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The reduction of the gross accumulations inwhole and of the investments in the fixed capital was, in 1998, more intensivethan for the other components of the aggregate demand. The increment of thediscount rate and reserve norms in the first half of 1998 limited theinvestment demand; the banking crisis in the second half of the year reducedeven more the possibilities to mobilize the financial resources in the realsector. The share of the gross accumulation in the GDP dropped by2.9percentage points, compared with 1997.

The first half of 1998 saw the growth ofthe share of accumulation of the material circulating assets in the GDP due tothe growth of the remainder of the unsold products; the second half-year saw,at the intensified trend to the production decrease, the reduction of thestocks, finished products, and material and technical resources. With thelimited money assets, the enterprises rejected the practice of forming thestocks forestalling the inflation rates.

The reduction of the demand for the capitalgoods also had the negative effect on the domestic market situation. In 1998,the share of the new investments in the fixed capital was 15% of the GDPagainst the 15.9% of the GDP in 1997. During 1998, the volume of the newinvestments in the fixed capital decreased by 6.7%. With the reduced newinvestments, the structure of the gross accumulation saw the growth of theshare of the capital repair at the expense of the one of the net accumulation.The slowdown of the rates of renewal of the fixed capital and the worsening ofthe characteristics of the age and technique structures of the fixed assets hasresulted in the irreversible processes in the capital reproduction. In thissituation, determining the efficient, rapidly repaying, segments of the economyand forming the conditions to mobilize the investments in these very sectorshas become the most urgent task of the state.

2.2. Oil and gassector

In 1998, the sharp drop of the world oilprices affected the Russian oil industry. While, in 1997, the average price ofthe Russian crude oil in the world market was US$133.3 per MT (US$18.3 perbarrel), in 1998 it dropped down to US$86.9 per MT (US$11.9 per barrel),i.e., by 35% compared with the preceding year (see Fig.2.2.). As thecalculation of the dynamic of the world oil prices in real expression show,this was the lowest level in the last 25years. The main factor determining thedrop of the world prices was the increase of the production and supplies of thecrude oil by the OPEC countries that ensure the main share of the world oilexport. The rapid increase by the OPEC countries of the crude oil productionobserved in 1997 was supported by the decision on the ten-percent increase ofthe export quotas; this growth continued, actually, during the whole first halfof 1998. At the same time, the growth of the demand for the crude oil and thepetroleum products was negatively affected by the crisis in the South EastAsia, slowdown of the economic growth rates in the USA and Western Europe, andthe relatively warm winter in the Northern Hemisphere. All these resulted inthe overproduction of the oil, imbalance of the world oil market, and collapseof the prices.

The efforts of the OPEC countries to limitthe crude oil production volumes made in order to restore the pre-crisis levelof prices did not yield any visible positive result. This was due to thecontinuing growth of the oil production outside the OPEC, accumulation of theexcess of the crude oil and petroleum products in the industrial countries, andsignificant increase of the oil production by Iraq whose export quota for Julythrough November 1998 was increased by the resolution of the UN SecurityCouncil from US$2billion to US$5.25billion.

The drop of the world prices resulted inthe sharp reduction of the hard currency inflow (see Fig.2.5), drop of theprofitability of the Russian oil export, and loss by the oil companies of thegreater share of their profit (according to our estimates, before the crisis ofthe world prices, the sale of the oil in the foreign market ensured almostthree fourths of all the profit from its sale).

Fig. 2.4

Source: US Department of Energy

Fig. 2.5

Export of crude oil and petroleum productsin kind and in money in 1997-1998, million.MT, US$million

Source: Calculated on the basis of the dataof the Russian State Committee on statistics (Goskomstat)

Table 2.7

Production in and export from Russia ofenergy resources in 1991-1998 (crude oil and petroleum products: million. MT;natural gas: billion. cub. m)

1991

1992

1993

1994

1995

1996

1997

1998

Production of oil

462.3

399.3

353.9

317.8

306.8

301.3

305.6

303.0

Export of oil, total

173.9

137.7

122.6

129.8

122.3

126.0

126.9

137.1

Export of oil outside CIS

56.5

66.2

79.9

91.7

96.2

105.4

109.8

117.9

Export of oil in CIScountries

117.4

71.5

42.7

38.1

26.1

20.6

17.1

19.2

Export of petroleum products,total

46.1

43.0

47.4

47.3

47.0

57.0

60.6

53.8

Net export of oil and petroleumproducts

196.1

167.9

157.4

166.4

156.4

171.6

175.6

181.4

Net export of oil and petroleumproducts in % of oil production

42.4

42.0

44.5

52.4

51.0

56.9

57.5

59.9

Production of gas

643.4

641.0

618.4

607.2

595.4

601.1

571.1

591.0

Export of gas, total

246.8

194.4

174.4

184.3

192.2

198.5

200.9

200.6

Export of gas outside CIS

91.0

87.9

95.9

109.3

121.9

128.0

120.9

125.0

Export of gas in CIScountries

155.8

106.5

78.5

75.0

70.3

70.5

80.0

75.6

Net export of gas in % of gasproduction

27.6

29.2

27.2

29.7

31.6

32.3

34.4

33.9

Note: The data on the geographicdistribution of the export in 1991 include the export outside the FSU and inthe former constituent republics of the USSR.

Source: Russian State Committee onstatistics; State Customs Committee of RF; International Energy Agency (IEA);calculations by author.

The visible reduction of the production andthe renewal of the recession in the oil industry were the reaction on theworsening of the external conditions (see Table 2.7). In 1998, the extractionof oil, including the gas condensate, was 303millionMT, i.e., it reduced by0.9% compared with the preceding year; the oil processing dropped down to164millionMT, i.e., by 7.5% (in 1997, the oil production grew by 1.4% and itsprocessing grew by 1%). The curtailment of the production facilitiesaccelerated: the operating fund of the oil wells reduced from 138,800 at theend of 1997 to 133,000 to the end of 1998; the number of the operating onesdecreased from 102,100 to 98,000. The investments in production also saw asharp drop: in 1998 compared with 1997, the volume of the development drillingfor oil reduced by 38.4%; the starts up of the new wells reduced by 20.6%.According to the date of the Russian Ministry of economy, the aggregateinvestments in the oil industry in the comparable prices reduced by26.1%.

The extremely low world prices faced theproducers with the necessity to reduce considerably all the kinds ofexpenditures. To support the positive profitability of the export, the oilcompanies had to pointedly reduce the depreciation deductions (on the basis ofthe decreasing factor used at re-evaluation of the fixed assets), the laborremuneration, and the number of employed. The comparison of the dynamic of thewells operating fund and volumes of the oil extraction also evidenced theformation of the trend to the concentration of the oil production at the mostproductive fields. The reduction of the general level of expenditures was alsofavored by the governmental measures aimed at reducing the cost of transport ofthe oil by the system of the state-controlled pipelines, namely, the reductionof the hard currency component of the transport tariff on the oil export androll-back of the excise tax on its transport. The hard currency component ofthe transport tariff was reduced from US$3.00 per MT in the first quarter-yearto US$1.50 per MT in the second quarter-year and to US$0.50 per MT in thethird quarter-year. In the fourth quarter-year, it was increased to US$1.50per MT due to the drop of the Ruble to hard currency exchange rate.

Table 2.8

Domestic prices on crude oil and petroleumproducts expressed in USDollars (average wholesale producer's prices,US$/MT)

1996December

1997December

1998June

1998,September

1998 December

Crude oil

63.9

63.1

46.1

17.0

17.0

Automobile gasoline

164.0

169.6

162.6

69.7

63.4

Diesel fuel

153.8

170.0

147.3

58.1

52.9

Fuel oil

71.2

73.8

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