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Russia must build on its energy windfall

Wednesday, March 30, 2011

Growing demand for Russia’s energy exports should not divert the country from diversifying its economy.

Sadly, even the worst human tragedies present opportunities for some. So it is with Japan’s nuclear crisis triggered by last month’s earthquake and tsunami. The crippling of the Fukushima reactors means that Japan’s energy needs will become even more onerous. No country is poised to benefit more than Russia, the world’s biggest energy exporter.

To the Russian government’s credit its initial response to the disaster was compassionate; it diverted to Japan liquefied natural gas cargoes from its Sakhalin II project, even if it meant that contracts with other customers were broken.

Eventually business rationale will take over. About one-third of Japan’s energy needs have been met through nuclear power. The crisis means that its dependence on gas and oil imports will greatly increase. Japan already imports about 70 million tonnes of LNG a year, making it the world’s biggest buyer of the resource. It will probably have to increase that to between 75 million and 80 million tonnes just to replace the lost energy production from Fukushima.

Although it is difficult to tell what the long-term repercussions will be for global energy markets, in the short term natural gas prices surged after the earthquake. In the immediate aftermath the price per therm for summer delivery of LNG to the UK, for example, rose by 6.4%, with winter delivery jumping by 5.8%.

The oil price too remains well above $100. With growing uncertainty about the geopolitical situation in the Middle East, not least in Bahrain, and a possible spill-over of the conflict there to Saudi Arabia, it is likely to head higher.

All this plays into Russia’s hands. Energy accounts for about 45% of its export receipts and budget financing. The oil boom, together with increased demand for gas, and not just from Japan, should propel Russia’s economy over the coming years.

Analysts at Uralsib forecast that growth will reach 5% this year, the highest since 2008, and that the budget will end in a surplus, so long as oil remains above $100 a barrel, eradicating the deficit generated by the financial crisis.

Yet Russia’s biggest strength is also its biggest weakness. The country’s over-reliance on commodities is well documented. It’s the reason why president Dmitry Medvedev has backed reforms that he hopes will help make Russia’s economy more competitive.

The trouble is, given the expected oil windfall there are signs of backtracking on reforms. Already less noise is being made about the government’s much-hyped $32 billion privatization programme, which was launched last year.

Perhaps most worrying are signs of open tension between Medvedev and his predecessor-turned-prime minister Vladimir Putin. Last month Medvedev rebuked Putin for criticizing the west’s military intervention in Libya. The last thing Russia needs is a falling out between the country’s two most powerful leaders. Yet with a presidential election due next year and uncertainty over what either man’s intention will be, the possibility of political stasis looms large.

Notwithstanding the unfortunate circumstances in which it came about, Russia’s stars are aligned. The country cannot afford to let the opportunity pass.

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