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Oil Prices and the Russian Economy. Some Simulation Studies with NiGEM

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  • Suni, Paavo
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    Abstract

    Russia has greatly benefited both from exporting more energy commodities in volume terms and from the improvement of it’s terms of trade due to the rise in oil and other commodity prices in the 2000’s. To study the impacts, the counterfactual simulation for the years 2001-2006 and the “usual” oil price rise simulations for the future were made. According to the counterfactual simulations, the role of oil has been a key driver in the recent Russian economic development in the 2000’s. The average GDP growth in 2001-6 would have been around 4 per cent, around 2.5 percentage points lower than in the actual case. The effect was strongest in the last years of the period bringing the growth even below one per cent in 2006 instead of more than 6 per cent. The strong effect is due to large and rising price difference between the actual and counterfactual oil prices especially in the years 2003-6, which would have meant pronouncedly smaller oil income into the economy than actually took place. In the other simulations, the effects of the permanent 20 USD price rise to the baseline was compared. The economy reacted initially strongly to the shocks with e.g. raising GDP growth and current account strongly. The effect was, however, quickly vanishing after the rise. The temporary end of the current commodity boom would cause serious difficulties in the Russian eco-nomic development as the fuel for the engine would dry. The more robust growth would necessitate drastic changes in the economic structure from resource based economy towards more normal economic structure. Given the short and rather undeveloped Russia time series and from this reason also rather undeveloped models, the results contain large uncertainty. However, simulations provide one useful benchmark on the size of the effects of the energy price rise on the Russian economy.

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    Bibliographic Info

    Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1088.

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    Length: 15 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:rif:dpaper:1088

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    Keywords: Russian economy; simulation; oil price;

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    References

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    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
    2. Kaitila, Ville, 2007. "Free Trade between the EU and Russia - Sectoral Effects and Impacts on Northwest Russia," Discussion Papers 1087, The Research Institute of the Finnish Economy.
    3. Rautava, Jouko, 2002. "The role of oil prices and the real exchange rate in Russia's economy," BOFIT Discussion Papers 3/2002, Bank of Finland, Institute for Economies in Transition.
    4. World Bank, 2005. "Russian Federation : From Transition to Development, A Country Economic Memorandum for the Russian Federation," World Bank Other Operational Studies 8628, The World Bank.
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    Cited by:
    1. Alho, Kari E.O., 2008. "Regulation of Energy Prices in Russia," Discussion Papers 1128, The Research Institute of the Finnish Economy.
    2. Andreas Benedictow & Daniel Fjærtoft & Ole Løfsnæs, 2010. "Oil dependency of the Russian economy: an econometric analysis," Discussion Papers 617, Research Department of Statistics Norway.
    3. Paavo Suni, 2008. "Effects of Energy Price Changes on Russian Economy," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 9(2), pages 9-15, 07.
    4. Daniel Treisman, 2010. "Oil and Democracy in Russia," NBER Working Papers 15667, National Bureau of Economic Research, Inc.

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