A great many people could recall the financial crisis of Russia on August 17, 1998 when its economy was in total disarray following reckless government borrowings and suffering a jarring slump after the default. At that time it was on the roster of the defaulted countries such as Thailand, Mexico, Argentina and Indonesia which had succumbed to the financial havoc in the 1990s.

However, after five years of market reforms, liberalization and deregulation, Russia is poised to become an economic giant along with China. According to its Energy Ministry, 34.1 million tonnes of oil were extracted in January 2003, a year-on-year increase of 14 per cent. This is the highest figure for oil extraction in the last 14 years. Now Russia has overtaken Saudi Arabia to become the leading oil extractor of the world. OPEC, the oil cartel in the global world, also confirms this fact. In 2002 Russia extracted 379 million tonnes of oil in total, a year-on-year increase of 9 per cent from 348 million tonnes. OPEC predicts that this figure would rise to 653 tonnes amy time this year.

In February this year, Russia extracted 34.35 million tonnes of oil, a year-on-year increase of 12.3 per cent. During the first quarter of 2003, 100.73 million tonnes was extracted, a year-on-year increase of 12.40 per cent annually. In January this year, the volume of oil pumped abroad via the state-owned oil pipeline system also increased to 3.1 million barrels a day including Kazakh and Azerbaijani oil. Furthermore, the oil that was left in the pipelines increased by 651,000 tonnes totalling 32.181 million tonnes according to the OPEC. Supplies of oil to Russian oil-refining plants [not including other Baltic states] in June increased by 12.7 per cent year on year to 16.831 million tonnes.

It is also interesting to note that there is now a surplus of oil on the Russian domestic market. In August 2003 Russians sold 500,000 tonnes of oil and oil products and the revenues jumped up by 25 per cent. Russia is set to run a surplus in the state budget for the third year running in 2003. This is mainly due to the fact that it has managed the economy with sound economic principles;earlier it was virtually impossible to increase the volume of oil exports as the capacity of the country’s oil pipeline system and export terminals were limited five years ago..

Now, the experts foresee a growing demand for Russian oil in the foreseeable future. The country is comfortably placed with $63 billion due to its strong economic fundamentals. The treasury is deluged with cash that it is planning to set aside some funds for the contingency funds in case of crisis that it confronted in 1998 like Mexico, Argentina and Thailand. The economy is booming with oil export cruising towards 6 per cent annual growth, increasing further to match its neighbour [China ‘s] GDP growth rate which is spurring on the average of 7.4 per cent.

There is a possibility of increasing the volume of oil exports in the near future. Planned projects to construct the Russia-Japan and Russia-China oil pipelines, as well as the project to integrate the Druzhba and Adria pipelines to provide a new export route via the port of Omishal (Croatia) are all long- term projects. This means that the only current possibility of increasing exports of Russian oil in the short term is to restart the supply of oil via the Latvian terminal covering the Baltic Republics and East European countries.

These oil terminals are capable of shifting 16 million tonnes of oil a year and 12 million tonnes of oil products. Until 2002 Russian oil export via this terminal usually came to about 15 million tonnes a year. However the supply of Russian oil via these terminals will only be restarted once the question of the terminal’s privatization has been resolved by Russia and Latvia.

The financial system is not equipped to take these challenges whereby western banks provide the funds and come to the rescue to channel these funds/resources to move the economy forward. The bulk of Russians savings are not intermediated or put to productive use by banks who can lend the money to businesses, the money is kept dormant in people’s homes.

At the moment, Russian company Transneft is offering the Latvian government $140 million to modernise the pipeline which leads to the Ventspils oil terminal as well as construct a new section of the oil pipeline in return for the government’s stake in Ventspils. As a result Russia lags behind other Eastern European countries in fostering growth of the small and medium size enterprise.

Russia has some world-class companies but it does not have the financial systems. The Latvian government has announced that it plans to complete privatization of the terminal by the end of 2003. Many western oil giants like BP, Shell, Total Finaelf are vying for the contract. Americans are also keeping a close eye to get the lion’s share by bolstering the efforts of Chevon Texaco. The political game plan has commenced from every front to tackle this geo-political schism.

While domestic oil prices continue to fall the prices of domestic oil products are rising whereby petrol consumer prices rose by 8 per cent between December 30, 2002 and January 27, 2003. In the Moscow Region, which is representative of the country as a whole, petrol consumer prices rose by about 4.63 per cent on average, according to the Russian Fuel Association.

Some of those on the oil market say that the rise in retail petrol prices is linked with the increase in export duty since January 1. However, oil experts say that this increase in export duty came into force in 2002 and this is simply a secondary price rise. On May 11, of this year the government lowered export duty on oil from $29.8 to $24.9 per tonne and from $26.8 to $22.6 per tonne on oil products. Surprisingly, this step was taken at a time when world oil prices had already reached a two-year high as a result of anticipated military action in Iraq and these prices are expected to continue rising.

The strategic analysis shows that it would be in the interest of Russian oil companies to further increase the volume of oil extraction in view of the undeveloped transportation infrastructure and the lack of prospects for greater oil exports. In these circumstances it would be better for Russian oil and gas companies not to be mere suppliers of irreplaceable hydrocarbon resources or competitors on the raw-materials market.

However, despite the improvement of the current financial situation, the Russian companies need to raise the standard of their product, bringing it in line with top international standards.

In all probability, in the next three years, Russia is likely to emerge as a an economic power along with China and Russia would dictate OPEC in the new future.