SAUDI ARABIA - Russia Between Bright GDP Future & The Oil Curse.

Russian oil output resumed steady growth and rose for a fourth straight month, adding 40,000 b/d in September to reach 9.53m b/d, a new post-Soviet high. Soaring oil prices could turn Russia into a phenomenally rich country, where GDP actually does double in line with President Vladimir Putin's wishes, Aton investment house says in a new report seeking to turn conventional doom-and-gloom forecasts on their head. The report, which looks at Russia's fortunes in a "best-case scenario", is based on economic models for Russia's benchmark Urals price at $50/b and $100/b from now to 2015.

The rosy predictions reopen a long-running debate over whether high oil prices are a blessing or a curse for Russia's oil-drenched economy. Some economists have criticised Aton for basing its report on too many assumptions and making bold predictions in a time of political uncertainty. Aton says: "While we concede that...a $100 per barrel oil price is not on the immediate horizon, the fact that it could return Russia to the front ranks of the global order is a fascinating idea". With oil at $50/b, the report says Russia's GDP could double by 2013 and overtake Spain by 2015. In per capita terms, Russia's GDP in 10 years would approach that of Portugal, which has long been a target for government planners. With a forecast of $100/b, the brokerage's predictions "start to border on the surreal" - as Aton itself admits.

Under a model crafted by Aton's chief economist, Peter Westin, the goal of doubling GDP would be met by 2011, while GDP per capita would exceed that of Portugal's by 2012. According to his calculations, Russia's GDP would exceed Germany's and Britain's by 2015. Another big assumption is that Russia will be able to avoid most of the ill effects of Dutch disease, the sickness which has hit most natural resource-based economies in times of high oil prices, leading to reform paralysis and inflationary spirals debilitating growth.

To achieve the economic surge which Aton maps, the government must keep spending tightly in check and continue pursuing reforms such as developing the banking sector. Other economists say the models built by Aton were based on too many assumptions. "This is all really conditional on fiscal policy", said Al Breach, chief economist at Brunswick UBS, adding: "That's the rub. It's extremely difficult to predict what's going to happen when we're heading toward elections".

Putin's government has already been loosening the purse strings as it comes under mounting pressure to spread the wealth from Russia's oil boom to the rest of the population. "This report is about the biggest ifs that we've ever seen", says one Moscow-based economist. Westin acknowledged that the report was based on big assumptions, saying: "This is a 'what if' issue, but given the growth we have seen over the past five years - if the government does not make mistakes - this is a possibility".

Westin says Russia's economic recovery over the last five years has seen faster growth rates than those projected in the Aton report for 2005 to 2015, adding: "There is definitely room for policy mistakes. We have seen them in 2003 and 2004. What we have presented is the best-case scenario".

The government's recent moves to take greater control over the energy sector have already translated into lower growth and less investment in the oil industry. The report, however, predicted that the aftershocks of the state's partial seizure of Yukos were now lessening, that the government would move to pursue a more liberal reform track and that investment in the oil sector would pick up.

The price of Urals, hovering under $60/b, is mirroring world oil prices soaring amid continuing instability in the Middle East and fears that global reserves could run out. In his report, Westin said that, although predicting global oil prices has proved a minefield for others in the past, it was conceivable prices would continue to climb. Goldman Sachs recently raised its long-term oil price prediction to $60/b.

The Aton report goes on the assumption the government does not spend any of the windfall revenues it channels into its stabilisation fund, which is aimed at reducing inflationary pressures and at protecting the economy against future shocks. According to Westin's calculations, a $50/b price will see the stabilisation fund's total climb to $557.2 bn by 2015. With a $100/b price and a tight fiscal plan, it would reach a staggering $1.5 trillion, the report says, adding: "If oil proceeds are used prudently, by the companies for investment and by the government for building up the stabilization fund, Russia's economy could reap huge rewards". But if the government starts spending the windfall, the results could be devastating. Westin said: "If the money is not kept in the stabilization fund, then the economy would dollarize further. We would have a sliding ruble, and then an exodus of capital. If there was a Venezuela-type scenario where all the reserves were squandered...there would be a big slowdown in growth and an increase in poverty. There would be no way the government would be able to compensate workers if inflation went much higher. That's the worst thing the government could do. A spending spree could spell disaster".

Some of Westin's colleagues say even government policy on the stabilisation fund is beginning to look unpredictable. John Litwack, the World Bank's chief economist, last week said: "It seems to me the political and social pressures to spend more from the fund would be insurmountable at $100 [/b]. There are also scenarios in which spending the fund would feed into economic growth. A lot of things could happen". But Brunswick UBS's Breach disparaged the idea of tying GDP growth to oil price rises, saying: "People like economists to come up with numbers...and say for each $1 increase in the oil price GDP will rise by X. But frankly, I think it's a lot of hocus".