Decisions by the International Monetary Fund (IMF) and World Bank to support Russia's economic reform program have value beyond the dollars involved. They give President Boris Yeltsin's administration an international political lift that is crucial at this stage in the country's reconstruction.
IMF agreed to provide Russia a $1 billion line of credit, to be followed by what Michael Camdessus, IMF managing director, called a "phased program of collaboration." The World Bank approved loans totaling $600 million to finance Russian imports. The support came despite growing unlikelihood that the Russian government can satisfy a key IMF condition by cutting its budget deficit to 5% of gross domestic product during the second half of the year.
INTERNATIONAL CONFIDENCE
International oil companies pursuing business in the former Soviet Union's most important oil and gas producing republic should welcome these displays of international confidence. They know that Yeltsin's challenge is to build a viable economic framework before conditions worsen to the point that a beleaguered citizenry loses patience and demands change. The IMF and World Bank moves will help the Russian president stay on course. But credit lines and international votes of confidence are no substitute for work, wages, profits, and growth. Russia still has some deals to conclude.
Oil companies have waited out coup attempts and dissolution of the Soviet Union. They'll wait out whatever other political surprises may be in store. But Russia doesn't need oil companies to wait. It needs them to revitalize 25,000 idle oil wells. It needs them to find and develop fields that the Russian industry can't find and develop. It needs them to fix pipelines and lay new ones. It needs them to provide the $60-70 billion that some see as the investment potential. And it needs them to get busy because it can't sustain oil exports-its key source of hard currency-without reversing an oil production decline that, according to the International Energy Agency, averages 13%/year.
For now, Russian oil exports look surprisingly healthy. But it's a pauper's irony. Exports have climbed because Russia has cut shipments to other republics of the old union and because consumption has slumped along with economic activity. IEA estimates Russian oil exports climbed to 2.25 million b/d in June from 2-2.1 million b/d in April and May, representing the country's main source of hard currency. With production plummeting, however, consumption growth, such as what would accompany economic recovery, would crimp exports - and hard currency income. Unless the oil production decline is reversed, Russia in effect cannot afford to grow.
WORK MUST START
That's why Russia needs foreign oil companies to start work soon. The government has made progress on several significant oil and gas deals. But companies still report institutional difficulties such as jurisdictional conflicts, indecision, and distrust. At the beginning of the year the government hampered progress when, for convoluted price disparity and fiscal reasons, it imposed a stiff oil export tariff. Since then companies holding or negotiating contracts have had to seek exemptions to salvage their deals. Russia should repeal the levy, which can generate no revenue at all from essential projects it renders uneconomic.
In the interest shown by companies and confidence displayed by the IMF and World Bank, the world continues to respond to Russia's economic overtures. Russia must respond in turn by recanting the mistakes that are inevitable-and potentially deadly - in the grassroots remaking of a nation.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
