Awash in Oil Dollars, Russia Tries to Steady Economy

www.nytimes.com By SABRINA TAVERNISE

MOSCOW, March 5 — While many countries are beginning to feel the pinch of high oil prices, Russia, the world's No. 2 oil producer, is suffering from a very different problem — too much money.

Russia's economy is awash in oil dollars. The combination of rising proceeds from exports and the heavy borrowing that Russian oil companies have done abroad has cash flowing into the country faster than the economy can absorb it. The central bank's currency reserves have risen by $4.8 billion, or more than 10 percent, since mid-January.

At the same time, the flow of cash out of the country is slower than it has been in years. Russians' faith in their currency, the ruble, has been rising, and they are not as quick to stash cash aboard.

The abundance of dollars is an enviable problem, and it contrasts sharply with fears about the state of Russia's infrastructure and its debt load that many thought would grip the country this year when its loan repayment obligations are scheduled to reach a peak.

Still, the situation is a headache for policy makers who are trying to steady the economy and minimize the zigzags of boom and bust.

"The oil price is responsible," Oleg V. Vyugin, first deputy chairman of the central bank, said in an interview. "No one counted on it being so high. We thought a decision on the war in Iraq would come sooner."

Russia's financial system, in many ways, is poorly equipped to handle such inflows of cash. Banks generally lack critical mass. Because the banks are too small to make loans on the scale that Russian companies require, the companies generally turn to foreign lenders, depriving Russian banks of the business they need to grow. The domestic banking industry has been adrift since the financial collapse in 1998.

A big concern is that the ruble will rise sharply against the dollar, making Russian goods less competitive with those made abroad. Many manufacturers, including the country's biggest carmaker, Avtovaz, reported a sharp improvement in business after the ruble was devalued in 1998; now the carmaker is cutting production and asking the government for trade protection.

Russia is in its fifth year of economic growth, with a national budget cushioned by a sizable surplus. Oil output continues to rise, up 11 percent in January and February in contrast to the first two months of 2002. Wages are rising, and company profits are soaring. And a stronger ruble makes imported goods more affordable for consumers.

The other big fear is inflation. Higher wages are translating into more spending and greater consumer demand, and the Russian central bank has been pumping even more money into the economy by buying dollars, an effort to keep the ruble from strengthening too much.

Russian policy makers are aware that the incoming tide of dollars is temporary, and that oil prices may fall later in the year. In the meanwhile, Mr. Vyugin said, the central bank is not going to make any sharp moves; rather, it is hoping that the government will mop up some of the additional money by running a large budget surplus.

"The situation — with Iraq and high oil prices, low interest rates in the U.S. and the weakening of the dollar — is temporary," Mr. Vyugin said. "By the end of the year the situation will be cleared up. We will try to make it through this period and not make big adjustments in the exchange rate."

The Russian federal government, which receives a third of its revenue from oil and gas, calculated its 2003 budget based on an average oil price of $21.50 a barrel. Lately, turmoil in the Middle East and in Venezuela, another major producer, has pushed crude oil prices up to nearly $40 a barrel.

"The government has an enormous windfall, and that should be saved fully," said Poul Thomsen, director of the International Monetary Fund office in Russia. "Otherwise the high oil prices will be associated with stronger pressures for a ruble appreciation, and that could choke the output recovery."

While Russia's oil is a boon, in the long run it is also a burden. Policy makers here are concerned about depending too much on such a volatile commodity, and are looking for ways of strengthening other parts of the economy. Crucial to that, they say, will be an upgrading of Russia's inefficient economic institutions — its weak legal system, bloated state apparatus and sagging Soviet-era utilities.

"It is important for growth outside the energy sector to prevent a sharp ruble appreciation by saving the oil revenue windfall," Mr. Thomsen said. "But over the long run, structural reforms are much more important."

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