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Domestic price of oil as % of exportprice






Source: Calculated after the data from theRussian State Committee on statistics (Goskomstat)

The reduction of the production expensesresulted in the significant decrease of the domestic prices on the oil. Theaverage producer's price, expressed in the USDollars dropped from US$63.10per MT in December1997 down to US$43.70 per MT in July1998, i.e., by 31%(see Table2.8). It should be. however, noted that this effect was due not onlyto the real reduction of expenditures, but also to the forced reduction of thenorm of profit of the producers because of the aggravation of the salesproblems in both the foreign and domestic markets.

Supporting the high enough level ofextraction under the conditions of the reduced domestic demand and limitedexport facilities resulted in a certain overproduction of the oil insideRussia. The wish to support the reached volumes of the oil extraction wasconnected, first of all, with that the access of the oil companies to theexport facilities was, in fact, linked with the volume of the oil they extract.Besides, cutting down the extraction leads, as a rule, to the drop of the finalyield at a field under development and loss of the maximal possible volume ofextraction. The social factors also favor the support of the production even atthe extremely low efficiency fields: the curtailment of production in theregions totally dependent upon the oil industry is inevitably connected withthe negative social consequences. Acertain influence comes from the yetaccepted management psychology (traditional orientation to the maximalproduction volumes).

For the other hand, the renewal of theeconomic recession and significant reduction of the export due to itsinefficiency conditioned the significant decrease of the demand for oil in thedomestic market. According to our estimates, in 1998 compared with 1997, thesale of the petroleum products in the domestic market reduced by 1.6% whiletheir export reduced by 12.3%. The resulting excessive offer of the oil had theimportant lowering effect on the domestic prices leading to their reduction notonly in the USDollar but also in the Ruble expression (the average oil pricedecreased from Rbl.376.00 per MT in December 1997 to Rbl.249.00 per MT inAugust1998, i.e., by 33.8%).

The conclusion on the domesticoverproduction of the oil is confirmed by the analysis of the dynamic of itsstored reserves. While the growth of these reserves was insignificant (from31.5millionMT in 1997 up to 31.6millionMT in 1998, or by 0.3%), if they arereduced to the comparable form taking into account the reduction of thedomestic consumption of oil, i.e., counted in the days of consumption, thesharp growth can be seen: from 64.5 up to 70.4 days, or by 9.1%.

In the conditions of the drop of the worldprices, the oil companies tried to compensate their financial losses byincreasing the physical volumes of export. The aggregate export of the crudeoil and petroleum products grew from 187.5millionMT in 1997 up to190.9millionMT in 1998, i.e., by 1.8%. With this, the export of the crude oilincreased significantly (by 8.1%) while the export of the petroleum productsdropped sharply (by 12.3%); the profitability of the latter stayed negative upto September 1998. As a result, the specific share of the crude oil in theexport of the liquid hydrocarbons grew from 67.7% up to 71.8%. The ratio of thenet (minus import) export of the crude oil and petroleum products to the crudeoil production volume reached, according to our calculations, 59.9%. At thesame time, the absolute volumes of the oil export have remained, up to today,significantly lower than before the reforms.

The visible growth of the oil and petroleumproducts export to the CIS countries in 1998 should be noted. With this, thegrowth of the oil export to the FSU was observed for the first time in the lastten years. The CIS markets remain, however, narrow enough from the viewpoint ofthe sale of the Russian oil. In 1998, they formed only 14.0% of the export ofthe crude oil and 4.8% of the export of the petroleum products.

The changes of the main indexescharacterizing the evolution of the oil and gas sector of the economy are shownat Figures2.6 and 2.7.

Fig. 2.6

Source: Russian State Committee onstatistics (Goskomstat), calculations by the author

Fig. 2.7

Source: Russian State Committee onstatistics (Goskomstat), calculations by the author

As the above analysis shows, in contrast tothe period of 1990-1996 when the crisis of the oil industry was conditioned,mainly, by the reduction of the demand for the oil in the domestic and foreignmarkets, the production decrease of 1998 was due, first of all, to the worsenedeconomic conditions of the industry's activity having resulted from the sharpdrop of the world prices having brought about the decrease of the petroleumproducts production and export. The change of the world market situation in theconditions of the high expenditures on the production resulted in the decreaseof the production, profit, and investments in the Russian oil industry. Thelatter means, in fact, the accumulation of the potential for the additionalrecession in the oil industry. The positive effects of the crisis are theintense activation of the Russian oil companies in the field of reduction ofthe expenditures and restructuring of the production.

The devaluation of the Ruble allowed toimprove significantly the financial situations of the oil companies due to thestrong growth of the gap between the expenditures on production and the incomefrom the products sale in the foreign market. According to our estimates, inSeptember1998, the profit from the Russian oil export outside the CIS reachedUS$45.80 per MT. To the end of 1998, under the effect of the world pricesdrop, this index reduced to US$31.10 per MT (see Table2.9, Fig.2.8). Thus,in September1998, the net profit from the oil export was US$29.80 per MT andto December it dropped down to US$20.20 per MT. At the same time, the largeliabilities of most of the oil companies for service the debts in foreigncurrencies (according to the Russian Ministry of fuel and energy, as ofSeptember1998, the sum of the foreign credits to the Russian oil companies wasUS$4.5billion) actually neutralized the effect of the devaluation. Accordingto the estimates of the World Bank, even after the devaluation, the currentliabilities of the oil companies for service of the foreign debt per ton ofextracted oil exceeded significantly their net profit.

Table 2.9

Estimate of influence of devaluation ofRuble on efficiency of oil export, USS$/MT






1998 Dec.

Outside CIS oil exportprices







Expenditures: costprice, excise tax, export expenditures (including transport)







Profit from export







Net profit







For reference: Ruble/US$ exchange rate (averagemonthly)







Source: Calculations by the author based onthe date of the Russian State Committee on statistics (Goskomstat) and RussianMinistry of fuel and energy.

Fig. 2.8

Source: Calculations by theauthor.

In these conditions, at the forecastremaining low level of prices in the world oil market, the financial situationof the Russian producers will depend, in the nearest future, on the repaymentof their external debt and dynamic of the real exchange rate of the ruble.Otherwise, the gradual loss of the effect of devaluation and gradual approachof the situation in the oil sector to the pre-devaluation one should beexpected.

2.3. Agrarian and foodsector

In 1998, the evolution of the agrarian andfood sector was influenced by the very contradictory and differently directedfactors. First, the agrarian production strongly suffered from the weather:even by the most optimistic estimates, the grain crop in Russia was very low.For the other crops, the effect of the weather factor was not soimportant.

Second, the budget crisis having beenintensifying during the whole year led to the sharp cutback of the expenditureson the agrarian sector. Though the efficiency of the agrarian and food complexwas very low, however, in the conditions of poor crop and crisis, such supportcould have had a certain stabilizing effect.

The permanent political crisis and, hence,the absence of the concerted agrarian and food policy formed one more negativefactor in the evolution of the agrarian and food complex.

Just as in the former years, theregionalization of the agrarian and food policy in the country, especiallyaggravated in the post-crisis period, had a negative influence. The tradebarriers between the regions led only to the growth of the food prices for theimporting regions and to the too low sale prices for the agrarian producers inthe exporting regions. At the same time, the corruption in the power bodies wasgrowing.

For the other hand, the adaptationprocesses having begun revealing themselves in the agrarian sector, it began toreact adequately to the situation of the market, to adapt itself to therealities of the economy. In particular, the tendencies revealed themselves tothe production growth in the poultry keeping and swine-breeding, thesub-branches capable of the fastest growth. The positive shifts showedthemselves in the food industry, as well; moreover, this was based on thegrowth of the investments in this sector of economy.

Paradoxical as it was, the economic andfinancial crisis had a positive effect on the agrarian and food economy. Thedevaluation of the Ruble became a natural barrier for the import thus havingfreed the market niches for the domestic producers. The latter had, already,been to a certain extent made ready for this by all the previous years of thereforms, all the accrued experience, and formed infrastructure. Moreover, thefinancial problems connected with the crisis had almost no effect on the sectorthat had for already long worked in the conditions of the exchange inkind.

The crisis has led to the reanimation ofthe tendency to the growth of production on the farms of the population, and,to all appearances, in 1999, this sector will see the evident growth. This isdue, first of all, to the decrease of the real incomes of the population andthe intensifying instability in the society.

In 1998, the agrarian and food policyunderwent substantial changes, not in the last instance because of the burstout economic and political crisis. Although the agrarian policy of thePrimakov's cabinet stays, yet, unclear, the trend to the strengthening of thedistributive methods of the regulation of the sector has begun to show itself.Here, it should be acknowledged that the Government has become aware of thechance of growth for the national agrarian and food sector and has begun tryingto help put it into life.

The gross produce of the agrarian sectorreduced by 12.3% (in 1997, the growth was 1.3%), but mainly in the plantgrowing. The animal breeding was characterized, last year, by the recessionextremely low for the latest years: less than 1% (5.3% in 1977).

Agrarian production

Plant growing

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