Oil Prices Support Russian Economy

As oil prices surged to another record ($93.56 per barrel), energy analysts said Russia has become a critical player in the world oil and gas market. Richard Herold is director of international affairs of the London-based oil multinational, BP, which has large investments in Russia.

“Russia is the number one country in the entire world in terms of proven oil and gas reserves,” said Richard Herold. “[It is] Larger than Saudi Arabia, the country that seems to be most famous for that in the United States, larger than Iran. It is also the largest in the world in terms of yet to find oil and gas reserves. This means reserves that are yet to be proven in the ground but reserves that the industry and experts believe are there.”

The energy sector accounts for 35 percent of Russian gross domestic product and provides 50 percent of government revenue. Russia’s economy is growing at a seven percent annual rate.

Matthew Sagers, the Russia specialist at Cambridge Energy Research Associates, says that, while much of Russia’s energy sector has been privatized, policy makers in the Kremlin view the industry as a foreign policy tool.

“It is basically perceived as being an instrument for restoring the power of the central authority within Russia and an instrument for reclaiming a position for Russia in international affairs,” said Matthew Sagers. “It is, really, the weapon.”

Russia used the energy weapon two years ago when it briefly shut off gas exports to Ukraine.

The experts identified weak infrastructure and lack of capital investment as challenges facing the Russian oil industry. They said taxes are so high that the private sector has little incentive to invest.

Cliff Gaddy of Washington’s Brookings Institution, a respected research organization, observed that with global energy demand rising, the West favors increased Russian oil and gas production. Gaddy says President Vladimir Putin has the same objective.

“Our [the West’s] desired outcome [in the presidential succession] can actually come, most likely, if Putin stays in charge and secures the succession,” said Cliff Gaddy.

Gaddy was referring to the possibility that Mr. Putin could hold on to power by becoming prime minister even after his presidential term expires next year.
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