West might have to pay for Moscow's support

Dropping oil prices or Islamic revolt could upset Russia's recovery

War On Terrorism

The World

October 09, 2001|By Will Englund | Will Englund,SUN FOREIGN STAFF

MOSCOW - The events of Sept. 11 knocked the United States and Russia into the same camp, but because they also upset the market price of oil, Russia could have to turn to the West to remain solvent.

With the opening of armed conflict in Afghanistan, the United States and its European allies could find themselves having to prop up Russia financially to keep its support.

The price of Russian oil - a major export - fell nearly 30 percent after the attacks on Sept. 11, and though it has risen some since then, the drop is going to force the Russian government to rethink its budget. Oil executives and government officials here say they are confident that the price will shoot upward because of the fighting in Afghanistan. But they are nonetheless laying the groundwork for an appeal to the West.

Russia, they say, could face extraordinary demands if Islamic radicals in neighboring Central Asia rise in revolt. The Defense Ministry, which keeps troops in Tajikistan to guard its Afghan border, has started to rotate in more combat-ready units. If serious conflicts break out in Uzbekistan or Kyrgyzstan, Moscow would almost certainly intervene. And the Russians like to point out that they are already fighting a war against Muslim extremists in Chechnya.

What Russia will tell the West is that it needs a break on its foreign debt.

If creditors agree to a restructuring, said Dmitri Miroshnichenko, a former Central Bank official who now works for a private forecasting group called the Development Center, "it will be a sign that partnership is becoming more important than confrontation."

Moscow owes about $143 billion, most of the debt inherited from the Soviet Union. Of that, $39 billion is owed to the so-called Paris Club of creditor nations. Payments to the Paris Club countries came to $3.8 billion this year, more than half of Russia's overall debt service, which is the largest single item in the federal budget.

In January, President Vladimir V. Putin's government told the Paris Club that there wasn't money available to meet Russia's obligations, despite a two-year boom in oil prices that has put the Russian economy back on its feet. The government said it needed to reschedule the debt. The Paris Club said it wasn't interested, and Russia found the money.

But that was before the worldwide coalition against terrorism was put together and before the worldwide economic slowdown began. Now, as the liberal politician Boris Nemtsov put it, a window has opened.

If oil income remains low, said Miroshnichenko, "the political will of the West will be demonstrated through restructuring of the debt."

In fact, Russia has $8.5 billion in hard currency reserves, and should have little problem meetings its obligations in 2002, but Western and Russian analysts agree that a crunch is coming in 2003, when debt service will soar to $19 billion. As far as many officials here are concerned, there's no time like the present to strike a better deal, though there have been no official requests for talks.

Russia has oil reserves second only to Saudi Arabia's, and exports 3 million barrels of oil and petroleum products every day. Before Sept. 11, Urals crude was selling for nearly $28 a barrel. Last week the price was hovering around $22.

Government economists and private analysts agree that if the price remains at $18 or higher, there should not be a serious crunch, although the 2002 budget is pegged at a $23-a-barrel price.

If it goes to $17, expect Moscow to start talking earnestly about debt relief.

If it sinks to $9 or $10, which a deep slowdown in the world economy could bring about, "that's a catastrophe," said Leonid Fedoun, vice president of Lukoil, the largest Russian oil company.

Fedoun said he is counting on the mobilization of armies to kick-start the world's economy, and he expects the conflict to be a prolonged one. "It won't be like Desert Storm," he said. "It will take a long time."

And that should boost demand for oil.

"Thank God, there are 500 to 600 American jet planes already lined up," he said. "And the Navy, the Navy needs a lot."

In a visit to Germany at the end of September, Putin announced that Russia would escalate its oil exports to Europe if sources in the Middle East were cut off by political or military action. At the moment, pipelines are flowing at capacity, but three new routes will be going into operation in the next two years and will make additional exports possible.

But if Middle Eastern oil continues to flow, Russia's new pipelines might serve only to glut the market and drive the price of oil further downward. The Russian government has said that it will not go along with cuts in production ordered by the Organization of Petroleum Exporting Countries. Russia is not an OPEC member.

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