The Dog Barks but the Caravan Moves On

Abstract

Abstract: With the revenue from Russia's oil exports, Russia has moved from its near-bankrupt status after the August 1998 financial collapse to a situation where it is now a financial powerhouse. Although revenue from natural gas exports is not as large, Russia's natural gas pipelines into Europe bring Russia immense political clout. Putin has used Russia's oil and gas skillfully so that the country is once again a superpower--emphasis on power. Keywords: Gazprom, ITERA, natural gas, petroleum, Putin, Russia ********** When asked at his January 31, 2006, press conference how he responded to calls by U.S. Senator John McCain and Congressman Tom Lantos to kick Russia out of the G-8, Russian President Vladimir Putin quoted an old Arabic proverb: The dog barks but the caravan moves on. This was Putin's way of saying, Who cares if some American senator thinks Russia is not up to the standards of the world's richest democracies. Russia will do as it pleases and there is not much anyone can do about it. They need Russia more than we need them. This was very different from what Boris Yeltsin used to say when he was president and, for that matter, how Putin would probably have responded to the same question during his first term. More than anything, this new assertiveness is a result of oil at $70 a barrel and the fact that Russia is the world's largest exporter of natural gas and the world's second largest exporter of petroleum. Considering the context, this new hubris might seem overly presumptive. Russia's GDP is growing at 6-7 percent per year--primarily because of growth in the energy and metals sector rather than manufacturing, which is lagging. Russia's per capita income is still less than Portugal's, and its army is bogged down in misadventures in Chechnya and by public revulsion at a scandal highlighting army hazing and brutalizing of draftees. But today, with oil and natural gas prices at record highs, abundant energy reserves count for more than per capita income and, like Venezuela, Russia is learning how to leverage those resources. I Russia's transformation from impoverished supplicant in the 1990s to haughty creditor today has been breathtaking. Less than a decade ago, in August 1998, because of its weakened economy and ever-increasing deficit, Russia was forced to default on its state loans, which in turn precipitated the collapse of most of its private banks. Russia's foreign reserves all but disappeared and its RTS index of stock (the Russian equivalent of the Dow Jones index) fell to 39 from a high the year before of 571. In July 2007, fewer than ten years later, the RTS index hit a new high of 2,091, a fifty-one-fold increase. Export volume rose from $71 billion in 1998 to $275 billion in 2006, most of which was generated by oil and gas earnings. Moreover, with export earnings in 2006 almost double the spending on imports, Russia had a $130 billion trade surplus. When added to reserves accumulated from previous years, Russian gold and foreign currency reserves hit $420 billion in August 2007. This is in addition to another $120 billion or so set aside from oil export tax revenue as a stabilization fund intended to reduce inflationary pressure. (1) Russia's gold and currency reserves are now the third largest in the world, although still far below China's $1 trillion. But the geographic location of Russia's oil and gas, particularly its gas, is even more important than the actual amount of its dollar, euro, and gold hoard. Although Russia's petroleum reserves are not as large and are often in locations with extreme temperatures, Russia's land access adjacent to Western Europe and its natural gas pipelines in particular put it in a much more strategic position than Saudi Arabia, whose influence arises almost exclusively from its oil. Still, in January 2006 Russia actually produced more crude oil than Saudi Arabia. Moreover, Russia was the source of up to 40 percent of the increase in world oil output between 2000 and 2005. …