../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
Russia Gushing With Oil Dollars
Subject Economic Growth
Topic International Finance
Key Words Exports, Imports, Balance of Payments, Economic Growth
News Story

While the rest of the world wrestles with increased payments to oil producing countries resulting from oil prices that are close to $40 a barrel, Russia, the world's second-largest oil producer, has to contend with oil dollars that are literally gushing in. Since mid-January, foreign currency reserves have increased by 10 percent. Russia derives a third of its total revenue from the sale of oil and natural gas, both volatile commodities. One problem for Russian policy makers is to improve the non-energy sector of the economy so as to stabilize the economy and moderate the swings in the economy. Another issue is whether the oil dollars are saved or spent. Analysts fear that if Russia spends its oil revenues, the ruble will appreciate against the dollar, hurting manufacturing exports and weakening the non-energy sector of the economy.

Russia's economy is doing well. Gross domestic product has increased for four consecutive years and will almost certainly increase this year as well. Wages are rising, profits are increasing and consumers are not shipping their currency out of the country in search of a safe haven. Consumer spending has increased, aided by a strong ruble that keeps import prices low.

Still there are problems. The central bank of Russia has been buying dollars in an effort to keep the ruble from becoming too strong. Higher wages and increased consumer spending have heightened inflation fears. There are many areas of the economy that need improvement including Russia's financial institutions, legal system, utilities and government. Improvement in these areas will strengthen the overall economy and make Russia less dependent on the energy sector.


(Updated April 3, 2003)

Questions
1.

What happens to Russia's balance of payments when oil prices increase? Explain your answer.

2. What happens to the ruble in relation to the dollar when the price of oil increases? Explain your answer. What happens to import prices? Imports?
3. How does the purchase of dollars by the central bank of Russia keep the ruble from appreciating further?
Source Sabrina Tavernise, "Awash in Oil Dollars, Russia Tries to Steady Economy," The New York Times, March 6, 2003.

Return to the International Finance Index

©1998-2003  South-Western.  All Rights Reserved   webmaster  |  DISCLAIMER