pipelines. An unknown quantity is lost in oil spills and leakage. Transneft, the state's oil pipelines monopoly, is committed to an ambitious plan to construct new export pipelines to the Baltic and to China. The market potential for Western equipment manufacturers, building contractors, and oil firms is evidently there.

But this serendipity may be a curse in disguise. Russia is chronically suffering from an oil glut induced by over-production, excess refining capacity, and subsidized domestic prices (oil sold inside Russia costs one third to one half the world price). Russian oil companies are planning to increase production even further.

Rosneft, the eighth largest, plans to double its crude output. Yukos (Russia's second largest oil firm) intends to increase output by 20% this year. Surgut will raise its production by 14%.

Last week, Russia halved export duties on fuel oil. Export duties on lighter energy products, including gas, were cut in January. As opposed to previous years, no new export quotas were set. Clearly, Russia is worried about its surplus and wishes to amortize it through enhanced exports.

Russia also squandered its oil windfall and used it to postpone the much needed restructuring of other sectors in the economy - notably the wasteful industrial sector and the corrupt and archaic financial system. Even the much vaunted plans to break apart the venal and inefficient natural gas and electricity monopolies and to come up with a new production sharing regime have gone nowhere (though some pipeline capacity has been made available to Gazprom's competitors).

Both Russia's tax revenues and its export proceeds (and hence its foreign exchange reserves and its ability to service its monstrous and oft-rescheduled $158 billion in foreign debt) are heavily dependent on income from the sale of energy products in global markets. More than 40% of all its tax intake is energy-related (compared to double this figure in Saudi Arabia). Gazprom alone accounts for 25% of all federal tax revenues. Almost 40% of Russia's exports are energy products as are 13% of its GDP. Domestically refined oil is also smuggled and otherwise sold unofficially, "off the books".

But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is based on a far more realistic price range of $14-18 per barrel. Hence Russia's frequent clashes with OPEC (of which it is not a member) and its decision to cut oil production by only 150,000 bpd in the first quarter of 2002 (having increased it by more than 400,000 bpd in 2001). It cannot afford a larger cut and it can increase its production to compensate for almost any price drop.

Russia's energy minister told the Federation Council, Russia's upper house of parliament, that Russia "should switch from cutting oil output to boosting it considerably to dominate world markets and push out Arab competitors". The Prime Minister told the US-Russia Business Council that Russia should "increase oil production and its presence in the international marketplace."

It may even be that Russia is spoiling for a bloodbath which it hopes to survive as a near monopoly in the energy markets. Russia already supplies more than 25% of all natural gas consumed by Europe and is building or considering to construct pipelines to Turkey, China, and Ukraine. Russia also has sizable coal and electricity exports, mainly to CIS and NIS countries. Should it succeed in its quest to dramatically increase its market share, it will be in the position to tackle the USA and the EU as an equal, a major foreign policy priority of both Putin and all his predecessors alike.

Financial Services

An expatriate relocation Web site, settler-international.com, has this to say about Russian banks: "Do not open a bank account in a Russian bank : you might not see your deposit again." Russia's Central Bank, aware of the dismal lack of professionalism, the venality, and the criminal predilections of Russian "bankers" (and their Western accomplices) - is offering "complementary vocational training" in the framework of its Banking School. It is somewhat ironic that the institution suspected of abusing billions of US dollars in IMF funds by "parking" them in obscure off-shore havens - seeks to better the corrupt banking system in Russia.

I. The Banks

On paper, Russia has more than 1,300 banks. Yet, with the exception of the 20-odd (two new ones were added last year) state-owned (and, implicitly, state-guaranteed) outfits - e.g., the mammoth Sberbank (the savings bank, 61% owned by the Central Bank) - very few provide minimal services, such as corporate finance and retail banking. The surviving part of the private banking sector ("Alfa Bank", "MDM Bank") is composed of dwarfish entities with limited offerings. They are unable to compete with the statal behemoths in a market tilted in the latters' favor by both regulation and habit.

The Agency for the Reconstruction of Credit Organizations (ARCO) - established after the seismic shock of 1998 - did little to restructure the sector and did nothing to prevent asset stripping. More than one third of the banks are insolvent - but were never bankrupted. The presence of a few foreign banks and the emergence of non-bank financing (e.g., insurance) are rays of hope in an otherwise soporific scene.

Despite the fact that most medium and large corporations in Russia own licensed "banks" (really, outsourced treasury operations) - more than 90% of corporate finance in 2000-2001 was in the form of equity finance, corporate bonds, and (mainly) reinvested retained earnings. Some corporate bond issues are as large as $100 million (with 18-months maturity) and the corporate bond market may quintuple to $10 billion in a year or two, reports "The Economist", quoting Renaissance Capital, a Russian investment bank.

Still, that bank credits are not available to small and medium enterprises retards growth, as Stanley Fischer pointed out in his speech to the Higher School of Economics in Moscow, in June 2001, when he was still the First Deputy Managing Director of the IMF. Last week, the OECD warned Russia that its economic growth may suffer without reforms to the banking sector.

Russian banks are undercapitalized and poorly audited. Most of them are exposed to one or two major borrowers, sectors, or commodities. Margins have declined (though to a still high by Western standards 14%). Costs have increased. The vast majority of these fledglings have less than $1 million in capital. This is because shareholders (and, for that matter, depositors) - having been fleeced in the 1998 meltdown - are leery of throwing good money after very bad. The golden opportunity to consolidate and rationalize following the 1998 crisis was clearly missed.

The government's (frail) attempts to reform the sector by overhauling bank supervision and by passing laws which deal with anti-money laundering, deposit insurance, minimum capital and bankruptcy regulations, and mandatory risk evaluation models - did little to erase the memory of its collusion in the all-pervasive, massive, and suspiciously orchestrated defaults of 1998-1999. Russia is notoriously strong on legislation and short on its enforcement.

Moreover, the opaque, overly-bureaucratic, and oligarch-friendly Central Bank is at loggerheads with would be reformers and gets its way more often than not. It supports a minimum capital requirement of less than $5 million. Government sources have gone as high as $200 million. The government retaliates with thinly-veiled threats in the form of inane proposals to replace the Bank with newly-created "independent" institutions.

Viktor Gerashchenko - the current, old-school, Governor - is set to leave on September 2002. He will likely be replaced by someone more Kremlin-friendly. As