF Ministry of Finance, the IMF, and the IET. The obtained re sults are similar. These revenues constitute more than one third of Russias federal budget revenue. The declining share in GDP of the revenues from the extraction of hydrocarbons and the increasing social burden on the national economy are two factors that will determine the shape of the financial problems to be faced by this country in the next decades.

The fate of the Stabilization Fund In Russia, the discussion of the issues relating to the feasibility of the creation of the Stabilization Fund, designed to level the influence of oil prices on the state budget, began in 2001 20026. At that time, there existed no indications that these The Ministry of natural resources forecasts a decline in oil extraction by 1 % per annum from 2021, and a stabilization of gas extraction from the early 2030s.

Drobyshevsky S., Zolotariova A., Kadochnikov P., Sinelnikov S. Perspektivy sozdaniia Stabilizat sionnogo fonda v RF [The prospects for the creation of the Stabilization Fund in the RF]. Nauchnye trudy No 27R [Scientific Works No 27R ]. M.: IET, 2001.

Introduction Key directions of economic policy prices might once again, as it had happened in the late 1970s early 1980s, rise to an abnormally high level.

This is the case when the instrument necessary for implementing a responsi ble financial policy was created at a time when the demand for such an instrument was highest. The resources accumulated in the Fund, alongside the possibility to repay the external debt, have also made it possible to restrict the growth of money in circulation resulting from the monetization of the assets in the balance of trade.

However, even when this instrument was applied, the rate of growth in money sup ply in 2004 2006 remained high ( Table 2).

Table Growth rate of money in circulation (M2) Year Growth rate of 2, in % 2000 61.2001 39.2002 32.2003 50.2004 35.2005 38.2006 48.Source: the RF CB.

Note. The rate of potential growth of money in circulation (M2) in conditions when there exists no Stabilization Fund and no early redemption of the external debt takes place has been calculated on the assumption that the money multipliers value is constant.

Source: the IETs estimates.

Fig. 3. Volumes of money in circulation M RUSSIAN ECONOMY IN trends and outlooks Without these instrument, the growth in money supply would have become dangerously high (Fig. 3)7. According to the estimates of the RF Ministry of Fi nance, if the revenues of the Stabilization Fund were used to finance the state budget, the rate of inflation in 2004 would have become 16 %, and in 2005 20 %8.

However, even the Stabilization Fund failed to sustain, in a situation of the up surge of oil prices in 2004, the emerging downward trend of the inflation rate that was characteristic of the period of 2000 2003 (Fig. 4). This decline in the inflation rate became slower. The roubles strengthening against the basket of currencies of Russias principal partners in trade became more rapid (Fig. 5).

Source: the Rosstat.

Fig. 4. Rate of growth of consumer prices in 2000 2006, in % From this point of view, Russia shares the destiny of the oil producing countries in a situation when the prices of this natural resource are high. The rate of growth of the broad money supply in the oil producing countries of the Middle East and Central Asia in 2003 was, on the average, 56.5 %, in 2004 57.9 %, in 2005 56.7 %. See: Regional Economic Outlook, September 2005: Middle East and Central Asia Department. IMF, 2005.

Newspaper Gazeta [Gazette] of 11 December 2006.

Introduction Key directions of economic policy -2002 2003 2004 2005 -Source: the RF CB.

Fig. 5. The dynamics of the real effective exchange rate of the rouble against the currency basket in 2002 2006, in % (positive values represent the roubles strengthening, negative value its weakening ) Neither the Russian political elite nor society have been used to the situation when the country possesses substantial financial reserves. Moreover, they did not see any need for such reserves. The Soviet Union, having spent in the 1960s the main bulk of its gold reserve on grain purchases, did not create any big gold and foreign currency reserves even during the period of abnormally high oil prices in the 1970s and the first half of the 1980s. This is one of the factors that made inevi table the collapse of the Soviet economy after the fall of oil prices in 1985 1986.

Even in 1997, when the onset of economic growth became a reality, the size of gold and foreign currency reserves remained modest. Coupled with the budget problems associated with the management of domestic debt, this made it impossi ble for the country to adapt to the fall in prices and to avoid its disastrous conse quences (Fig. 6).

It seems that the financial disaster of the late 1980s early 1990s, as well as the lesser in scope but more recent problems of 1998 could, indeed, teach us the simple notion, well understood by Joseph, son of Jacob: years of plenty may be fol lowed by years of dearth. It is a dangerous policy to spend everything today, without giving any thought to the risks of tomorrow.

Meanwhile, the issue of selecting the most attractive areas for spending the resources of the Stabilization Fund represents one of the most popular themes in the economic and political discussions presently going on in Russia. We are by no means unique in this respect. Politics in conditions of universal suffrage is largely a RUSSIAN ECONOMY IN trends and outlooks competition among those who are striving to put forth the most popular programs for spending taxpayers money9.

30 0 Jan 1997 Apr 1997 Jul 1997 Oct 1997 Jan 1998 Apr 1998 Jul 1998 Oct Size of gold and foreign currency reserves Price of Brent Source: the RF CB, IMF IFS.

Fig. 6. Russias gold and foreign currency reserves against oil prices in 1997 When a country has at is disposal a Stabilization Fund, there can be no issue as to where the money needed for finding appropriate solutions to various existing problems should be taken. A Minister of Finance even if he is the person notori ously nicknamed Mister No, cannot always respond to the requests with the tradi tional answer: Your proposal is excellent, but the government has no money for implementing it! His opponents can then use the well substantiated argument that the resources accumulated in the Stabilization Funds are enormous, and there is no sense in increasing them further in face of the existing acute socio economic problems.

As of 1 February 2007, the money accumulated in the Stabilization Fund of Russia amounts to 2.6 trillion roubles, or 9.9 % of GDP in 2006. This is a handsome sum. But the picture looks optimistic only if one forgets the extent to which the prices of oil, oil products and natural gas are influencing the Russian budget. The estimates prepared jointly by the IET and CSR show that if the price of oil goes The Founding Fathers of the United States, indeed, suspected that this would be so. J. Adams wrote that, if universal suffrage is introduced in the country, the first thing to be done would be the abolition of all debt obligations, then high taxes would be levied on the rich, while the rest would be come tax exempt, and finally the majority of voters would cast their votes for universal division of property. See: Adams J. Defense of the Constitutions of the United States. Vol. 1. London: Minted For C. Dilly, in the Poultry, 17871788.

GFCR,billion USD Oil price, USD / barrel Introduction Key directions of economic policy down from $ 50 to $ 25 per barrel, that is, to a level higher than that which not so long ago, in 2000 2002, was assumed to be a natural benchmark for financial planning, the revenue of the general government will fall by more than 8 % of GDP.

If this happens, the resources accumulated in the Stabilization Fund will be spent in 3 years.

The previous period of low oil prices began in 1985 1986 and lasted for years. For 3 years, the Soviet Union was able to properly regulate the problems as sociated with its balance of payments by attracting private credits. When this re source was exhausted, the collapse of the Soviet economy became inevitable. This should be borne in mind while discussing the sufficiency of the present margin of safety, guaranteed by the Stabilization Funds, for ensuring the reliable functioning of the Russian economy.

It is not advisable to blindly extrapolate somebody elses experience. But it is useful to remember it while making key economic and political decisions. By the index of life quality (the human development index) Norway is the worlds leader10.

This is one of the countries where the national economy, just like Russias, depends on the situation on the hydrocarbon market. It is not easy to believe that such re sults have been achieved by a state pursuing an irresponsible policy, which is con trary to its own national interests. Since the time when the oil fund was created, that country managed not only to curb the trend of a growing share of public expendi ture in GDP, but to reverse it (Fig. 7).

Source: BD OECD, http://stats.oecd.org/wbos Fig. 7. The share of expenditures of the Norwegian general government, in % of GDP, 1990 Human development index is calculated by the UNO; it is determined by a set of parameters char acterizing the expected lifespan, education level and GDP per capita. By this index, in 2005 Norway was the first, followed by Iceland and Australia. Russia was in the 65th place.

RUSSIAN ECONOMY IN trends and outlooks The problems faced by the pension system, as well as the prospect of a di minishing share in GDP of revenues from the oil and gas sector, urged the govern ment of that country to transform the Oil Fund, whose purpose had been to level out the fluctuations of budget revenue, into accumulations designed to ensure sta ble functioning of the national system of social insurance. Between 60 % and % of the government revenue from the extraction of oil and natural gas is ear marked as the funds revenue. Its size as of 1 February 2007 amounted to $ 280.billion, and the forecast for 1 January 2008 is $ 299.5 billion. In 2005, Norways GDP was $ 283.9 billion.11. The incomes from the placement of the funds assets (as estimated by the Norwegian authorities approximately 4 % of GDP) create a base which is necessary and sufficient for the pension systems stability.

Oil revenues and pension endowment It is easy to assume budget obligations. They can not, however, be shed off with the same ease. The political problems emerging as a result of such a reason able but inefficiently implemented measure as the monetization of social privileges represent one vivid example of this principle. Lately, Russian authorities have be gun to display quite an extraordinary light mindedness towards their own obliga tions12. But even the Soviet leadership, while being in full control of the mass media and relying on efficient secret police, well understood that the system would be stable until they breached the terms of their quite simple agreement with society, namely that well not ask you why you are ruling the country, while you guarantee us the habitual conditions of existence and do not undertake any experiments that may radically change our lifestyle. This compromise remained valid until the late 1980s, when the fall of oil prices made it no longer possible to keep the terms of the contract between authority and society.

For the majority of the Soviet Unions population in the early 1950s the very idea that people had a right to pension endowment was something quite exotic.

Collective farmers at that time had no annuity rights. Since then, the institutions of social protection created in Russia and involving tens of millions of people have be come an element of everyday life. Today it would be impossible to abolish them without giving rise to a serious socio political upheaval.

The decisions made during 2005 2006 (national projects, parent capital, in vestment programs), the dynamic of demographic development, and the growing number of pensioners per one worker can all make an increase, in the nearest dec ades, of the share in GDP of the general governments expenditures at least prob able, if not inevitable. In an event of a reasonable economic policy and the imple mentation of reforms aimed at promoting the spending of private funds on annuity provision, public health care, public education, and on improving the efficiency of public expenditures earmarked for state defense and security, this trend can be The data published by the Pension Fund of Norway and the World Bank.

One example is the proposal of the Ministry of Health Care and Social Development that pension savings should be withdrawn from the Vneshekonombank (they amount, as of 1 January 2007, to 267 billion roubles).

Introduction Key directions of economic policy come less pronounced, but its total disappearance is highly unlikely. Against this background, the lagging of the growth rates of oil and gas extraction behind the growth of GDP, the strengthening of the roubles exchange rate, and the growing cost of oil and gas extraction have launched the trajectory of declining revenues from the extraction of hydrocarbons.

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