Recognizing their problem, the Chinese government, for example, seeks to reduce energy consumption per unit of GDP by 20 percent from 2006 to 2010. That would help, but since China grows by 10 percent a year, much of that saving would be absorbed by the higher rate of growth. Moreover, so far the Chinese have been able to reduce energy consumption per unit of GDP by only 3 percent a year.13
The story is much the same in India. It now imports two-thirds of the energy it consumes. The expectation is that it will have to import even more to fuel its future growth, especially if it continues to grow annually at 8 percent as it did in 2006. What makes China’s and India’s appetite for energy particularly important for Russia is that these newly enriched super-size populations have created an unprecedented new market situation. Their incremental demands in the early twenty-first century have sopped up most of the world’s available excess oil-production capacity and more than offset whatever energy conservation may have been achieved in countries like Japan or Europe and in 2006, even the United States.14 From 2001 to 2005, China was responsible for 30–40 percent of the increase in oil consumption. Emerging market countries as a group in 2005 generated 90 percent of the incremental growth in demand.15 No wonder prices rose to what seemed to be new highs.
If allowance is made for inflation, 2007 oil prices were not, in fact, at record levels. April 1980 oil prices, for example, if adjusted for inflation in mid-2007 would have amounted to $101, about equal to what seemed to be the record $100-a-barrel price of January 2008. Nonetheless, in mid-2007, the International Energy Authority predicted that because of growing market pressures, real energy prices would continue to increase through 2012. As they saw it, world demand for petroleum would grow at an average of 2.2 percent a year while oil supply in non-OPEC countries would expand at only 1.1 percent. This would reduce OPEC’s spare capacity and lead to continuing high energy prices.
The tightening of the market for energy products and the increase in prices that followed, even if not at a record level, had a direct and immediate impact on Russia. After a half dozen or more years of asset stripping and a corresponding reluctance to invest in new exploration and development, the oligarchs and managers of energy-producing entities came to realize that with higher energy prices they could make more money by putting their funds into exploration and production at home rather than by stripping such assets and investing the proceeds from their sale abroad. Their decision to increase production was also affected by the state’s decision in 1998 to begin liberalizing taxation by instituting a flat 13 percent tax on income. It also helped that after the devaluation of the ruble in August 1998, the cheaper ruble meant that foreigners could buy more Russian products with their dollars and euros, which helped to increase Russian exports.16
So the oligarchs began to invest in geological exploration and better equipment. This included using more advanced Western technology. In September 2006, I had a chance to see how important Western technology has become for the Russian oil industry when I visited the Yuganskneftegaz Priobskaia oil field in West Siberia. This was the oil division that had been taken over by the state-owned Rosneft company from Mikhail Khodorkovsky’s Yukos. Almost all the drilling there was being done by the American-French company, Schlumberger. Halliburton, Vice President Dick Cheney’s former company, is doing much the same thing elsewhere in Russia. They both are using technology denied to the USSR during the Cold War. When the Cold War ended, the Russians still were unable to use this technology because with oil prices so low, they could not afford it. Once oil prices rose, however, Russian companies were able to hire such service companies and in doing so, they gained access to deposits that would otherwise be beyond the reach of their indigenous technology. Almost immediately there was a sharp jump in production, the first time there had been a meaningful increase since 1987. Contrary to the earlier prediction by the CIA that Russian oil production would fall off sharply, in 2000 Russian oil production rose 6 percent and by 2003, 11 percent. While the rate of growth fell to 2 percent in 2005, by 2006 Russia was even out-pumping Saudi Arabia. Just as in the periods from 1898 to 1901 and 1975 to 1992, Russia once again became the world’s largest producer of petroleum (see Table 2.1).
Since Russian GDP turns out to be almost entirely dependent on changes in oil production, after years of decline Russia’s GDP also increased significantly. As Table 4.1 indicates, there is an almost perfect correlation between oil production increase and decrease and changes in GDP. Moreover, with more output, there was more to export. By 2006, Russia’s foreign trade surplus hit $140 billion, much of which went into Russia’s currency reserves. In 2006 alone, Russia’s reserves increased by more than $100 billion to a total of $300 billion by year’s end. This meant that as of mid-2007, with more than $420 billion in the state treasury, Russia had the world’s third largest holdings of foreign currency reserves and gold, behind only China, with more than $1.4 trillion, and Japan, with $900 billion.17
With so much cash in hand, the Russian government moved quickly to pay off its loans. As of September 2006, its foreign sovereign debt amounted to about $73 billion, less than half of the $150 billion it owed in the aftermath of the August 1998 financial collapse.18 Much of this debt was prepaid in advance of when it was due. In August 2006, for example, Russia paid $23.7 billion to the Paris Club (creditor countries that join together to try to collect money they are owed by other debtor countries), some of it in advance of the due date.19 Along with the buoyant yearly growth of its GDP, this prepayment helped to improve Russia’s credit rating. By contrast, while the government was paying down its debt, the private corporations and banks moved in to take advantage of the more favorable credit ratings and as of October 2006 had increased their borrowings to more than $210 billion. Much of this went to corporations like Gazprom, Rosneft, and UES to finance their purchase of other properties.20 There were fears that with private corporations seduced by so much cheap money, too much of their borrowing was being used for peripheral projects that might some day prove to be a problem. Despite the pay-down of government debt, the ratio of overall joint private and government debt to GDP increased from 19 percent at the end of 2004 to 23 percent in 2005. Nonetheless, the overall financial ratings for Russia and its corporations increased markedly from their 1998 low point.21 In July 2006, for example, the financial rating company Fitch Ratings lifted Russia from a risky to a reasonable investment rating.22