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Developments in Russia were much in the news last week. In London the former chief of the TNK-BP consortium said that Russian appears to have reached its peak in August and is now going into a gentle decline. This view was backed up by the CEO of Russia’s Lukoil who forecast a 1.5 percent decline in Russian oil production next year. In July the Russian government approved tax breaks to spur investment and last week cut export duties in response to complaints that prices were now so low that Russian companies were actually losing money on shipments to foreign customers.

In what may be a policy shift, a vice-president of Lukoil said last week that the future of Russia’s oil industry hinges on cooperation with OPEC to help prop up prices. He added that Russia could afford to cut production and exports by 300,000 to 400,000 b/d to help OPEC, and said executives from Russian oil companies could attend OPEC’s next meeting. Last month the company’s president said Russia should not join OPEC as it would harm Russian production.

In another development, Russia and China signed a pipeline deal last week to create a new overland export route for Siberian oil to the Far East. China will loan Russia some $25 billion to pay for the pipeline and other projects and will be paid back by oil deliveries from Siberian fields which could reach 300,000-600,000 b/d. This move frees Russia from dependence on Western markets, without investing their own resources, and gives the Chinese yet another source of relatively secure supply.

Overshadowing these developments however is the state of Russia’s economy which has become highly dependent on oil and other commodity export revenues. In the last few weeks, a 70 percent plunge in Russia’s stock market, the global credit crisis and a run on Russia’s private banks has forced Moscow to spend its foreign reserves, which have fallen from $600 billion to $484 billion in recent weeks. After many years of increasing oil prices and rebounding oil production, Russia is headed into trouble along with most other countries. Foreign investors have fled the country and nobody is getting much in the way of bank loans these days.

Moscow says that the state budget will be all right if oil averages $60 a barrel for 2009, but after that will have to start cutting unless oil prices go higher.