Bellerbys Economics - Mr Stephenson

Thursday, April 20, 2006

Russia - the Great Sheikhs of the North

Most economists agree that Russia is about to enter a golden period. Money has been flooding into the country since the price of oil moved up from $30 a barrel last year to $70 a barrel. (A barrel of oil is the same as 159 litres or 35 gallons).

This has led to inflation which has the Government worried, so it has very sensibly created a separate fund - the Oil Investment Fund which now stands at about $60 billion. The government plans on using this money in a way that does not increase demand too quickly in the Russian economy. Some of it has been used to pay off Russia's international debts early; some has been used to help Russian businesses to invest overseas - such as Gazprom; some is being used on supply-side measures in Russia.

I visit Russia frequently and I have seen the money being invested in schools, roads and housing - especially in the Moscow region. There is a short-term problem with this type of infrastructure development because at first it acts as a demand-led policy as demand increases for building materials and labour - but in the longer term (provided the money is invested wisely) it converts into a supply-side policy, improving the overall economic efficiency of the country.

The Oil Investment Fund is getting bigger and bigger every day - some estimates suggest it may reach $1.3 trillion by 2030 even with the current level of investment. Of course, some Russians are getting impatient and they ask the question - "Why is it I am still relatively poor when the country is earning so much money?" and it will be interesting to see whether the government is able to maintain this long-term investment approach when the political pressure to release more of the money now begins to build.

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