First of all, can the current drop in oil and gold prices seriously affect Russia's budget surplus?
It certainly will. I think there is no doubt about that if it continues.
Is that serious from your point of view or it is just a temporary drop?
I know it is a typical economist’s answer, but it is a double-sided question because in some ways a lower oil surplus will be good, because it will force budgetary policy to be much more discriminating in terms of what the Government spends money on. When oil prices are high, it is rather easy to spend on everything. So, as you can see, it could force some discipline. But the bottom-line is of course, if this continues and prices continue to go down for an extended period of time, then it will certainly reduce the Government’s surplus going into the oil stabilization funds.
As you know, they use a budget rule of the average oil price of Urals planned for the past 5 years, which is currently at $91 a barrel. So, until they get to $91 a barrel the budget is not significantly affected in terms of current expenditure. What would happen as it drops to $91, is that the surplus going into the oil stabilization funds would be lower or disappear. But it would not affect the current budget until it hits that critical $91 a barrel.
Okay. Let’s continue discussing what’s actually critical. When giving a lecture in Washington last month, you said that Russia's economy was not cursed by oil as it was usually stated. You say that the revenues from oil sales are not a crucial factor for Russia’s GDP. If it is so Sir, what economic factors are really crucial for Russia’s GDP?
Understanding the GDP, what drives the real GDP in Russia, it is a question of comparing apples and oranges. Oil prices don’t drive something real. It is a nominal value. What really drives the GDP is producing more cars, booking more insurances, driving more miles, selling more gasoline, more education. Those are real things. And what happens is, even with the President’s goals of exporting and producing more oil and gas, these increases are relatively small in real terms, actual gas or oil production, as opposed to prices.
So, they don’t add very much to the GDP. What drives the GDP growth in Russia is internal consumption. It is consumers, it is purchases by households and businesses and it is not Government spending, it is not even Government investment. So, despite these high oil prices you don’t really see it coming through into the economy driving the GDP growth.
Let’s get to Russia's budget. Russia’s budget is funded by oil and gas to the tune of 35% actually. Forbes said that Russia’s Minister of Finance Anton Siluanov said that without that income Russia would have a deficit of close to 10%. Could you comment on this statement? Is it so?
Siluanov is basically talking about what the IMF calls the non-oil deficit, in other words, if you were to exclude oil, what would the budget look like. And that’s an important concept to track. But I would also say that you shouldn’t compare the non-oil deficit as a concept with what is really happening here. In fact, even when oil prices are, say about $100 a barrel of Urals blend, the budget would be almost in balance. We are not talking about a big deficit. The oil price would have really to go down to $90 a barrel and stay there for, say much of 2013, for there to be a small deficit may be of 1.5-2% of GDP, not Siluanov’s conceptual number of the non-oil deficit.
And Russia can easily finance even out of its oil stabilization fund a small deficit without even borrowing money on the market. So, Russia would have a long way to go, I mean the oil price, let me put it this way, would have to drop significantly down to probably $70 range and below before Russia starts to encounter some of the financing difficulties, that we see in other large emerging market economies.
But we are a long way from there. And that of course assumes that the Government doesn’t hold back on the expenditure side in the interim. My suspicion would be that the Russian Government is going to be very rational about this and if they see oil prices continuing to drop down below $90, they will start holding off expenditure that they consider less of a priority. And as I said at the very outset, maybe that’s not a bad thing.
I understand. And the last question, let’s forget about oil. In what industries does Russia have good chances to be competitive in global market as a producer?
I wish I knew the answer to that question, it is a very difficult one. The Japanese 40-50 years ago thought they knew the answers. My suspicion is that Russians who lived through the Soviet era have understood that the Government bureaucrats are not very good at trying to devise or even imagine which sectors are going to be the powerhouses of the future.
My own opinion, though, would be that given the high level of education in Russia that it would be clearly not in the manufacturing area, but really in high-tech, innovation, software and the development of services. The service industry I think would be a continuing area of future growth in the Russian economy.
Thank you very much Mr. Gilman. That was Martin Gilman – Ph.D. in Economics from State University, Higher School of Economics.