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Slippery Slope For Russian Oil

Economic Trends


In the late 1980s, Russia was the world's largest oil producer. Today, it is No.3, and the drop in output that accelerated after the Soviet Union's breakup continues. Despite its substantial potential, says Adam Sieminski of NatWest Washington Analysis, Russia's oil industry is unlikely to recover soon.

The problem is poor profitability. While oil exports provide hard currency, the industry is heavily taxed, and its domestic prices are still held below the costs of production. Meanwhile, efforts to expand output and exports are hampered by bureaucracy and inadequate investment.

Since 1991, Russian oil output has fallen by about a third, and the World Bank estimates that the industry would have to invest $8 billion a year for the next six years to get back to 1991 output levels. In 1993, it was able to shell out only $2 billion to $3 billion.

The irony is that Russia faces an oversupply of oil at home, even as net exports have continued to decline. With its economy on the rocks, domestic consumption has fallen by about 30% since 1991. To raise profits, the industry needs to increase exports, but that requires more investment in infrastructure.

At best, says Sieminski, Russia is likely to experience "only a gradual and moderate rise in oil production and exports through the rest of the decade."BY GENE KORETZ

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