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Table Oil, Oil Products and Natural Gas Production in 2001-2008, as percentage to the previous year 2001 2002 2003 2004 2005 2006 2007 JanuaryFebruary Oil, including gas con- 107.7 109.0 111.0 108.9 102.2 102.1 102.1 100.densate Primary oil processing 103.2 103.3 102.7 102.6 106.2 105.7 103.8 105.Motor petrol 100.6 104.9 101.2 103.8 104.8 107.4 102.1 101.Diesel oil 102.0 104.7 102.0 102.7 108.5 107.0 103.4 104.Furnace fuel oil 104.2 107.1 100.3 97.8 105.8 104.5 105.2 107.Natural gas, bln.cu. m 99.2 101.9 103.4 101.6 100.5 102.4 99.2 101.Source: Federal State Statistics Service Data on oil production by oil companies demonstrate that increase in oil production in Russia in 2007 was mainly due to a considerable growth of oil production by projects of production share agreement operators (Sakhalin-1, Sakhalin-2, Khariyagin oil field). The total increase in oil production in 2007 was 10.8 mln of tons, increase in production share projects 8.7 mln of tons or 80.6% of the total increase. Oil production in Russia not taking into account production share agreements projects increased only by 0.4% in 2007 (table 3).

Table Structure of Oil Production Increase in Russia in 2007 as compared with 2006 mln of 2007 mln of Increase, Increase, tons tons mln of tons % Oil production in Russia - total 480.5 491.3 10.8 2.Oil production by production share 5.1 13.8 8.7 170.agreement operators Oil production in Russia, produc- 475.4 477.5 2.1 0.tion share agreements operators excluded Source: Ministry for Industry and Power, authors calculations.

A considerable decrease in new production facilities implementation in 2007 is also noticeable. Implementation of new oil wells in 2007 was equal to 2.7 thousands, decreasing by 21%, and was the lowest over the recent years, not taking 2005 into account. Considerable decrease of this figure in 2005 by 29% as compared with the previous year - was accounted for by sharp decrease of investments in production by YUKOS and Sibneft: YUKOS was busy mainly with urgent payment of taxes imposed on it, and decrease in Sibnefts investments was due to its sale.

In contrast to 2005, in 2007 the drop in investment activity occurred world prices for oil being exceptionally high and there being no destabilizing events. In our opinion, this is an indicator of considerable decrease of incentives for investments in oil production that can be accounted for by two factors.

First, in the environment of real worsening of oil production conditions and inflexibility of existing taxation system decrease in expected profitability of investments in the new projects occurred. New oil fields are usually characterized by worse mining, geological and geographical conditions their exploitation requiring increase in capital, operating and transportation costs. At the same time existing taxation system does not provide necessary decrease of tax burden while exploitation of new oil fields with high costs that limits investments in new projects.

Second, governmental expansion in oil sector and apprehensions as to further taking up of the private business considerably decrease willingness of private oil companies to invest in the long run.

At the same time investments of state-owned companies were limited by considerable amount of their debts by credits taken to purchase new assets.

As a result, excluding abnormal 2005 out of consideration, in 2007 despite exceptionally favorable situation at the world markets implementation of new oil wells was the lowest over the recent years (Table 4) Table Implementation of New Oil Wells in 2001- 2001 2002 2003 2004 2005 2006 Wells implementation, 3.8 3.1 3.0 3.1 2.2 3.4 2.thousands Source: Federal State Statistics Service Such dynamics of new production facilities implementation indicates unsteadiness even of the low oil production growth rates that are being observed at present. The result of the trends mentioned can be a decrease in oil production in the country in the forthcoming years.

Under the influence of oil world prices growth a considerable growth in prices for oil and oil products at the domestic market was observed. The producers prices for oil, car petrol, diesel fuel and furnace fuel oil (mazut) reached the maximum over the whole post-reform period at the end of 2007 and the beginning of 2008. In January 2008 the average internal price for oil (producers price) in dollar terms reached USD per ton. Internal prices for natural gas have also increased (table 5).

Table Internal Prices for Oil, Oil products, Natural Gas in US dollar terms over 2006(average producers prices, as USD per ton) 2006 2007 2007 2007 2008 December June Septem- December January February ber Oil 168.4 230.3 240.9 288.2 305.0 285.Motor petrol 543.416.5 491.7 493.6 581.2 562.Diesel oil 426.1 442.0 467.1 692.5 637.2 626.Furnace fuel oil 148.8 181.6 210.1 276.5 262.4 241.Natural gas, as USD per thou. 14.4 15.6 19.2 17.6 17.7 18.cu. m Source: calculated on the basis of Federal State Statistics Services data As compared with the previous year in 2007 oil export in natural terms increased by 4.0%, oil products export by 8.0% (table 6). Share of export in furnace fuel oil (mazut) production was equal to 82.5%, in diesel fuel production to 55.0%, car petrol production to 17.1% (for reference: in 1999 share of export in car petrol production was equal only to 7.2%, in 2006 to 18.3%).

Table Oil, Oil Products and Natural Gas Export from Russia in 2002-2007, as percentage to the previous year 2002 2003 2004 2005 2006 Oil, total 113.9 117.8 115.0 98.4 98.0 104.Of which:

To non-CIS countries 109.9 118.9 116.3 99.1 98.0 104.To CIS countries 137.3 112.4 108.3 94.9 98.0 99.Oil products, total 118.5 103.6 105.5 117.9 106.3 108.Gas, total 102.4 102.0 105.5 103.7 97.6 94.Source: Federal State Statistics Service Proportion of oil and oil products net export in 2007 reached 74.7%, net oil export being 52.0% of its production. Share of net export in gas production was equal to 28.3% (Table 7). Share of oil products increasing slightly, crude oil export still prevailed in the structure of oil export, whose share was 70% of the total oil and oil products export.

Table Ratio of Energy Supplies Production, Consumption and Export in 2002 2002 2003 2004 2005 2006 Oil, mln tons Production 379.6 421.4 458.8 470.0 480.5 491.Export, total 187.5 223.5 257.4 252.5 248.4 259.Export to non-CIS countries 154.8 186.4 217.3 214.4 211.2 221.Export to CIS countries 32.7 37.1 40.1 38.0 37.3 37.Net export 181.3 213.4 253.2 250.1 246.1 256.Domestic consumption 123.5 129.8 124.2 123.1 131.2 123.Net export, as percentage to the production 47.8 50.6 55.2 53.2 51.2 52.Oil products, mln tons Export, total 75.0 78.4 82.1 97.0 103.5 111.Export to non-CIS countries 72.5 74.9 78.0 93.1 97.7 104.Export to CIS countries 2.6 3.5 4.1 3.9 5.8 6.Net export 74.8 78.2 81.4 96.8 103.2 111.Oil and oil products, mln tons Oil and oil products net export 256.1 291.6 334.6 346.9 349.3 367.Oil and oil products net export, as percentage of oil production 67.5 69.2 72.9 73.8 72.7 74.Natural gas, bln. cu. m Production 594.5 620.3 634.0 636.0 656.2 651.Net export 178.3 180.5 193.5 199.6 195.3 182.Domestic consumption 416.2 439.8 440.5 436.4 460.9 468.Net export, as percentage to the production 30.0 29.1 30.5 31.4 29.8 28.Source: Federal State Statistics Service, Ministry for the Industry and Power, Federal Customs Service, authors calculations.

As it is demonstrated by the analysis of the Russian oil export dynamics over the long period of time in 2007 the total net export of oil and oil products reached unprecedented level (367.2 mln of tons) and by 75.mln. tons (25.9%) exceeded the level of 1988, which was characterized by a maximum oil export volumes (291.6 mln. tons) before the crisis. At the same time the increase of oil products share in oil export was observed, their share increasing from 18.2% in 1990 to 30.4% in 2007. In the environment of the sharp reduction of domestic oil consumption (according to our calculations it has decreased from 269.9 mln. tons in 1990 to 124.1 mln. tons in 2007, that is more than by half) the share of oil and oil products net export in oil production increased over this period from 47.7% to 74.7%.

This testifies that the export orientation of oil sector in comparison with the pre-reform period has considerably reinforced. It should be, however, taken into account that it is connected not only with the increase of the absolute export volumes, but also with a considerable decrease in the domestic oil consumption as a result of Russian economy market transformation. In recent years in the environment of rapid economic growth, domestic oil consumption in the country was quite stable, which testifies the decrease in oil capacity of the GDP.

High level of world prices for oil determined considerable incomes growth in the oil sector of the economy (Fig. 1). In 2007 total earnings from oil and main kinds of oil products export (car petrol, diesel oil and furnace fuel oil) reached USD 164.9 bln., which is a record level over the whole post-reform period (table 8). For reference it can be noted that the minimum level of oil export earnings was observed in the environment of world oil prices fall in 1998, when the export profit was only USD 14 bln.

Table Oil and Oil Products Export Earnings in 2002-2007, as USD bln 2002 2003 2004 2005 2006 Oil and main kinds of oil products 38.7 51.1 74.6 112.4 140.0 164.export earnings Source: calculated on the basis of Federal State Statistics Service data A number of factors provide favorable demand and price prerequisites for further development of oil sector in Russia. The export opportunities of Russian oil to European countries will expand the demand for oil in the countries of Western and Eastern Europe increasing and oil production in the Northern Sea decreasing.

At the same time the growth of demand for oil in the countries of Asian-Pacific Region, China in particular, as well as the predicted considerable aggravation of their dependence upon the import create favorable op portunities for Russias access to the markets of this regions countries and for considerable growth of oil export in this direction.

New oil pipelines projects that are being carried out at present and are being planned for implementation, for instance construction of oil pipeline East Siberia-Pacific Ocean with the branch for China, will enable necessary infrastructure creation to increase Russian oil supplies to the world market. At the same time opportunities for Russian oil export will be more and more limited by the possibilities of its production expansion, real worsening of production conditions.

80 60 40 20 0 Mln of tons (left-hand scale) USD mln (right-hand scale) : .

Fig. 1 Oil and Oil Products Export in Natural and Value Terms in 1997-2007, mln tons, USD mln Increase in oil production and export in the future is possible only on condition of new oil fields development, whose exploitation in many cases is characterized by high capital, exploitation and transportations costs. Start of such oil fields development requires improvement of the existing system of oil sector taxation, pursuing of special tax policy, which provides necessary incentives for investments in oil production8.

In the near-term outlook it can be expected that high world prices for oil and favorable external conditions for incomes part of the state budget, replenishment of reserve funds and oil and gas sector development will sustain. According to the IET forecast, the price for oil grade Brent in the forthcoming months will be in the range of USD 98-107 per barrel9, which is considerably higher than the level of the previous year.

Inflation, Monetary and Credit Policy P. Trunin As of February results, the CPI in the RF stayed at the high level, having reached 1.2 per cent as compared with 1.1 per cent in the relevant period of the preceding year. Therefore, the rapid growth of consumer prices is continued, making doubtful the possibility of achieving the Government estimates of the annual inflation rate at the level of 9.5 per cent Herewith, foreign currency reserves were being accumulated in the country, the volume if which amounted to USD 500 bln in March. There was also the information, that the Bank of Russia might attract external investment companies to manage a share of foreign currency reserves.

See: Yu. Bobylev Reform must go on Russian Oil, 1, 2008, p. 72-77.

See: Bulletin for model calculations of short-term forecasting for social and economic indices in the Russian Federation. March 2008 oscow. IET. 2008.

01.06.11.04.09.02.07.12.05.10.03.08.01.06.11.04.09.02.07.12.05.10.03.08.01.06.11.The consumer price index in February made 1.2 per cent (against 1.1 per cent in February 2007 (see Fig.

1.). Unlike January, the greatest contribution to the prices growth in February (+1.7 per cent), was made by an upsurge of prices for food products (+1.7 per cent). Herewith, as we noted in previous surveys, the agreement of the government with the leading trade networks to freeze prices for some socially significant goods was still in effect. Moreover, as soon as the term of that agreement expires in May, there is a high probability of a sharp upsurge for food products prices. In February the highest growth rates were observed in the costs of fruit and vegetables (+5.1 per cent), bread and bakery products (+2.2 per cent) pasta (+2.1 per cent) and milk and dairy products (+2 per cent). Herewith, the price of eggs has been downgraded by 0.4 per cent.

In February the traditional upgrading of prices for commercial public services was continued and reached 1.4 per cent as of month results. The utmost growth was noted in regard to prices for public transport (+3.per cent), pre-school education (+1.8 per cent), consumer services (+1.7 per cent) and healthcare services (+1.4 per cent). Prices for communications services went down in February by 0.4 per cent.

In February, the growth was observed also in regard to non-food items, which average nation-wide prices have increased during the month by 0.6 per cent. The highest growth rates were noted in February for tobacco (+1.4 per cent) and detergents and cleaning agents (+1 per cent). Herewith, no downgrading was observed in any type of non-food items.

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