Monday, September 25, 2006

Russia Spending Increases Significantly

Oil prices have a direct impact on the budgets of nations. Our dependency on foreign oil provides a cash bonanza to the oil producer in the Middle East, Latin America and Russia.

The Russian State Duma gave preliminary approval to a 2007 budget that is expected to be 25% bigger than this year's. The hike comes on top of a 40% increase in 2006. The government is spending windfall revenues created by high world oil prices.

By a 343-94 vote with no abstentions, deputies passed the draft budget on first reading. Budget spending is to swell to 5.46 trillion rubles ($205 billion), or 17.5% of Russia's GDP. With expected revenues of 6.96 trillion rubles, the budget foresees a surplus of 1.5 trillion rubles, or 4.8% of GDP.

The projected surplus, however, will largely depend on the oil price, as the budget is based on an average price of $61 per barrel of Urals crude -- a far higher level than in previous years.

If global oil prices stay at their current levels -- supply and demand are constant -- then this is probably a safe bet. If they turn down, heads will roll in Russia.

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