SINCE THE RUSSIAN economy began growing strongly in 2000 the question has been: can it do enough quickly enough? Blessed with the second-largest oil reserves in the world, it has relied on oil revenues to buy itself out of the worst pain of transition, but it needs to break its addiction to high oil prices if growth is to be sustainable.
A report for the World Bank in February poured cold water on Russia enthusiasts who have been saying that the growth of small and medium-size enterprises and consumer spending are already the main economic drivers. It concludes that Russia is as addicted to oil as it has ever been.
Curious fact
In the preamble the World Bank wrote: "Looking at the importance of the oil and gas sectors in Russia's national accounts, a curious fact emerges. Together, these sectors account for only about 9% of GDP at basic prices. If correct, why would anyone worry about over-dependence? On the other hand, according to the same Goskomstat accounts, natural resources constitute over 80% of Russia's exports, and oil and gas export revenues alone are about 20% of GDP. The answer to this puzzle is the scale of transfer pricing and tax avoidance in Russia."
Oil companies have long since dumped the transfer pricing scams used to move billions of dollars of oil revenues into offshore havens ? a producer would sell its oil at knock-down prices to its own offshore trading company that then sold the oil on to international markets at real prices, leaving the profit in a shell company in the Bahamas. These days they are running the same schemes at home to take advantage of tax breaks offered by some regions.
As "trading" counts as a service, the size of these scams has distorted the national accounts. The World Bank recalculated the statistics and found that oil accounts for about a quarter of GDP, not 9%.
A second survey, from Renaissance Capital, found that, rather than decreasing, Russia's dependence on oil was greater than ever. Renaissance suggests it now accounts for 34.5% of GDP, up from 32.9% in 2000.
"If you have a market economy and capital is rational then it is going to go where the returns are highest ? it is going to go into the oil sector," says Alexei Moisseev, author of the Renaissance report. "All the reforms have done is to slow down the domination of the economy by oil, which really shouldn't be so surprising."
The picture is not entirely bleak. The economy grew by 9.3% last year and forecasts for this year suggest 6% or more. And SMEs are really investing, although still in a small way.
Vulnerable economy
However, even this growth is coming mainly from sustained high oil prices: the World Bank estimates that if the effect of high oil prices is stripped out, the real underlying growth is closer to 4% to 5%.
The oil prices of the past four years have held open the opportunity to re-engineer the economy for longer than expected and have put public finances on a solid footing. If oil prices fall from $30-plus a barrel to $10, this will not spark another collapse, but the economy remains vulnerable to external shocks and they would be painful.
"The lack of structural reform, especially the lack of progress in banking reform, makes it hard for capital to go elsewhere," says Moisseev. "Some small and medium-size enterprises should be offering better returns now than oil but the bureaucracy is holding back investment and stopping them making real profits."
The banking sector is also looking a lot healthier than four years ago as reforms look to be under way again. However, bank loans as a percentage of total invested capital remains stuck at about 4% to 5%.
Moisseev says anecdotal evidence suggests that the structure of investment has begun to change only in the past nine months as increasingly attractive opportunities in other sectors and the beginnings of administrative reform have led investors to push through the barriers.
The Kremlin is not blind to the importance of oil for the economy, but despite president Vladimir Putin's promises to keep the Kremlin's hands off the sector in the wake of Yukos owner Mikhail Khodorkovsky's arrest in October, it looks as if the state intends to play a bigger role.
"Putin looks outside of Russia and Kazakhstan and sees that these two are the only two hydrocarbon producers [in the region] where the oil companies are not owned by the state," says Caius Rapinau, the deputy head of research at NIKoil. "In these other countries these companies are competing in a normal way and not having their blood sucked out by managers. It must be very tempting for Putin."
During his annual question-and-answer session with the people, Putin promised a Surgutneftegaz oil worker he would not to punish the oil sector too hard. "The oil sector is the goose that lays the golden egg. Killing that goose would not be very sensible. It would be stupid and impermissible," he said. "This won't happen. Don't worry."
Now the elections have passed, the Kremlin has changed its tone a little. Newly appointed prime minister Mikhail Fradkov reiterated Putin's point after his appointment was confirmed last month.
"We will take advantage of [high international oil prices]," Fradkov told reporters.
There will be no renationalizations, which would do more damage than good. The Kremlin is playing a subtler game. Most of the private companies are working fields in western Siberia that they inherited from the Soviet era.
These are already reaching, or have passed, maturity. There has been little exploration or development, except in Russia's northwestern region of Timan Pechora and on the Caspian Sea coast.
However, the future of Russian oil is in eastern Siberia. Completely ignored by the Soviets, the region has a very similar geology to western Siberia and should be home to huge and untouched oil fields.
Fradkov said in March that the state would work to "increase the effectiveness of the oil sector and expand oil production". He highlighted the need to "increase geological exploration and pipeline construction and to ensure an increase in investment in the energy sector".