Recent events, including the Mechel saga and the military conflict with Georgia, have long-term consequences for the Russian economy according to Chris Weafer, Chief Strategist at Uralsib.

Weafer began by noting that the perception of risk involved in investing in Russia has increased.

“The perception is certainly that investment risk in Russia has gone up. And that will need to come down, it will need to reduce to much lower levels if we are going to see investment participation that’s required.  So the immediate consequences are probably few, but the longer term consequences could be much more serious if this process is not, sort of, reversed and handled properly.”

RT: You mentioned that Russia may be more actively pushing for this gas OPEC.  Why do you think that is, and how do you think it will proceed?

“One of the future growth segments in energy is LNG, and specifically we think that that’s why Russia got involved in the idea of creating the so called gas OPEC structure.  So, as the result of recent events we certainly do see that the government is likely to now push ahead with that much more vigorously so that it can effectively improve its hand in negotiating with western countries and leverage off its strong energy position, not just directly but also as part of structures like gas OPEC.”

RT: It seems like while the budget spendings are growing the oil revenues are not growing as fast because the price of oil is not as stable as it used to be. Where will the Russian government get the money?

“If we get to the situation, where the oil price falls below that required by the budget, the Russian government has a couple of options literally depending on the scale of the fall. I think if we were to end up with a situation where the oil price or the oil revenue was to fall substantially short of what was required by the budget and there were no compensating revenue increases elsewhere, then I think we would have to have a major rethink of the whole programme.  And that essentially is what the Finance Minister has now been warning about for some time, and again today, is the fact that that we are using up time, that the whole delay in spending to generate these extra revenues has been delayed for too long.”

RT: And is Mr Kudrin being heard?

“It certainly is a key question to ask, because this sort of balance in government between people who are on the state side shall we say, then we have the so called reformers who want all of the money to be prioritized towards diversifying the economy and creating this better balance in the economy.  And it has to be said up to now that we’ve had a lot of debate but not a great deal of progress on either side. So we’re at a critical stage, there’s no doubt about it.  We need to see substantial progress being made on spending programmes that will ultimately deliver growth in other areas of the economy, that will lead to diversifying of the economy.  The longer we leave it the more at risk the economy becomes to oil revenues – the more dangerous the oil price becomes for the economy.”