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Energy Revenue Makes Diversification Difficult in Russia

From the Associated Press:

But local industry is flagging and economists argue that the time to act to modernize the economy is now — while Russia has the luxury to spend its oil bonanza on incentives and tax breaks aimed at spurring decrepit industries and boosting small businesses. Wait too long, they say, and the chance will be missed because the government’s money men will be trying to protect savings as oil prices fall. Ironically, part of the reason industry is being held back is due directly to Russia’s huge energy earnings. The flow of energy revenue into Russia has seen the ruble appreciate by some 10 percent against the dollar over the past two years, sending up companies’ ruble-denominated costs. “This means new companies that can make new products and diversify the economy are appearing at a much slower rate. They can’t compete with imports,” said Yevgeny Gavrilenkov, chief economist with the Troika Dialog investment bank. If prices for oil and gas remain high, the prospect of dwindling reserves as a force to diversify the economy is unlikely to bother Kremlin policy makers for some time to come. Some economists argue there has been a structural shift to higher prices and that oil at under US$30 per barrel is a thing of the past.