CAPITAL: Moscow

MONETARY UNIT: Ruble

REFINING CAPACITY: 6,672,964 b/cd

OIL PRODUCTION: 5.903 million b/d

OIL RESERVES: 48.573 billion bbl

GAS RESERVES: 1,700 tcf

Russia`s economy, hurt by the East Asian economic crisis and sharp fall in prices of oil and gas in 1998, had trouble recovering in 1999.

After several failed rescue attempts by international lenders, Russia announced on Aug. 17, 1998, that efforts to maintain a stable ruble would be abandoned. The ruble was allowed to float freely against other currencies, a 90-day moratorium on foreign debt payments was imposed, and negotiations were started to restructure Russia`s short-term debt.

On Aug. 23, 1998, President Boris Yeltsin followed these measures by dismissing his entire cabinet. After a failed attempt to restore former Prime Minister Viktor Chernomyrdin to his former position, Yeltsin gave the post to Sergei Kiriyenko. Each move triggered a confrontation with parliament. Yevgeny Primakov became prime minister in September 1998. In subsequent cabinet upheavals, Sergei Stepashin took over in May 1999, followed 3 months later by Vladimir Putin.

In a surprising move on Dec. 31, 1999, Yeltsin resigned his post, and Putin became acting president until an election could be held. On Mar. 26, 2000, Putin was voted into office as Russia`s president.

Russia`s economy remained in disarray. Two of Russia`s most significant economic accomplishments since the collapse of the Soviet Union-maintaining a stable currency and controlling inflation-were undone near the end of the 1990s.

After devaluation, the ruble fell to 50-60% below its predevaluation value.

But a political shift appeared to be taking shape. In elections held in December 1999, political parties supporting economic reform made strong gains in the State Duma, the important lower house of parliament and previously a Communist stronghold.

While the Communist Party won more votes than any other single party, it lost its ability to control legislation. The upstart Unity bloc, put together by the government, did nearly as well as the Communists, strengthening Putin`s position as prime minister and as the politician most likely to succeed the ailing Yeltsin in the presidential election.

The election outcome was not a clear-cut signal of support for economic reform, however. To some extent it also reflected the popularity among Russians of a massive assault by the Russian military, acting at Putin`s direction, against largely Muslim Chechnya. Putin claimed to be responding to anti-Russia terrorism originating in the breakway republic.

Also in 1999, Russia took long-awaited steps to implement a production-sharing agreement (PSA).

With a PSA in place, direct foreign investments in Russia`s oil and gas sector was expected to climb to as much as $64 billion. The total since the fall of the Soviet Union: $4.2 billion as of Jan. 1, 1999.

Russian PSAs in effect before 1999 included two Sakhalin Island offshore development projects instituted by presidential decree in 1999.

The Duma was to consider two Russian oil fields for development under a PSA regime: the Northern Territories complex, licensed for exploration and production to a joint venture of Russian oil giant Lukoil (60%) and Conoco Inc. (40%); and Priobskoye oil field, licensed to Russian major Yukos.

The Northern Territories complex, north of the Timan Pechora oil province, had postulated potential reserves of 1.3 billion bbl of oil. Priobskoye was estimated to hold original oil in place of more than 4.4 billion bbl.

Russia needed $8-10 billion/year just to keep oil and gas production levels from falling. Failure to attract adequate investment would force Russia to either scale back oil exports or reduce domestic consumption.

The PSA was to be implemented at 125 oil and gas fields throughout the country. For every $100 invested, foreign investors would be allowed $24 profit.

But many Russian companies objected to the PSA, claiming it gave too much control over Russia`s petroleum resources-and possibly politics-to foreigners, threatened environmental values, and encouraged speculation.

Processing activity

The Russian refining industry languished in operational and economic trouble in 1999. A report during the year by Eastern Bloc Research Ltd. (EBR) estimated that throughput of Russian-owned refineries fell to 165.7 million tonnes in 1998 from 294.6 million tonnes in 1990. Capacity utilization in 1998 was 55%. Statistics for 1999 were likely to be similar.

Production of automotive fuels at Russian plants had dropped by 45% since 1990. Output of lubricants, bitumen, coke, and aromatics fell by 50-67% during the period. Production of solid paraffins, basic petrochemicals, and carbon black feedstocks were down 84-86%.

During 1998, Russia`s refiners increased their debts to oil producers, the government, and refinery workers by 2 billion rubles to 27 billion rubles.

The refiners were owed 15.9 billion rubles by products distributors and exporters at the beginning of 1999.

Bankruptcy proceedings had begun for some plants. And at least one-the 34,140 b/d Krasnodar refinery, operated by a subsidiary of Rosneft-had been declared bankrupt.

The quality of Russian refined products improved during 1990-98. At the end of the period, unleaded gasoline represented 81% of the total gasoline pool, high-octane grades accounted for 44% of gasoline production. In addition, 88% of the country`s diesel output had 0.2% sulfur or less.

These reductions were made under a federal fuel and energy program that called for 60-65% unleaded gasoline output and 85% reduced-sulfur (0.2%) diesel.

EBR said that the goals were achieved because of proportionally greater throughput declines at Russia`s oldest and worst-equipped plants, some of which had been shut down.

Russia`s refinery modernization program was not faring well, EBR said.

Of the 38 new units planned for start-up during 1996-98, only eight were operating at the start of 1999. The main reason for the delays was lack of financing. During 1996-98, only 20% of the planned investment capital for refineries was spent.

"A number of plants are almost ready for commissioning, but work on them has practically stopped because of the shortage of money," EBR said. These include atmospheric and vacuum distillation units at the 210,863 b/d Syzran and 126,518 b/d Ukhta refineries, an alkyation unit at the 566,318 b/d Omsk plant, a catalytic reformer at the 437,792 b/d refinery at Kstovo, and a lube additive plant at the 359,471 b/d refinery at Yaroslavl.

Transportation

Caspian Pipeline Consortium (CPC) in November 1999 began laying the pipe for a new crude oil pipeline in Russia that would connect western Kazakhstan to the Russian port of Novorossiisk on the Black Sea.

The pipe was to be laid in a new 450-mile section from Komsolmoskya, Russia, to Novorossiisk.

CPC equity interest holders are: Russia, 24%; Kazakhstan, 19%; Chevron Caspian Pipeline Consortium Co., 15%; Lukarco BV, 12.5%; Rosneft-Shell Caspian Ventures Ltd., 7.5%; Mobil Caspian Pipeline Co., 7.5%; Oman, 7%; Agip International (NA) NV, 2%; BG Overseas Holdings Ltd., 2%; Kazakhstan Pipeline Ventures LLC, 1.75%; and Oryx Caspian Pipeline LLC, 1.75%.

Elsewhere, Russia planned to reroute its section of the Baku-to-Novorossiisk oil pipeline around Chechnya.

The pipeline had been a frequent target of looting and terrorism. Tapping of the line to steal crude oil was common in Chechnya, leading to repeated interruption of oil shipments. The line was out of commission for much of 1999.

Russia sought to improve reliability of shipments on the pipeline, one of three routes considered by the Azerbaijan International Operating Co. consortium for exporting oil produced in the Caspian Sea.

In other Russian transportation action, gas giant Gazprom completed construction of Phase 1 of the Yamal-Europe transcontinental gas pipeline and was preparing to take advantage of the new revenue.

The 4,000-km pipeline was to carry gas from the Yamal Peninsula region of western Siberia through Belarus and Poland and into eastern Germany, where it connects with the Western Europe gas grid.

The Yamal-Europe export pipeline is not the same one labeled the Yamal pipeline during the 1980s-the last export-oriented pipeline of a six-pipeline gas network extending from Russia`s supergiant Urengoi gas field, just south of the Yamal Peninsula, to European Russia. This project was the object of a largely fruitless embargo of US equipment and technology by the administration of former US President Ronald Reagan that ended in 1982. Pipelaying was completed in 1984, and the pipeline started up in 1985, ultimately delivering gas from north of the then-Soviet Union`s Arctic Circle to continental Europe.

Preparations for the new Yamal-Europe pipeline, subject of studies that began in the late 1980s, got under way in 1994.

During 1998, Gazprom began the first phase of the Yamal-Europe project by debottlenecking its existing gas pipeline network and adding sections. The completion of the first branch of new trunkline, through Belarus and Poland, was celebrated in October 1999 in separate ceremonies in the two countries. The system has a throughput capacity of 2.9 bcf/day.