Yury K Shafranik: «Russia in a multi-polar energy world» (World Affairs Spring 2006 Vol 10 № O1)

Russia occupies one of the leading places in the world in the sphere of supply of hydrocarbon resources—oil, gas condensate and natural gas.

Oil reserves predictions stand at 44 billion tonnes, which constitutes about 20 per cent of the world reserves. Russia definitely has 12–13 per cent of proven global oil reserves.

At present it enjoys a high rate of growth in oil production, which is significantly higher than the prediction made a few years ago. This turned out to be a real surprise for many. Oil production reached 379.6 million tonnes in the year 2002, which is 9 per cent higher than the production in 2001, and 26 per cent higher than in the year 1996 when the production declined to an all time low. Russia occupied second place after Saudi Arabia in the sphere of oil production in the world in the year 2002. Its total oil production including gas condensate, rose to 421.4 million tonnes registering a growth of another 11 per cent.

According to the Federal Service of State Statistics, the oil production reached the post-Soviet record level of 458.7 million tonnes in the year 2004, which is 8.9 per cent higher than the 2003 level. It is to be noted that three-fourths of the oil produced in the country including petroleum products are for export.

According to the State Energy Strategy, oil production in the country would rise up to 450–520 million tonnes and oil exports would increase up to 280–355 million tonnes by the year 2020.

Russia occupied second place after Saudi Arabia in the sphere of oil production in the world in the year 2002.

An analysis of this data against the backdrop of global energy consumption predictions permits one to arrive at certain conclusions;

A) The share of Russian oil constitutes 3.6–4 per cent in the global energy balance, 10 per cent in total oil consumption and 13 per cent in world oil trade. Russian oil has special significance for Europe as one-third of the latter’s imports come from Russia. Moreover, Russia is linked to Europe not only by common history and a long partnership but also by an extensive oil pipeline network. Russian oil and petroleum-products supplies to Europe play a significant role in ensuring energy security of many European countries.

B) By the year 2020, the share of Russian oil would remain at the same level of 3.6–3.7 per cent in the global energy balance, would rise to 10.3–10.4 per cent in total oil consumption and would decline to 11.5–12.3 per cent in world oil trade. Russia would continue to remain one of the major suppliers of oil to Europe and at the same time would begin to make large-scale supplies to the countries of the Asia-Pacific region and the US.

C) Under conditions of globalisation, implementation of necessary structural reforms in the oil and gas sector with the formation of modern multi-profile, vertically integrated companies plays a most important role in raising the competitiveness of the Russian oil and gas business.

Three major components should be stressed here:

I. Formation of vertically integrated companies;

II. Creation of a modern, highly-competitive company structure;

III. Integration of extraction and processing of hydrocarbons and oil and gas-based chemical production.

GLOBALISATION OF ENERGY MARKETS

Globalisation of world energy markets is a natural stage of their development.

Oil production reached the post-Soviet record level of 458.7 million tonnes in 2004, which is 8.9 per cent higher than the 2003 level. Three-fourths of the oil produced is for export.

Oil markets, being one-product-based and local at the outset, are transformed into regional and global markets of concrete energy resources (for example, world oil market), and regional energy markets (for example, European market for electricity and gas). The energy markets strive to form a global energy space with uniform rules of the ‘game’. And it would be easy to play the game for those who make these rules. That is why, at present, long before the formation of that space, there is a battle for future key-positions in it.

A group of oil producers and a group of oil consumers are being formed in world energy markets mainly in the sphere of oil resources.

The role of Russia as one of the major independent players in the external oil markets received a significant boost during 2001–2004.The reason behind this is the right choice of reforms in the oil and gas complex, and a huge accumulated potential in the production-technical and resource spheres.

The US and Russia stand at the opposite poles of the global energy market.

The US is the largest oil consumer in the world (29 per cent), and is expected to maintain this position till the year 2030 (about 1.2 billion tonnes or 21 per cent of the global oil consumption). Moreover, the US meets more than half its consumption through imports. (Share of imports in total oil consumption of the US would rise up to 60–65 per cent by 2030).

The US administration is watching the developments in the world oil market very keenly and is ready for action in any changing situation. Each US President beginning from the 1970s drafts a national energy strategy or doctrine for the next 15–20 years. Energy security is one of the top priorities of US governments. A well-designed coordination of all the activities of the state and companies outside the US is conducted through the State Department.

Drafting of a long-term energy policy is in practice in Russia since the 1990s. The Russian government approved the main elements of its energy policy under the new economic conditions in 1992 itself. In 1995 President Yeltsin through a decree set the ‘Main directions of energy policy of Russian Federation up to the year 2010’. The government also approved it through a special resolution. In 2000 it adopted the main directions of the energy strategy for the period up to 2020, and approved it in the year 2003. However, these documents at present do not permit Russia to find solutions to important strategic issues, including the formation of a modern, highly competitive economy. These documents need further development. Moreover, there exists a gap between the clauses of the energy strategy that still retain significance and the current practice.

The US is the largest oil consumer in the world (29 per cent), and is expected to maintain this position till 2030 (about 1.2 billion tones or 21 per cent of the global oil consumption). The US meets more than half its consumption through imports.

The most important factor in oil is its world prices. The USA, as the largest consumer of this product, is interested in cheap oil. Cheap oil is the locomotive of the US economy and the basis of the well-being of the American nation. The US has always exerted significant influence in determining oil prices. On the other hand, Russia as an exporter is interested in high oil prices in the world market. However, it never had hitherto an opportunity to seriously influence the global prices.

Nevertheless, Russia and the US have a common interest in regulating oil extraction and the development of the oil and gas industry. Both countries are interested in predictable oil prices. Hence, within the framework of G-8 — Russia-US energy dialogue—it is necessary to work out common and mutually agreed upon approaches to the issue, and then formulate conditions for creating and supporting a range of fair oil prices which would be acceptable to the consumers, and at the same time would create an opportunity for the oil-producing countries to run a profitable oil business.

During the last ten years, the time frame of price fluctuations in the world oil market has accelerated and their extent has gone up. This means that the impact of new destabilising factors has been gradually growing in the market. These factors include, uncontrolled growth of supplies from Russia, Kazakhstan and other oil-exporting countries that do not form a part of OPEC. The Russian economy is particularly hit by fluctuations in global oil prices because of its heavy dependence on hydrocarbon exports. There is only one way out, which is to actively participate in regulating the world oil market along with OPEC and other oil-producing countries.

SIGNIFICANCE OF THE CASPIAN SEA REGION

The super power’s manoeuvres around Caspian Sea are at the core of the US energy policy. This region was declared strategic for US interests as early as the mid-1990s. Washington makes major efforts—to the extent that it is being accused by leaders of some countries of being manipulative—to establish control over the oil and gas resources of the Caspian region, supporting relevant pipeline projects.

Russia and the US have a common interest in regulating oil extraction and the development of the oil and gas industry. Both countries are interested in predictable oil prices.

Does this kind of policy threaten or annoy Russia? The Caspian Sea region is a zone of conflict for Russian and US interests (not only in the sphere of oil). Here the US has a clear edge over Russia. But Russia has only itself to blame. There were serious opportunities which it lost due to various reasons. But it is now time for action, for defending our national interests in the sphere of energy security.

Since the Iraq war, the geopolitical importance of the Caspian region has risen significantly. The region under the new conditions will emerge either as a zone of peace (through joint infrastructural and other projects) or become a new source of international tension, and perhaps military conflicts.

The viewpoint of Russian interests in the Caspian region can be articulated in the following way: We have no other choice—there should not be any strategy other than that of large-scale investments in Azerbaijan, Kazakhstan and Uzbekistan with the objective of bringing one-third of the hydrocarbon resources of these countries under the management of Russian companies. This is possible and realistic and it benifits the interests of Russia and of other countries of the Caspian region. Delay on the part of Russian companies to move in could cost them dear and also provide opportunities for other countries to step in.

Unfortunately, there is not a single vertically integrated oil and gas company in Russia which can be regarded as transnational. All the Russian companies in the sphere stand at the entry-point of the international market of hydrocarbon production and services connected with it. The most advanced and consistent in its effort to transform itself into a transnational company is Lukoil, which is increasing its foreign oil and gas assets in a planned manner. However, its foreign assets do not yet exceed 5 per cent of the total.

In the meantime, in the post-Soviet era the oil and gas sector has developed dynamically. The investment into the Oil and Gas Complex per tonne of oil extraction and per capita in Kazakhstan, Uzbekistan and Azerbaijan exceed those made in Russia.

The Russian economy is particularly hit by fluctuations in global oil prices because of itsheavy dependence on hydrocarbon exports. There is only one way out, which is to actively participate in regulating the world oil market along with OPEC and other oil-producing countries.

Russia extracted 643 billion cubic meters of gas in 1991 and 634 billion cubic metres of gas in 2004. The corresponding figures for Kazakhstan are 8 and 20 billion cubic metres; for Uzbekistan—42 and 60 billion cubic metres. Russia produced 462 million tonnes oil in 1991 and 459 million tonnes in 2004. The corresponding figures for Kazakhstan are 27 million tonnes and 59 million tonnes. The oil production in Kazakhstan might reach 80 million tonnes in 2006–07. Azerbaijan increased its production from 8 million tonnes in 1991 to 16 million tones in 2004.

In the sphere of oil and gas production, Russia is just approaching the Soviet level, while the Central Asian states and Azerbaijan, under most unfavourable conditions, are increasing their hydrocarbon production and have achieved significant progress in comparison to the Soviet period.

The necessity of moving Russian companies towards not only the West but also towards the erstwhile Soviet East is absolutely clear. The cost of extraction in Kazakhstan, Azerbaijan, Turkmenistan, Uzbekistan is substantially lower than in many regions of Russia. In the foreseeable future these countries will turn into our competitors in the world energy market, particularly in Europe. In this situation it is prudent to invest in the oil and gas sectors of Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan. The share of Russian energy companies in the oil and gas extraction within these countries should be at least 30 per cent of their total production. This would allow Russia not only to shift from competition to partnership in the world energy market vis-à-vis these countries but also resolve many geopolitical issues.

It seems that the realisation of the importance of large investments into CIS economies is gaining ground within the ruling classes as well as in the oil business circles of Russia.

There should not be any strategy other than that of large-scale investments in Azerbaijan, Kazakhstan and Uzbekistan with the objective of bringing one-third of the hydrocarbon resources of these countries under the management of Russian companies.

Europe is traditionally the main export market for Russian oil and gas. The situation would remain so in the coming decades in spite of all European efforts to diversify energy sources. The globalisation process requires the adoption of new directions even in traditional business. That is why the main task before Russian companies is to enter the domestic markets of Europe, in both the oil and gas sectors, to reach the end-users with readymade products bypassing intermediaries by acquiring European oil-processing facilities and distribution-companies and making them participate in the development of the oil and gas pipeline network linked to Russia. This would give us guaranteed sales, guaranteed income and stability in currency and exchange rate. In such a situation, several years from today, one will not have to seriously worry about the happenings in OPEC and the economic situation in the USA.

Harmonisation of the institutional and legal frameworks of the Russian Federation and European Union, unification of the tax and customs policy and all out assistance to the companies striving for assets acquisition abroad are necessary.

In view of the situation in Iraq and around the Caspian, the first and foremost requirement is coordination of efforts between the state and the business sector. An active energy diplomacy is required which is not possible without a well-conceived and consistent state energy policy. Here one has things to learn from partners and competitors.

INEVITABILITY OF A MULTI-POLAR ENERGY WORLD

The appearance of energy ‘poles’ is observed together with the process of globalisation of world energy markets.

Until the Soviet break-up there were several clear poles which ensured a balance of political, military and economic interests. The system of balance of interests was seriously disrupted following the USSR’s disintegration. We witnessed the emergence of a unipolar world. The world cannot survive on just one pole. The basis for a new multi-polar world is energy.

One of the poles of the multi-polar energy world is the USA which consumes 27 per cent of the oil and gas produced in the world.

The other pole is formed by producers of oil and gas, united in OPEC. One more peculiar pole of the world rests on independent oil producers like Russia, Norway and others.

Two new powerful poles of energy consumption—India and China—are rapidly emerging.

It is possible that new speedily developing poles will appear in countries of South-East Asia. They can freely combine to create different configurations which would be proof of the inevitability of a multi-polar energy world.

The question is: Can Russia retain its place in this world in the future? The answer lies in Russia’s choice of development.

Innumerable books and articles have been written on the role of energy in the development of society, and nobody can deny that energy-equipment and energy efficiency have turned into one of the criteria of state power. It cannot be ruled out that after 10–15 years there might appear a qualitatively new kind of energy. But that will not diminish the importance of the power infrastructure.

Without the growth of energy consumption, long-term economic growth and development of society is not possible. Because, along with the development of society grows the dependence on energy and energy sources. Each technological cycle is accompanied not only by qualitative changes in the structure of utilization and forms of energy resources but also by a multi-fold growth of energy consumption.

Thus, from 1971 to 2000, world energy consumption increased 1.8 times while oil consumption during the period went up by 47 per cent, consumption of coal increased by 62 per cent and of natural gas by 2.3 times. But it is to be noted that consumption of uranium went up 23 times. Fast growth in the consumption of primary energy resources is predicted for the coming decades. Though the figures predicted during the last 10 years vary significantly, the common tendency for the increase of energy consumption is beyond any doubt.

The rate of annual rise in world energy consumption up to the year 2030 could be between 1.6 to 2.5 per cent depending on the rate of economic growth, dynamics of scientific-technical progress as well as the success of the implementation of a sustainable development programme aimed at preserving the environment.

The cost of extraction in Kazakhstan, Azerbaijan, Turkmenistan, Uzbekistan is substantially lower than in many regions of Russia. In the foreseeable future, these countries will turn into our competitors in the world energy market, particularly in Europe.

As shown by the study conducted by the International Energy Agency (IAEA), the demand for energy resources in the past several decades grew in proportion to the growth of the world GDP. Thus, during the period 1971 to 2002, each per cent in the growth of world GDP, accounted on the basis of purchasing power parity (PPP), was reflected in a rise in demand for primary energy resources by 0.6 per cent.

Forecasts about world energy consumption brings to the fore two issues:

1. How far is planned growth of fuel and energy consumption ensured by natural resources?

2. What is the role of oil in the predicted growth of demand?

The studies of the last one decade prove beyond doubt that mankind will not face energy starvation in the foreseeable future. The planned development of the world energy system is founded on a strong raw-material base. The proven world oil reserves are estimated at 143–173 billion tonnes and if world oil production stabilises at 4 billion tonnes per annum (oil production in 2003 was 3.7 billion tonnes) it would lead to the disappearance of these reserves in 36 to 43 years. Some probable oil resources are estimated at around 200–230 billion tonnes, which amounts to 50–57 years of future consumption. Apart from this, there exist resources of ‘non-traditional’ nature, meaning oil contained in bitumen and oil-carrying gritstones.

About 90 billion tonnes in that form are ready for industrial use. The total estimate of such resources ranges between 260 and 950 billion tonnes. According to the latest assessments of Sedigas, proven world gas reserves are estimated at around 180 trillion cubic metres which if extracted at an average level of 3 trillion cubic metres per annum (production in 2003 was 2.6 trillion cubic metres) will lead to exhaustion of these reserves in only 60 years. Total primary gas resources are estimated at 436–500 trillion cubic metres, out of which about 55 trillion have already been extracted and 180 trillion are prospected. Thus, gas resources (predicted and probable) are estimated at 200–265 trillion cubic metres, which is equivalent to another 67–88 years of consumption.

From 1971 to 2000, world energy consumption increased 1.8 times while oil consumption went up by 47 per cent consumption of coal increased by 62 per cent, and natural gas by 2.3 times. Consumption of uranium went up 23 times.

Prospected profitable world reserves of coal are estimated at around 900–1000 billion tonnes, out of which 750 billion tonnes are coal-ore. If production stablises at the level of 5 billion tonnes per annum (coal production in 2002 stood at 4.8 billion tonnes), the supply will last for 180–200 years.

Apart from dug-up forms of fuel, the world has significant re-usable sources of energy. Those that are technically and economically viable at present are estimated at 80–85 billion tonnes of oil equivalent. Besides, the world has substantial prospected reserves of uranium which would be enough for 45 years at the present rate of consumption. Thermonuclear energy is at our doorstep. There are other so far undisclosed forms of energy and ways of harnessing it.

The main problem for the development of the world’s energy sector in the foreseeable future would not be the lack of energy raw material, but the difficulty of ensuring the necessary volume of fuel and energy production through adequate investment under terms and conditions both acceptable to consumers and attractive for producers. In this case, adequate attention should be paid to scientific-technical progress and new technology as one of the factors determining the situation and the prospects of world energy.

The role of oil in world economy cannot be exaggerated in the contemporary state of development of society. Oil is the main raw material for production of diverse synthetic materials. Though existing technologies enable us to manufacture products of organic synthesis from other kinds of raw materials like coal, gas, biomass etc, their cost (with the exception of gas technologies) so far is higher than the oil-derived products. Oil by-products are the main fuel for transport and heating. It is enough to say in this regard that 8 per cent of world electricity is generated from oil.

The demand for energy resources in the past several decades grew in proportion to the growth of the world GDP.

Oil will keep its dominant position in the structure of the world energy consumption for the next 20–30 years, though the demand for it will not be as high as for gas or energy resources taken as a whole.

In spite of further growth in the volume of oil consumption its importance in world energy balance would gradually diminish. Oil as a fuel has reached its peak. The nineteenth century was the century of coal, the twentieth century the century of oil, the twenty-first century, (at least its first half) will see the diversification of energy sources (oil, gas, coal, nuclear fuel, organic sources including bio-mass).

Other energy-carriers will increasingly compete with oil in the twenty-first century. However, oil would still dominate in the sphere of motor-fuels. The breakthrough of natural gas into the engine fuel market is expected in the near future. Hence, the task is to determine the sectors in which oil would remain the most effective energy-carrier.

OIL: ENGINE OF GROWTH OR OBSTACLE TO DEVELOPMENT?

What is oil for Russia?

The oil industry is an important part of the Russian economy, providing all sectors of the population with a wide-range of engine fuel and other combustibles, raw materials for the petroleum industry, boiler-house fuel and other valuable oil products.

The oil industry, including oil pipelines, accounts for 12–14 per cent of the industrial production of Russia, provides up to 16 per cent of the federal budget income (17.6 per cent in the year 2000) and 13–15 per cent of the consolidated budget (16.3 per cent in 2000). Oil also provides more than 30 per cent of the hard currency for the country (35 per cent in the year 2000).

The growth of oil production in Russia, during the last several years, has taken place mainly in the existing fields and on the basis of already existing infrastructure.

The proven world oil reserves are estimated at 143–173 billion tonnes and if world oil production stabilises at 4 billion tonnes per annum (oil production in 2003 was 3.7 billion tonnes) it would lead to the disappearance of these reserves only after 36–43 years.

Consistent cost reduction is taking place in the oil production worldwide. However, the fall in costs in the Russian oil industry is largely artificial. First of all, this occurs as a result of our past achievements. A huge extraction and distribution infrastructure was built in the country before the 1990s on the basis of which it is possible to maintain the desired production without incurring heavy maintenance costs.

That is why the logical question is—would our oil and gas giants be able to resolve the imminent problems? In my view, this is not possible without the active support of the state.

It is the external factors more than the internal ones, like favourable international market conditions, that are to account for the current growth of the oil and gas complex. The present high oil prices are due more to the situation created by the US global military-political strategy than to long-term structural tendencies.

That is why the fast growth of Russian oil production during the last few years is based on a very weak foundation. This leads to several conclusions.

First: Without questioning the dependence of the contemporary Russian economy on the world oil-market or the role and importance of the price-factor in the development of the oil industry, it should be acknowledged that these factors are only two out of many, and should not be exaggerated.

Second: Favourable price conditions on the external markets in combination with positive internal factors of economic growth have created the illusion that the main problems of the oil complex of Russia have been resolved, and its further development is expected as an obvious consequence.

Third: The oil industry of Russia mainly works for foreign markets. 73–75 per cent of the oil produced, including oil products, was exported in the years 2002–2004. It should be noted here that the percentage was only 49 in the year 1995, the same as in 1990 with the only difference that, in 1990 out of the total 266 million tonnes of oil sent out of Russia, 154 million tonnes went to meet the requirements of the constituent republics of the unified state—USSR, and hence were not considered as an export.

Then, in 1997–98, a fundamental change took place. Two tonnes of oil out of every three produced in the country were earmarked for export. That percentage has increased since. According to the energy strategy of Russia, this situation is expected to prevail in the country until 2020.

Oil will keep its dominant position in the structure of the world energy consumption for the next 20–30 years, though the demand would not be as high as for gas or energy resources taken as a whole.

Fourth: The oil industry of Russia stands on the brink of significant and serious changes. Prospects of its development in the near future would be determined by the resolution of such problems as the use of underground natural resources, the situation of the sector, the structure of industry, the demonopolisation process, investments and new projects. The future of the oil industry depends on these issues, not on the level of world prices which can either facilitate or hinder the solution.

Which oil prices—higher or lower—are more favourable to the economic development of Russia?

The answer (higher prices are desirable because the main hard currency income comes from oil export) looks obvious on the surface. The main negative factor arising out of high oil prices is that they maintain the structure of the Russian economy in its present form, create an appearance of economic well-being and an illusion that nothing should change: Produce oil, export it to the world market and everything else could be purchased. On the contrary, lower prices act as a stimulant for positive structural change. The experience of 1998–2000 showed that after its sovereign default, the Russian economy was activated against the backdrop of lower prices. The moment abundant hard currency flows into the country, the stimuli for development become weak.

Serious research, as a basis for models of macro-economic prediction, is required for finding a satisfactory answer. That kind of research lies ahead, though frankly there are not many anxiously waiting for the answer. The present situation is probably too comfortable for most of the country’s political and business elite.

What is oil for Russia? Is it a means for developing into a modern highly-effective diversified economy or an instrument for further enslavement of thecountry as a ‘great raw-material appendage’ for the developed countries?

The oil industry accounts for 12–14 per cent of the industrial production of Russia and forms up to 16 per cent of the federal budget income. Oil also provides more than 30 per cent of the hard currency for the country.

One does not have a simple answer to this question. Of course, one would like the country to successfully overcome the socio-economic crisis—triggered by ill-conceived and unplanned transition to the market economy—with the help of the oil industry and the entire energy complex. The money coming from the fuel and energy industry should be spent on bringing about structural changes in the economy and ensure sustained development. After all, these objectives were set by the scientists and specialists who in the mid-1990s drafted the energy strategy of Russia.

The strategy was approved by Government Resolution No. 1006 dated October 13, 1995. During 1996–2000, it could not be uniformly applied, though it dictated the broad trends in the management and reform of the fuel and energy complex of the country.

The contemporary Russian state still does not have a comprehensive long-term economic development policy. The energy development strategy (in the 1995, 2000 and 2003 editions) though contains some basic economic elements, is mainly directed at resolving issues of energy production. Even the questions on the use of fuel and energy are simply included in that document with no solutions being offered.

This author’s point of view is that the Russian fuel and energy complex, including the oil industry, does not have the potential either to generate resources for purchasing the required machines, equipment and material for industry or to create financial flows to be redirected towards the development of industry.

Can the oil industry oriented towards export, in principle, ensure long-term and sustainable economic growth?

Let us analyse the economic and energy indicators of major countries that export oil and oil-products, and developing countries that import oil and other energy resources for a 30 year long period from 1971–2000. Take developing countries that not only traditionally import oil, oil products and natural gas but also significantly depend on that kind of import. For example, Singapore and Hong Kong in the year 2000 imported all the energy they consumed. The dependence of Taiwan, Israel and South Korea on energy import that year varied from 97 per cent to 87 per cent, while Turkey’s dependence on import was 66 per cent and Finland’s 51 per cent. Let us include Thailand and Brazil in this group, though their dependence on energy imports amounts to 45 per cent and 24 per cent respectively but has a permanent character. None of these countries, except Brazil produces oil.

STRATEGIC DEVELOPMENT OBJECTIVES FOR THE RUSSIAN OIL INDUSTRY

There is an average level of per capita GDP production in all the oil-exporting countries. This indicator amounted to US$ 10.46 thousand, US$ 14.83 thousand and US$ 18.24 thousand for Saudi Arabia, Kuwait and the United Arab Emirates respectively in 2000, well below not only industrially developed countries where this indicator touches US$ 21.94 thousand per capita, but also below countries like Israel, Taiwan, Singapore and Hong Kong which were considered semi-developed until recently.

The present high oil prices are due more to the situation created by the US global military- political strategy than to long-term structural tendencies.

Here Qatar is the only exception where a country with a population of half a million produces 32 million tonnes of oil and its LNG exports amount to 44.7 million tonnes of oil equivalent. The per capita GDP on the basis of purchasing power parity (PPP), in the year 2000, reached US$ 26.05 thousand, which is comparable to the levels of Denmark, Canada and Sweden.

In the case of traditional oil exporters like Iran, Venezuela, Libya and Algeria the per capita GDP on the basis of PPP is rated at US$ 5.56–4.98 thousand, which is lower than the world average level (US$ 6.93 thousand) and also lower than in Thailand, Turkey and Brazil. Even Mexico, which is among the OPEC countries, possessing a developed multi-sectoral economy has a per capita GDP on the basis of PPP several times lower than that of Israel, Singapore and Hong Kong.

Even Norway, famous for very high living standards and one of the major hydrocarbon exporters of the world, (146 million tonnes of oil and 50.5 billion cubic metres of natural gas in the year 2000 with a population of 4.5 million) has per capita GDP on the basis of PPP, lower than that of Ireland which does not have any energy resources, or lower than that of Iceland that fully meets its energy requirements through imports.

After its sovereign default, the Russian economy was activated against the backdrop of lower prices which act as a stimulant for positive structural change. The moment abundant hard currency flows into the country, the stimuli for development become weak.

While Norway’s per capita GDP is US$ 26.3 thousand, the figure is US$ 27.65 thousand and US$ 26.86 thousand for Ireland and Iceland respectively. Iraq and Nigeria had one of the lowest in the year 2000 (US$ 1.38 thousand and US$ 0.81 thousand respectively).

Oil exports ensured the growth of per capita GDP for the majority of the oil-exporting countries to the level of developed countries or ‘Asian Dragons and Tigers’, but failed to maintain this indicator at the level reached 30 years ago. The GDP on the basis of PPP declined by 13.4 per cent in Saudi Arabia, in Nigeria by 15 per cent, in Venezuela by 22.5 per cent, in the United Arab Emirates by 31 per cent, in Libya by 3.5 times, in Iraq by 5.3 times. Obviously, the richest (UAE and Saudi Arabia) and poorest (Iraq and Nigeria) countries were all affected by the process. The per capita GDP on the basis of PPP practically did not rise in Iran where its growth in 30 years amounted only to 7 per cent. This indicator rose by one and a half times only in Algeria and Mexico.

These oil exporting countries together produced and supplied more than 33 billion tonnes of oil to the world market in 30 years. In effect, they supplied more than a billion tonnes every year.

The countries without oil resources, which were under-developed till recently, have witnessed much greater economic growth than leading oil-exporting countries. Thus, the per capita GDP on the basis of PPP increased 3.6 to 3.8 times in Israel, Thailand and Hong Kong, 4.6 to 4.7 times in Korea and Singapore, 5.9 times in Taiwan. Only in the Philippines, Brazil and Turkey did the per capita GDP on the basis of PPP increase at a slow pace in the last 30 years. The per capita income of these countries remained almost at the level of Algeria and Mexico.

Economic history thus clearly bears witness that an export-oriented oil industry in principle cannot ensure long-term and sustainable growth of the national economy.

Yes, oil is a powerful engine for economic growth, but only if this oil is consumed in the domestic economy and not exported. For Russia, with a per capita GDP of US$ 7.63 thousand in the year 2000 on the basis of PPP (higher than in Libya, Venezuela and Iran but lower than in Mexico or Saudi Arabia), it is not possible to double the GDP by the year 2010 solely through the growth of hydrocarbon exports.

Russia is certainly a great oil and gas power. However, it will become a great economic power only when a major part of the oil produced in the country is used in the domestic economy. It should not only be burnt. It should be processed into hundreds and thousands of industrial products.

So, in conclusion, we can make the following recommendations:

1. The development of the oil industry in Russia should be oriented mainly towards the domestic market.

2. The strategic vector of development of the oil industry should be the creation of a powerful oil-based petrochemical complex within vertically integrated oil and gas companies;

3. The export-oriented oil industry should be closely linked to the expansion of domestic oil and gas companies in foreign markets and should be supplemented by acquisition of hydrocarbon resources in foreign countries.

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Translated from the Russian by Professor Arun Mohanty, Centre for Russian And Central Asian Studies, School of International Studies, Jawaharlal Nehru University, New Delhi.

World Affairs Spring 2006 Vol 10 № O1