Investors mired in gloom a year ago because of the state's dismembering of the Yukos oil company have now forgotten that unpleasant episode. Russia's stock market has soared 65% since the start of the year.
PROMISING THE MOON. But Russians are a wary bunch, more focused on the cloud than the silver lining. My driver, Volodya, wonders why, if Russia is swimming in so many oil dollars, he can't find any kindergartens in much of Moscow.
Like many ordinary citizens, he suspects Russia's oil dollars are spirited abroad by corrupt businessmen dreaming of the day they can retire to the French Riviera.
Yet listen to some professional economists, and you'd think that Russia was embarking on an oil-fueled bacchanalia sure to end in tears. President Vladimir Putin has invited charges of populism by promising massive salary hikes for public employees, new schools and hospitals, subsidies for farmers and homeowners, homes for the disabled and war veterans, and much else besides.
DO THE MATH. In an open letter to Prime Minister Mikhail Fradkov, made public by business daily Vedomosti on Sept. 30, a group of 11 economists at top Russian investment banks warned of potentially dire consequences from surging government spending. "The foundation for stable economic growth, efficiency, and the population's income is above all the creation and development of jobs in the private sector," they wrote.
Who's right? Is Russia using its oil windfall wisely or wastefully? A recent report from Brunswick UBS, an investment bank in Moscow, sheds some light. A breakdown of the figures shows that Russia's oil bonanza is not being squandered.
For every $1 rise in the oil price above $25 a barrel, the government gains some $3 billion each year, while oil companies' net profits rise by $1.1 billion. So the state certainly has plenty more cash to play with: Budget expenditures have soared from just $34 billion in 2000 to $129.5 billion this year. Yet tax revenues have expanded even faster, from $40 billion, to $153 billion. The 2006 figures for budget expenditures and tax revenues are $150 billion and $177 billion, respectively.
DREAMS COMING TRUE. Even with another steep rise in government spending, Moscow could still balance its books comfortably at an oil price of just $33 -- well below the forecast figure, which analysts expect to stay around $60 a barrel. This means that while budget expenditures are rising sharply, the bulk of Russia's windfall from high oil prices is being saved up for a rainy day.
Brunswick's economists estimate that, by the end of this year, the government's total reserves, which include hard currency reserves and the budget's Stabilization Fund, will reach $180 billion and rise to $280 billion by 2007. The reserves totaled just $12.5 billion in 1999.
The highly conservative policy meets with the approval of Brunswick, which says, "To date, most of the oil shock has simply been used to create the previously only-dreamed-of: financial and macro stability.... We see every sign that this will run and indeed the better years of it are yet to be enjoyed."
FORGETTING REFORMS? So how come so many other economists are now sounding the alarm? With everyone from general practitioners to generals now clamoring for a bigger share of the loot,Russia's fiscal restraint is sure to be tested in the coming years, especially in the runup to parliamentary elections in 2007 and the presidential election in 2008. But with such colossal sums on hand, the government can afford considerable largesse without worrying about emptying the piggy bank.
Another source of worry: With so much easy money, bold economic reforms between now and the next elections are unlikely to happen. But as recent years have shown, Russia's economy has probably reformed enough already to allow decent growth, even if it still isn't performing up to full potential.
True, this optimism hinges on the belief that Putin has no plans to spring any more unpleasant surprises similar to his crackdown on Yukos. Another caveat is that the sanguine forecasts for Russia's economy relate only to the next two or three years -- pessimists argue that the negative consequences of recent renationalization policies will not manifest themselves until decades to come.
ONE-TRICK PONY. Even the bullish economists at Brunswick UBS worry that Russia's inevitable dependence on oil prices makes for a potentially shaky economy in the long run. One day, "when oil falls significantlyhere could be some kind of crisis," they say.
Still, while the oil price tag stays at $60, the problem remains hypothetical. Russia's economic boom, already in its seventh year, shows no signs of giving out in the near future.
Bush is BusinessWeek's Moscow bureau chief