Download Determining the influence of oil and gas rent on the efficiency of

MINISTRY FOR EDUCATION AND SCIENCE, RUSSIAN FEDERATION
FEDERAL STATE AUTONOMOUS ORGANIZATION OF HIGHER EDUCATION
«NOVOSIBIRSK NATIONAL RESEARCH STATE UNIVERSITY»
(NOVOSIBIRSK STATE UNIVERSITY, NSU)
Faculty
Economics
Chair
Political Economy
Department
Management
Master Educational program
Oil and gas Management
GRADUATE QUALIFICATION PAPER
MASTER'S DISSERTATION
Krivosheev Nikita Alexandrovich
Paper title
Determining the influence of oil and gas rent on the efficiency
of monetary policy
«Admitted to defense»
Scientific Supervisor,
The head of the chair:
Ph.D., Assoc. Professor
D-r of Econ. Sciences, Professor
Mishenin M.V./………...
«……»………………20…г.
Filimonova I.V./…………..
«……»………………20…г..
Date of defense: «……»………………20…г.
Novosibirsk, 2017
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TABLE OF CONTENTS
INTRODUCTION ................................................................................................................................................... 3
CHAPTER 1. OIL RENT IN THE ECONOMY OF A GOVERNMENT .............................................................. 5
1.1. Definition and meaning of oil rent ................................................................................................................... 5
1.2. “Dutch disease” and institutional restrictions on the way of the effective use of oil and gas rent ................... 7
1.3. Oil and gas rent in the economy: Literature review ....................................................................................... 10
CHAPTER 2. METHODICAL APPROACHES TO ANALYZING THE INFLUENCE OF OIL AND GAS
RENT ON THE MONETARY POLICY .............................................................................................................. 18
2.1. Influence of oil and gas export on the policy of the Russian Federation ....................................................... 18
2.2. Method of calculating oil and gas rent ........................................................................................................... 24
2.3. Selecting and describing of the models for analyzing oil and gas rent .......................................................... 26
CHAPTER 3. ANALYZING THE DEGREE OF INFLUENCE OF OIL AND GAS RENT ON THE
MONETARY POLICY IN HYDROCARBON-EXPORTING COUNTRIES ..................................................... 28
3.1. Selecting of the factors and making of the regression .................................................................................... 28
3.2. Influence of the factors in the regression ....................................................................................................... 33
3.3. Analysis of the results of the panel data modeling ......................................................................................... 36
CONCLUSION ..................................................................................................................................................... 38
REFERENCES ...................................................................................................................................................... 41
3
INTRODUCTION
In economic literature, the specific features of the natural resource-rich countries are widely
discussed. This category consists of tens of countries (including Russia), which extract hydrocarbon
resources.
Production and use of oil and gas resources is one of the most discussed problems in the world.
Much attention is paid to the questions connected with the direction and efficiency of use such
resources. The resources are used for producing of fuel and petrochemical products which can be
consumed within the country, and can be exported. The countries having considerable reserves of oil,
gas or both resources often export oil and gas in the form of raw materials (Clifford G. Gaddy, 2005).
The main benefit of oil and gas production is the natural oil and gas rent measured as revenue
minus costs (including also profit for production and transportation). The rent can be used to develop
the economy or increase the current consumption. The best ways of using this profit are: to improve
the process of production and infrastructure, to invest into the human capital, to develop the system of
institutes. Inefficiency of institutes within the country can lead to export of the rent and, as a result, the
rich and influential structures get a lot of money. Accumulation of the rent can also increase inequality,
bureaucratization and preservation of inefficient structure of economy.
The government of Russia and the Central Bank of the Russian Federation developed the policy
of reducing dependence of the economy and the budgetary system on the oil and gas incomes, created
regulatory framework for saving of their part in reserve funds and checked efficiency of this policy
during the crisis period. Now it is necessary to analyze their results. The policy of decreasing
dependence on oil and gas sector eventually has to lead to diversification of economy. However,
complex efforts are required in the following directions: ensuring macroeconomic stability including
low inflation and clear rules of exchange regime; providing of competitiveness; developing of the
financial market; creating of necessary infrastructure; stimulation of production of high value added
products; supporting of institutes of innovations; decreasing of administrative barriers. Such policy
leads to change of economic structure not as a result of the state expansion, it is evolutionary process
(Yogo, 2011).
Oil and gas income influence on the Russian economy depends on the national currency — its
movement depending on the offer of currency in the market. Respectively, the exchange rate depends
on the market forecasts, demand and supply of the currency. It can be explained by the balance of
payments: at the positive balance of payments the national currency becomes stronger. However in the
countries-exporters of natural resources the balance of payments can be changed faster, than in the
developed countries which don’t depend on export of mineral resources. Increase in inflow of currency
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from sale of mineral resources in the world markets at high prices can be replaced by its decrease, then
the offer of currency in domestic market decreases, and the exchange rate can quickly fall.
The novelty: The use of econometric analysis for the purpose of estimating how oil & gas rent
influences monetary policy. Obtained model can be helpful for monetary structures, tax structures,
investment decision-makers and different institutes.
The main purpose of this work is to make the panel data analysis of economic indicators of the
hydrocarbon-exporting countries to study influence of oil and gas rent on the efficiency of monetary
policy.
Object – the monetary policy of 20 oil and gas exporting countries
Subject – methodological approaches for analyzing the influence of oil & gas rent on monetary
policy with using panel data
Objectives:
1. To designate institutional obstacles on the way of effective distribution of oil and gas rent.
2. To show the role of oil and gas rent in the economy of Russian Federation.
3. Make an analysis of methodological approaches to assess the relationships between oil and gas
rent and the efficiency of monetary policy.
4. To define the degree of impact of oil and gas rent on the efficiency of monetary policy using
panel data analysis.
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CHAPTER 1. OIL RENT IN THE ECONOMY OF A GOVERNMENT
1.1. Definition and meaning of oil rent
Traditionally, the value produced from resource sector is defined as rent. In other words, it is a
surplus that is obtained from the production of gas and oil. We can define rent as the revenue received
from sale of the source minus the cost of production. By this definition, rent is equal to economic
profit, that is, revenues minus economic costs (including depreciation of fixed assets and a “normal”
return on capital) (Clifford G. Gaddy, 2005).
Let Rt denote the true total rent produced in period t, which is defined as:
R t = Pt Qt – Ct,
(1)
where P and Q are the current spot price and the actual quantity produced, and C is the natural
cost of production. But if one measures the production cost using data on the reported cost, the
measure of rent will be different. Natural cost is the cost of production that would be incurred in a
competitive market with free entry (Clifford G. Gaddy, 2005). The reported cost may include waste
and inefficiencies. Let’s consider the reported cost be Ct’ = Ct + εt, where ε is the excess cost of
production. Then the rent R’ will be:
R’ = Pt Qt – Ct’
= Pt Qt – Ct – εt
(2)
P is the market price, but producers may receive less if there is a price subsidy. For instance, in
Russia, the domestic price for oil and gas is below than world price, and exports to CIS
(Commonwealth of Independent States) are made at below market prices. Let the price subsidies per
unit of the resource be p. Then the total subsidy S = pQ. The actual producer price, P’ = P – p. Thus,
pre-tax profits are given by
Πt = Pt’ Qt – Ct’
(3)
It is useful to distinguish between formal and informal taxes. Formal taxes are prescribed by
legislation. In Russia it is Mineral extraction tax and export tax. Informal taxes are nominally
voluntary but in fact mandatory for a business that wants to survive (Гуревич Е.Л., 2011) (Гуревич,
2011). For example it may be bribes paid to government officials and payment made by enterprises to
support the social sector of towns and regions, cultural programs, etc. Both kinds of taxes are applied
to the revenue received. Let’s assume that these taxes is a share of profits, and let the normal tax rate
be α and the informal tax rate be α’. Then after-tax profits can be written as:
Πt’ = (1 – α – α’) Πt
(4)
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We see that the total surplus can be divided into five categories: excess extraction costs, price
subsidies, formal taxes, informal taxes and the after-tax profit of the enterprise.
There are some recommendations about long-term stabilization of consumption (Hartvik's rule)
and the budgetary expenses (in particular, the principle of the constant income) in the conditions of the
forthcoming exhaustion of natural reserves for the resource-rich countries. Such recommendations
usually concern rules of management of the income received from the raw materials sector. For
example, according to the known principle of the constant income it is recommended to spend the
fixed value of the oil and gas income of the budget quantitatively equal to the income from investment
of the sum at which the natural richness of the country is estimated (Трубицын Д. В., 2014).
It’s possible to notice some tendencies in redistribution of natural rent between the state and
producers. It is known that in the first half of the 2000th years the system of the taxation of oil and gas
sector was actively reformed in Russia. Now the natural rent in this sector is imposed by two special
tax tools: MET and export tax. Thanks to introduction of progressive scale of export taxes for oil and
oil products (with the maximum rate of 65%) and a MET rate, level of withdrawn natural rent reached
approximately 81% in 2006-2009 (Трубицын Д. В., 2014).
By 2008, total rent incomes of the budget have grown in dollar expression by 40 times as a result
of increase of the rent withdrawn and increase in prices for hydrocarbons. The relation of oil rent
incomes of the budget to GDP has grown from 6% in 1998 to 20,5% in 2005 (Figure 1.1), and share in
the total income of the budgetary system has increased from 7% in 1999 to 26% from 2005 to 2009. In
structure of the income of the federal budget the role of rent incomes is even more: approximately 44%
from 2005 to 2009.
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14.3
14
13.6
11.2
11.1
10
9.6
8
6
8.1
Oil rent
Natural gas rent
5.6
5.6
4
2
1.4
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
1996
% of GDP
12
Figure 1.1 – Oil and gas rent in the Russian Federation (% of GDP)
Source: World Bank
7
In gas sector the rate of export taxes is 30%, and the rate of MET is fixed in rubles and didn't
change from 2005 to 2010. As a result, the share of a natural rent withdrawn in gas sector for 20012009 remained steadily low, fluctuating (depending on change of the internal and external prices)
about the average level of 38%. For so radical distinction in the taxation of two hydrocarbon sectors
there are no serious economic reasons.
As a conclusion, the rent has a beneficial influence on development of countries-owners of oil
and gas resources, at the same time it isn't always used most effectively. Efficiency depends on
institutes: if their quality is high, then the economy receives big profit. Bad quality of the institutes
leads to smaller profit that can affect also economic growth. For resource dependent countries it’s
more important to increase oil and gas production, than for less dependent.
The rent can be invested into spheres of production and infrastructure, but the most important
spheres are human capital, education, health care, science and culture.
1.2. “Dutch disease” and institutional restrictions on the way of the effective use of oil and gas
rent
In literature, "resource curse" is negative aspects of distribution and use of the natural rent
received from natural resources. First of all, reserves of oil and gas. But now nobody shares the
hypothesis of so-called "resource curse in the strong version" that assumes that extraction of
hydrocarbons can have negative influence on the economic growth, preserving or even blocking
development of economy. The modern view on this problem is characterized as a hypothesis of "a
resource curse in the light version". This hypothesis tells that the countries with inefficient institutes
use natural wealth worse, than other types of the capital. The light version of this hypothesis is
connected with the assumption that the excessive natural wealth can negatively influence quality of
institutes because of a weak control of implementation of laws and quality of education (Суслов Н. И.,
2015).
"The resource curse" strikes first of all those countries where institutes aren't developed … its
main mechanism is further destruction of institutes" (Кротова М. А., 2013). There is some
interdependence of such processes as increase of natural resources orientation of the economy and
restriction of social freedom and democracy. Typical symptoms of the resource curse – increase of
authoritative tendencies, preservation of corruption and decrease of education level and qualification
of labor force.
Recently the point of view according to which economic growth in Russia in 2000-2008 was
explained by the high price of oil is widespread. It is unknown, there would be economic growth the
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same high at lower prices of oil. There are also points of view that growth could even be replaced by
recession at low prices. Actually the role of natural resources in terms of growth rates isn't so obvious
as it seems at first sight. There are no doubts that the Russian economy is strongly dependent on raw
(especially fuel and energy) sector as it was also in economy of the USSR 1970 — the 1980th. And it
means vulnerability of not only economic, but also political system: crash of the USSR was connected
considerably with sharp decrease in that level of prices for oil (Кротова М. А., 2013).
A high natural rent (in particular, the high prices of oil), stimulates economic growth in one
sectors, creates obstacles in a way of long-term growth of economy in general. It is possible to point a
number of the factors that impact negatively on the economic situation under the conditions of rich
natural resources.
First, it is "the Dutch disease". It increases the actual rate of national currency, reduces
competitiveness of considerable part of economy. The measures taken to control real ruble exchange
rate lead to inflation growth.
Secondly, the significant gap in profitability different sectors of economy leads to discouraging
of investments into other sectors, so, structural transformation restrains. Structural reforms are also
slow down.
Thirdly, there is a conflict between interests of the budget and interests of the economic
development. "Cheap money" improves the state of the budget and possibility of the budgetary
maneuver. At the same time the considerable part of economic agents isn't interested in such situation
when competitiveness of the sectors decreases.
Fourthly, the government is tested by economic populism and corruption. Existence of
considerable financial resources leads to increasing strength of lobbist activity. It is harder and harder
for government to resist this pressure, and eventually the budgetary expenses can begin to increase,
increasing danger of macroeconomic destabilization in the future. Thus, natural resources, on the one
hand, give potential opportunities for economic growth. On the other hand it interferes development of
the institutes promoting long-term economic growth.
So, in the sector of extraction of resources and in the sector of manufacture depreciation of
constructions, machines, the equipment and transport as of the end of 2008 was respectively 50,9 and
45.6% (Кудрин А., 2012). Degree of depreciation of fixed assets in 2005 was 43.5%, by 2011 reached
51.3% (Кудрин А., 2012). According to consulting company the McKinsey, labor productivity in
metallurgical sector has doubled from 2002 to 2012, but makes only 33% of level of the USA. About
40% of the Russian thermal power plants are more than 40 years old whereas in the USA 28%, in
Japan – 12%, in China – only 3%. (Кудрин А., 2012).
Russia’s economic development has to be followed by creation of all necessary conditions for
evolutionary transition from extensive to the intensive post-crisis economic growth based on the use of
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modern equipment, advanced technologies of achievements of science, more economic resources and
increase of labor productivity of workers (Кудрин А., 2012). At the same time one of the central
problems of modern Russian economic policy is achievement continuous and sustainable economic
growth first of all due to high-quality improvement of mechanisms of regulation of economic
processes (Кудрин А., 2012).
To understand how to achieve this purpose, it is important to reveal the old ineffective institutes
which contain economic growth.
In modern Russian economy there were following main institutional restrictions which slow
down development of key sectors of economy. Moreover, index of “Rule of Law” is very low in
Russia (Figure 1.2). It has the meaning of less than 0 (it may be between +2,5 and – 2,5). It means that
the quality of institutes is very low, and law works inefficiently.
0
-0.5
-1
-0.87 -0.93 -0.86 -0.91 -0.93 -0.95 -0.93
-0.77 -0.77 -0.74 -0.82 -0.78 -0.71
-0.6
-1.13
-1.5
"Rule of Law" index
-2
-2.5
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure 1.2 – “Rule of Law” index in Russia
Source: World Development Indicators
Firstly, excessive bureaucratic control of activity of the enterprises of all forms of ownership
remains. It limits their development in the conditions of the increasing competition in the internal and
external markets (Engel E., 2000).
Secondly, property rights of shareholders and investors of the large capital are not regulated
well. Numerous bureaucratic regulations lead to increase of transactional expenses, corruption taxes
etc. that eventually is reflected in product cost and makes it noncompetitive in comparison with foreign
producers of similar production. Besides, such control induces businessmen to remove part of their
profit to the "shadow" sphere or to take out financial assets abroad. The businessmen who decide to do
the business in Russia are forced to enter the informal relations with authorities for the purpose of
obtaining individual privileges. The representatives of the government at the same time are involved in
semi-commercial and "shadow" operations (Engel E., 2000).
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Obligatory element of formal institutes is the legislation in the field of fight against corruption. It
will allow to make conditions for changing of structure of the Russian production towards diversified
and more integrated with foreign business structures. Effective protection of the rights of investors and
shareholders will allow to provide high efficiency of capital investments, to attract more investment of
foreign partners.
1.3. Oil and gas rent in the economy: Literature review
There are a lot of researches about oil and gas industry, its benefit and role in the modern
economy. Akelyev E.S. (Акельев Е.С., 2012) describes the modern structure of the Russian economy
in terms of institutional analysis. Author tells about tendencies of development of the main sectors of
economy in the conditions of the continuing structural crisis and recession. The conclusion is drawn on
need of change of institutional structure of the Russian economy for the purpose of increase of
productivity of large capital-intensive branches of economy.
In the book of Lisin V.S. (Лисин В.С., 2011) institutional obstacles which can block economic
growth are described. Problems of the countries trying to follow a way of long-term economic growth,
and the new institutional problems are analyzed. The special attention is paid to questions of quality of
the institutes providing a law and justice. Recommendations about overcoming of crises and
strengthening of the institutes providing modern economic growth are made.
Researchers call several reasons of such rather paradoxical result when between abundance of
natural resources and social and economic development of the country there is a negative dependence.
In case when the rent is caused by export of natural resources, there is a serious incentive of
development of monogrocery economy and especially monoproductive export. It leads to braking of
development of other branches of economy — inflow of cheap foreign currency stimulates import of
the majority of goods and undermines positions of domestic manufacturers.
Thus, by a certain moment the country becomes completely dependent on fluctuation in prices of
very limited set of goods of the export.
Besides, raw branches impose lower requirements to qualification of labor, and therefore their
domination in national economy reduces demand for educational services that can have very
dangerous long-term consequences.
Additional danger arises when investment incomes fall upon the country unexpectedly and in a
huge number — as a rule, as a result of jump in prices of natural resources. If the government
perceives them as a steady source of receipts, then the temptation appears to use new opportunities for
ambitious externally - and internal political projects, social programs, etc. As the source seems
bottomless, the country leaders willingly take loans, seeking to receive today's political benefit on the
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security of future income. The balanced budget also doesn't seem necessary. As a result in several
years the country burdened by external and internal debts is involved in a significant amount of
political and economic adventures. Reduction of a rent during this period means catastrophe.
The abundance of investment incomes influences also efficiency of decision-making: on the one
hand, danger of punishment for risky or nonprofessional steps disappears — they can always be
corrected by monetary injection, with another — risks of corruption which is almost inevitable when
the authorities has to be engaged in sharing of a rent (Лисин В.С., 2011).
For example, in the state with the population N citizens maximize usefulness of ui of i’ citizen
which is positive function of consumption of the public benefits x and opportunities to influence policy
of the state v and negative function of payment of taxes t (thus, x and v — partially interchangeable
goods). This ratio can be written down in the form of a formula:
Max ui = ui (v i+, xi+, ti– )
(5)
where i = 1, 2, ..., N.
Benefit of the state at every moment is considered to identical benefit of the agents occupied in
governmental structures and management of the state.
The state is a supplier monopolist of the public benefits.
The public benefits of X are created on the money received from taxes T and from R rent.
There are no other sources of the income, there is no deficit and surplus of the budget:
X = T + R, where
(6)
𝑁
𝑁
X = ∑𝑁
𝑖=1 𝑥𝑖 ; T = ∑𝑖=1 𝑡𝑖 ; V = ∑𝑖=1 𝑣𝑖
where V — total usefulness from possession of the power.
The state is founded on democratic institutes, i.e. management is made with the participation of
the people and is connected with need to give him a part of influence β (0 < β < 1). In this case size β
is democracy index. In general the prize P states is described by the equation
P = (1 — β) * V + (T + R — X)
(7)
Total usefulness for citizens will make:
Max U = U (βV, X, T)
where U = ∑𝑁
𝑖=1 𝑢𝑖
(8)
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The state will always seek to limit as much as possible democracy (to reduce β), i.e. to
concentrate the power in the hands. Let in an initial situation of R0 = 0. Thus, X = T. Possibilities of
the state to reduce β are very limited as he has nothing to offset usefulness loss (it is possible to
increase X, having only increased T what will lead to reduction of the general usefulness of citizens
(∆βV < 0, ∆X > 0, ∆T > 0 => ∆U = ?)). Therefore society is stabilized in a point O with democracy
level β0 and quantity of the public benefits of X0 (Figure 1.3).
Figure 1.3 — Model of corruption of the voter: the public choice in space “powerconsumption”
Let's say that as a result of exogenous change the rent has increased and makes R 1 ((R1 > R0). In
case of usual goods citizens have to pass to the budget of IR1 and have an opportunity to choose from
the combinations corresponding to him βV and X among which there will be also combinations where
β > β0 (for example, F point F (β1,Х0)).
However the rent differs from usual goods in the fact that it is the income which distribution
depends only on the government. In its turn, the government is not interested to increase β and
therefore it is ready to limit artificially a possibility of the choice to the combinations which are to the
right of a point of C (β0, X1).
The basket C by definition is more preferable than a basket O (β0 = β0 ; X1 > X0). Depending on
functions of usefulness of citizens (personal utility functions) there can be some more combinations
(βm < β0 ; Xm > X0), for example the point of M(βm, Xm) is also more preferable in comparison with an
initial basket O and, perhaps, in comparison with a basket C.
Thus, rationally adjusted citizens, deciding to accept the artificial restriction connected with not
increase (reduction) of democratic regime or to refuse the income connected with use of a rent,
undoubtedly will choose the first. Respectively emergence of investment incomes in the state has to
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lead to the fact that democracy level won't grow in him, and it is possible, and will decrease in
comparison with a "before-rent" situation — and all this from a full consent of citizens (Лисин В.С.,
2011).
Additional, though implicit, consequence is that it becomes important at what stage of formation
of institutes of the state the rent will appear. As restriction for distribution of a rent is a necessary
condition of model, it is much easier to take this step in society where the institutes which regulate
activity of the government weren't created yet. In other words, where balance wasn't created yet, it is
much easier to change it with lower level of β.
The book of Shmatt V.V. (Шмат В.В., 2014) is devoted to problems of development of oil and
gas sector in Russia. The reasons of some problems taking place in oil and gas sector are considered.
Author analyses and explains the processes happening in oil and gas sector in the context of
transformation of the institutional environment, formation and development of relationship between
the state and business, the federal center and regions.
The authors of the other research (Корордюк Е. С.)analyze the foreign experience of regulation
of an oil and gas complex in the countries with developed market structure. Giving the example of
Norway, Great Britain, Canada and the USA they describe the models of functioning of an oil and gas
complex. Volynskaya N.A. and Ezhova S.S. (Волынская Н.А., 2006) made the analysis of "rent" in
raw branches of energy industry, approaches to a quantitative assessment of a rent are given. Rent
sources, the principles and mechanisms of her distribution are designated.
Adam Ondo and Zachary Taylor (Ondo A., 2010) tell about large outflows of the capital from
many countries of Africa since they have gained independence. They explain what factors cause
outflow of the capital and if there is a hope that this process can be regulated, providing Africa with
the capital which it will be able to use for development. Authors made a hypothesis that increase of
share of an oil rent in GDP has to lead to increase in flight of the capital. Research is focused only on
the post-colonial countries of Africa to the South from the Sahara.
Authors revealed the positive dependence with capital outflow of the following variables:
external debt, existence of natural resources and cruelty of a policy. But the most interesting variable
was the share of an oil rent in GDP. The oil rent is determined by the World Bank as a difference
between oil cost by the world prices and cumulative costs of production, including rate of return.
Mechanisms of increase in capital outflow in case of increase in a share of a rent in GDP are
corruption, economic and political instability. The corrupted power controls oil-extracting sector that
gives them the chance illegally to take out profit from the country. Economic stability of the country
suffers because it actually becomes dependent on the single resource – oils. It can lead to devaluation
of currency that forces citizens and companies to keep and invest the capital in other countries. It
means that direct foreign investments from oil-producing countries increase, thereby being added to
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value of capital outflow. The third mechanism, political instability called by political cruelty or the
military conflict is doubtful as some researches tell about absence of connection between oil rent and
political instability (Ondo A., 2010).
Authors have explained capital outflow with the following equation:
KFit = ∆DEBTADJit + FDIit – (CA + ∆RESit)
(9)
Where, ∆DEBTAD – change of residual of an external debt after it was enumerated according to
rate fluctuations of currency, FDI – pure direct foreign investments, CA – a deficit on the current
operations, RES – a pure increase of foreign exchange reserves. Money transfer from the state
accounts to private ones, reward for execution of the state contracts, the expenses artificially uprated –
all this one of methods of illegal export of the capital used by ruling persons and their close friends.
Authors use the econometric model based on selection of 40 countries of Africa from 1970 for
2000. Dependent variable is capital outflow percentage of GDP. Explanatory variable is the oil rent
percentage of GDP. Remaining factors are: not - oil natural resources percentage of GDP, GDP
logarithm per capita, a logarithm of received help for development of this country, and the conflict
which is the dummy variable based on the number of the victims in a year.
The used model looks as follows:
KFit = Orit + NRit + GDPit + AIDit + Cit + KFi,t-j
(10)
Where, for the country i in year of t, KF – capital outflow index percentage of GDP (j = 1 … q –
size of a log), OR – an oil rent percentage of GDP, NR – a logarithm quantity of a rent from non -oil
natural resources percentage of GDP, GDP – GDP logarithm per capita, AID – a logarithm of the
received help for development, C – a dummy variable where the military or political conflict is equal 1
if there was more than 24 (Ondo A., 2010).
Researchers summed up the result that two factors are the most important reasons of increase in
capital outflow from the country: corruption and economic instability.
Corruption is the most sensitive to increase in a share of a rent in GDP the mechanism. It occurs
because magnitude of influence of a share of an oil rent on capital outflow is small, and corruption of
the government usually explains a small share of illegal capital outflow therefore it is explained by
magnitude and the statistical significance of results.
Rabah Arezki and Markus Brückner (Arezki R., 2009) consider that increase of oil rent promotes
corruption growth, deterioration in a political situation, at the same time leads to significant increase in
civil liberties. Authors believe that these results can be explained with existence of the political elite.
Authors also claim that there is a considerable effect of oil rent for fight against corruption in the
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countries with high share of oil production while such communication doesn't exist in those countries
where the state participation in oil production is insignificant.
By means of regression model authors solve a problem of heterogeneity and an endogeniosity
with calculating correlation of an oil rent with corruption and the state stability with the fixed effects.
Authors use such variables as geological distinctions between the countries and variable stability of the
state. Results show that increase in a rent within the country carries to essential increase in level of
corruption, lowering of the political rights and freedoms, but also increase in civil liberties. On the
other hand, authors found out that on average increase in a rent has no significant effect on risk of
appearance of the civil conflict.
Researchers use the following model:
ΔCorruptionit = αi + γt + βΔOil Rentsit + ΓXit + uit
(11)
Where, αi – the fixed effects which reflect unobvious invariant characteristics of the country and
γt – annual fixed effects which reflect shocks for all countries. The evaluated parameter β reflects
marginal effect which renders change of a rent on corruption (Arezki R., 2009). The Xit variables
switched on in regression as reliability check, are the first difference in non-oil GDP (ΔNon-Oil
GDPit), connected to change of the income in branches of non-oil sector; the first difference on
production of oil (ΔOil Productionit) which is connected to change of amount of the produced oil; and
corruption with a log equal to unit (Lagged Corruptionit-1).
Results reject a hypothesis that an oil rent – direct threat of the state stability. From the strategic
point of view, it doesn't mean that investors shall be afraid that high rent incomes can mean threat for
their projects because this income most likely will cause the civil conflict. On the contrary, politicians
shall worry that the oil rent considerably increases the level of corruption which bears essential
lowering of welfare because of non-rational use of resources and hidden expenses.
Prof. Suslov (Суслов Н. И., 2015) in his article discusses the problems of efficiency of use of
the rent created in oil and gas sector worldwide. Research is based on the econometric analysis of the
statistical data provided by the World Bank. Author proves that the rent gives a strong impulse to
development of economy. The rent can influence quality of institutes: to improve them or to preserve
institutional development.
For the empirical analysis it is selected 2010. 132 economies from all continents got to the
general selection, from them 91 countries extract oil or gas (or that and another). The data on GDP per
capita calculated at par purchasing power and on an oil and gas rent are taken from the database of the
World Bank. The index of quality of institutes (Rule of Law index) is also taken. This index, according
to the author, best of all reflects a status of system of institutes: fair trial and arbitration, quality of the
16
legislation, protection of the rights of investors are more important than economic freedom. Besides,
some more indices playing a supporting role are used.
The econometric model includes two regressions estimated at the same time i.e. as a system of
equations. The first equation – for GDP explanation per capita – includes the following regressors: a
rent per capita, the rent in a combination with an index of institutes (i.e. their work) called by the
interactive member and level of the internal prices concerning the USA. Levels of per capita incomes
and a rent were also normed to the GDP per capita in the USA taken for unit. The second equation
evaluates a price variable (the left part) from the interactive member, an index of institutes and a
binary variable which has values of unit for member countries of the Organization for Economic
Cooperation and Development, but without new members – the former countries of the socialist camp
– and zero for all other countries (Суслов Н. И., 2015).
The general significance value of regressions was also high, and determination coefficient
analogs for the equations have reached 0,82 and 0,68 that seldom works well for cross data.
The combination from a variable rent and the interactive member for income levels allows to
estimate efficiency of use of investment incomes in the considered states at regressions. The
investment income taken in itself as well as should be expected, finds very much the close positive
coupling with the income. The more a rent in oil and gas sector, the better for the state and society:
each dollar created in oil and gas sector of average economy adds 1,86 dollars to GDP. But it on
average. The interactive member – the work of rent and institutional variables – adjusts this
communication for the specific countries.
The rent can be used less effectively. Despite of that fact, that oil and gas often are generally
exported the rent concluded in them can be used for the benefit of the state and society. But at bad
investment climate such phenomenon as flight of the capital is shown, and a part of a rent can be taken
out and invested abroad. Besides, in economies with bad institutes the most part of a rent can go for
non-productive consumption of elite (Суслов Н. И., 2015).
One more factor of decrease in efficiency of use of a rent – subsidizing of inefficient sectors of
economy. For example, in Russia via the mechanism of cut prices for energy and tariffs for production
services a considerable part of the Russian rent goes on support of the inefficient industrial enterprises
and other sectors of economy which differently would be unprofitable. Here a problem not only that
rent subsidies don't give effect of growth, but also that at the subsidized subjects incentives to
investment into new technologies decrease. As a result the effectiveness ratio of use of a rent in Russia
is not 2,28, as in Norway, but only 1,704 – lower than an average in the world.
The indicator of elasticity of GDP on a rent is also given in calculations. On the one hand, it’s
the higher, the more the multiplier of a rent. But on the other hand, that is more important, the more
dependence of the economy on a rent – its share in GDP. On all selection of oil and gas economies the
17
coefficient of elasticity of a rent is about 0,2, and for the countries from rent shares in GDP more than
40% it accepts values over 0,7. For two economies – the Republics of Congo and Kuwait – this
indicator exceeds unit. The higher this indicator the more important for the country to increase
volumes of extraction of hydrocarbons if it wants to maintain high rates of economic growth (Суслов
Н. И., 2015).
18
CHAPTER 2. METHODICAL APPROACHES TO ANALYZING THE
INFLUENCE OF OIL AND GAS RENT ON THE MONETARY POLICY
2.1. Influence of oil and gas export on the policy of the Russian Federation
In the early 2000s there were high prices of oil and gas in the world, and Russia began to gain
huge income from their export. Financing of all sectors of national economy, including health care,
education, science, infrastructure, was insufficient. The government was aimed to raise a standard of
living of citizens, expanding social support, to increase investments in infrastructure and to promote
business development. Thanks to an increase in prices for oil and gas resources in the world market
there were conditions for the solution of these tasks.
As the share of oil and gas resources in export of Russia is about 60%, this movement of an
exchange rate is especially sensitive. Though, it also depends on other factors such as GDP, investment
attractiveness, etc. That’s why the exchange rate of national currency unit moved behind price of oil
(Figure 2.1). We can see that at the points of minimal prices of oil and gas Russian ruble depreciated.
And at the points of maximal prices Russian ruble appreciated. At the same time Shmatt (Шмат В.В.,
2014) in his work tell that there is no strict dependence of ruble against dollar till 2014.
69
109
111
65
63
64
91
59
98
54
80
64
49
60
45
56
51
39
31
24
21
29
24
74
56
44
34
100
21
31
28
29
40
24
36
31
29
26
25
32
28
30
31
27
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Average nominal USD/RUB exchange rate
20
32
Average price of oil
Figure 2.1 — Dynamic of USD/RUB exchange rate and price of oil
Source: Central Bank of the Russian Federation
0
$/bbl
USD/RUB, rub
120
108
19
First of all, the main channel of influence of the income from export of hydrocarbons on the
Russian economy is the exchange rate of national monetary unit. However, the balance of payments of
the countries-exporters of natural resources can change faster, than in the developed countries which
don’t depend on export of natural resources. Increase in inflow of currency from sale of natural
resources at high prices can be replaced by its decrease, then the offer of currency in domestic market
decreases, and the exchange rate can quickly fall (Кудрин А., 2012).
Over the period from 2000 till 2008 ruble exchange rate steadily became stronger (Figure 2.2).
Negative increase of USD/RUB exchange rate tells about strengthening of Russian currency against
the dollar. Under the pressure of huge inflow of currency the Central bank of the Russian Federation
has been forced to reduce the participation in regulation of national currency. In 2000 — 2007 the
average effective exchange rate of ruble has become stronger for 77,2%, average annual ruble
exchange rate to dollar — for 123%. After devaluation in 2009 the ruble continued to appreciate.
70
80.00%
73.66%
70.00%
60
60.00%
USD/RUB, rub
50
50.00%
40.00%
40
27.69%
30
20
10
0
30.00%
20.00%
7.47%
-2.11% -1.84%
-3.89%
3.70%
-6.13%
11.94%
-2.97%
-5.92%
-4.17%
10.00%
3.24%
2.57%
Average nominal
USD/RUB
exchange rate
4.08%
0.00%
-10.00%
Increase over
previous year
-20.00%
Figure 2.2 — Dynamic of the change of USD/RUB exchange rate
Source: Central Bank of the Russian Federation
But measures of the Central bank and the government for control of strengthening of ruble
through purchase of currency in the market didn't allow to reduce inflation rate (Figure 2.3). In 2000
inflation rate steadily became to decrease until 2006. In 2006, it has fallen to 9%, but subsequently has
grown up and remained rather volatile and high. Over the period from 2009 till 2010, inflation rate was
at the level of 8,80% in spite of decrease of oil prices, because Central bank used the big amount of
reserves from Reserve fund in order to support financial system in Russia.
20
40.00%
35.00%
37.70%
30.00%
25.00%
23.64%
20.28%
20.00%
17.96%
15.00%
Inflation rate
13.78%
13.80%
10.00%
5.00%
4.77%
1.99%
0.00%
7.68%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure 2.3 — Inflation rate in Russia
Source: Central Bank of the Russian Federation
Because of inflow of foreign currency on accounts of the current and capital operations of the
balance of payments the currency income of economic entities in Russia grew. The income from oil
and gas export promoted essential growth of currency supply in domestic market (Figure 2.4). At the
same time the share of Oil and Gas export in the whole export of Russia steadily grew over the period
from 2000 till 2010, and in 2010 this share was approximately 60%.
600
66%
63% 62%
61%
500
52%
50% 51%
54% 55%
68%
66% 67% 67%
63% 63%
522
528
70%
527.3
60%
497.8
60%
471.6
50%
400.6
,bln $
400
345.7 351.5 354.6 340.9
354.4
303.6
310.1
300
254
243.8
218.6
183.2
148.9
200
100
190.8
337.8
303.4
40%
30%
203.4
190.7
20%
135.9
105 101.9 107.3
100.2
73.7
52.8 52.2 56.3
10%
0
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Oil and gas export
Export of products
Share of oil and gas export
Figure 2.4 — Export of oil and gas in Russia
Source: Central Bank of the Russian Federation
21
To constrain strengthening of currency in the conditions of the strong balance of payments, the
Central Bank has to buy or sell currency in the last 12 years. However, additional monetary issue in
domestic market was allowed and it wasn't possible to combat with monetary inflation (Figure 2.3). As
a result, foreign-exchange reserves were formed.
With significant growth of export revenue, which goes to domestic market, the Bank of Russia is
forced to purchase currency and to emit ruble. It makes active the channel of the offer of money
through currency transactions and limits use of other channels, including mechanisms of refinancing of
a banking system and discount rate.
The efforts made by the Central Bank of the Russian Federation only partly have softened the
main effect of strengthening of national currency — the import growth. In Russia import of goods and
services has increased from 61 billion dollars in 2000 to 367 billion in 2008. The increase rate of
import was significantly higher than the increase rate of GDP. Data shows that use of the oil and gas
income for investment into economy allows importers to purchase currency and promotes increase in
import, number of importers also grows (Кудрин А., 2012).
The income of the budget from oil and gas consists of the income from Mineral extraction tax
and export duties on oil, gas and oil products. After introduction of an oil and gas transfer the price of
oil of 50 dollars/barrel was reference point. This rule has been cancelled in 2009 because of crisis.
The new rule is introduced since 2013. It establishes "the base price for oil", average price for
the last five years with annual increase of calculated period for 1 year until period achieves 10 years.
According to the new option the standard size of Reserve fund decreases from 10 to 7% of GDP. At
the same time after its filling the additional oil and gas income not completely goes to the National
Wealth Fund. It’s divided: 50% goes to NWF, 50% goes to the budget.
When the base price is settled it is also necessary to consider risks of balance of the budget
during the reduction of prices of oil. The government should be aimed at the base price. It will provide
necessary margin of safety during the increase of budget deficit in case of price shocks in the world
markets of oil. Then the base price will increase only by inflation rate in the USA.
Thus, in the 2000th years the fast-growing oil and gas income went to expenses and
accumulation in reserve funds for different rules and, despite their improvement and more accurate
formulation, each new rule was softer and. As a good illustration of dependence of the budget on the
oil and gas income serves the indicator of "non-oil&gas deficit". It is the deficit covered by the oil and
gas income. Its size has grown from 1,8% of GDP in 2004 to 13,7% of GDP in 2009. Over the period
from 2000 to 2012 the government increased expenses rapidly (Кудрин, 2012).
The annual growth of expenses of the federal budget from 2005 to 2009 more than for 20% (and
even for 40% in 2007) was consequence of increase in the income of the government from oil and gas.
22
But the government saved the part of oil and gas income in Reserve fund and NWF in order to sterilize
excess money supply.
Similar record growth of expenses not only creates risks for a financial system of the country
such as influence on the exchange rate and inflation rate, but also becomes an independent factor of
potential instability of the Russian economy after reduction of prices of oil. Then the government won't
be able to provide earlier reached level of social support, financing of the main sectors of the
budgetary sphere and subsidies to economy. Reserve funds of the government can temporarily be a
source of support. But it may be not enough.
Saving of part of the income in reserve funds carries out the stabilizing role both for
macroeconomic indicators, and for the budgetary system. But even after that the increase of money in
the economy was excessive and additional source to inflation (Figure 2.5).
35000
70%
31,405
61%
30000
32,111
60%
27,405
50%
57%
49%
25000
24,483
50%
bln rub
43%
20000
39%
32%
15000
20,012
39%
36%
40%
40%
39%
33%
34%
31%
31%
10000
12,869
8,971
18%
3,205
4,354
1,609 2,131
2,009 2,785
715 1,151
763 1,147 1,535
30%
25%
20%
6,430 6,986 7,172
6,032
5000
15,268
31%
12,976
3,702
17%
5,939
5,063
15%
3,795 4,038
1%
10%
9%
2%
0
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
M0
M2
Increase of M2
Increase of M0
Figure 2.5 — Dynamic of increase of M2 and M0 over previous year in Russia
Source: Central Bank of the Russian Federation
Growth of quantity of money in economy much more exceeded the volume which it could
accept. For the entire period of 2000 — 2012, despite savings in reserve funds, the quantity of money
in economy never decreased. In the 2000s money supply grew annually more than by 30%, and in
2006 — 2007 — more than by 40%. After two crisis years when its growth was 0,8 and 17,7% (that is
even these years the quantity of money in economy hasn't decreased thanks to expenses from Reserve
23
fund), in 2010 it has again exceeded 30%. It is significantly more than rate of GDP growth and even if
the Russian economy would grow for 6 — 7% a year, then the increase of money would remain
excessive.
At the same time insignificant part of income gained by the country from export of oil and gas
was saved in reserve funds (Figure 2.6). In 2008 the budget has spent an equivalent of 94,7 billion
dollars, and has preserved 82,2 billion. Expenses from the reserve funds of the government in 2009 —
2010 have provided stability of both the budgets, and financial system of the country in general.
250
200
176.4
150
108.4
100
76.3
9.9
0
1.5
13.9
1.2
17.7
16.9
2.2
74.1
70.3
93.9
82.2
Oil and gas
income, bln $
51.7
35.9
50
127.7
113.4
Other sources of
income, bln $
23.3
Oil and gas
savings, bln $
0.7
-31.9
-50
-74.9
-100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 2.6 — Government budget of Russia
Source: Ministry of Finances
Summing up the result, one may say, that receipts from sale of oil and gas in many respects
depended on an exchange rate of national currency. Undoubtedly, even at strong ruble and growth of
volumes of oil and gas export the income made an impressive part of the budget, a part of which
collected in reserve funds. Meanwhile, money supply quickly grew since the beginning of the 2000th
that couldn't but provoke increase in the rate of inflation in the country.
24
2.2. Method of calculating oil and gas rent
The right of the citizen of Russia is to know what profit is got by oil and gas companies as they
use minerals which are property of the state, and, therefore, the property of everyone.
Determination of a natural rent is the main source of distinctions in estimates of investment
incomes. In economic science two of its directions are provided. One, carrying on tradition of classical
political economy, considers a rent as result of use of a competitive limited resource (originally lands).
At the same time the rent appears the legal income of the owner of this limited resource (originally –
the land owner).
Other direction can be characterized as a tendency of washing out of this classical determination
and identification of a rent. It is based on the idea that the entrepreneur faces a set of various
restrictions, each of which (legally or illegally) can be a source of the rent payment reducing his profit.
For example, prohibition will use certain types of gasoline a source of additional incomes of those oil
companies which are capable to make the permitted types of gasolines. Introduction in the institutional
theory of a phenomenon of establishment by officials of restrictions, their rights to grant permission
(for example, licenses) as a possible source of corruption is based on it, in particular.
As the most important part of an absolute oil rent (and its total amount) in Russia serves excess
by export price of crude oil of its internal price and size of costs as average, and limiting. The huge gap
between levels of export and internal prices undoubtedly demonstrates that in system of rent taxes the
duty tax on export of crude oil shall be the major.
Many researchers claim that the oil and gas rent (its biggest part) is taken in favor of the state by
means of such tools as export duty and a MET. These researchers are, for example, Suslov N. I. and
his article "Rent — Our Everything", Volkonsky V. A., Kuzovkin A. I., Mudretsov A. F. in their
article "Natural Rent and Methods of its Assessment", Clifford Gaddy and Barry Ikes in their article
"Resource Rent and Economy of Russia".
Authors of the article "Natural Rent and Methods of its Assessment" claim that estimates of an
oil rent can be received by the elementary calculation flowing costs of production and transportation
(prime cost minus the taxes included in prime cost). Then to define the standard income of an oil
complex, i.e. the income which would be gained by the enterprises or the companies if they worked in
the branches which aren't using such natural resources as oil. For this purpose the current expenses are
multiplied by the profitability, average on the national economy, calculated according to the data on
expenses published by Goskomstat and the profits which aren't including the export income (on large
and medium-sized enterprises). Rent income of oil and gas complex is excess by the total primary
income of its standard value.
25
We can get close results if to determine the standard income by the profitability referred not to
the current expenses, but to the cost of fixed assets. Mathematically it can be described as follows.
We will enter designations:
R – revenue of the enterprises and organizations before payment of taxes;
E – the current expenses (material, labor and so on) on production, transportation, refinery;
T – the amount of taxes in the enterprises and the organizations;
T = Tp + Ti, where Tp and Ti – taxes on products and income tax;
P – profit (balanced financial result);
I – the actual primary income of the enterprises and organizations before payment of taxes:
I = R – E = P + Tp
(12)
F – value of fixed assets.
If these indicators characterize sector of the economy or the industry, then they are supplied with
the top index (Ri, Ei etc) where i – number of sector. Use of an indicator without the top index means
that it characterizes all national economy. The rent income (Rent) gained by sectors using natural
resources is a difference between their actual primary income from use of labor, capital and other
resources, except natural, and the "standard" income (In):
Renti = Ii – Iin
(13)
Standard income Iin on sectors using natural resources can be calculated with one of the
formulas:
Iin = КeEi
(14-a)
Iin = КfFi
(14-b)
Or
The quantitative assessment of Кe and Кf is complicated because of a shortcoming and
unreliability of statistical information, and also incomparability of conditions of production in the main
extracting sectors and sectors making services or sectors with a big share of small business.
The main sectors producing rent – it is obligatory the sectors exporting a considerable share of
production: the export share of other sectors is small. At the same time the internal prices of their
production contain only very small part of a rent.
Goskomstat of Russia publishes data on total costs of production (works, services) and on profit
(balanced financial result) – in general on the national economy and branches of the economy. These
26
data are based on volumes of release and expenses in the internal prices. Therefore indicators of profit
don't include the export income. However it is necessary to consider that 75-80% of the Russian export
make "mineral products" and "metals, gemstones and their products ". The specified data on profit also
characterize that effect which is gained generally by the enterprises which aren't using the most
profitable of natural resources. Therefore they are suitable for estimate of the standard income of the
enterprises.
Adding to the specified indicators of income the amount of taxes on products (without export
duties), we will receive the sum of primary income without the export income (we will designate this
indicator of D). The relation of this indicator to expenses or to fixed assets gives the values of
profitability which are characterizing branches with a small share of export and not having a natural
rent:
Кe = D/E, Кf = D/F
(15)
The assessment of standard income Iin in the sectors producing rent has shown that the formula
(14-b) gives close, but permanently smaller Iin value (and therefore, bigger value of a rent), than when
using a formula (14-a).
Summing up the result, we can say, that it is possible to calculate a rent, having enough data on
expenses of the oil and gas enterprises, including tax rates, export duties, resource prices and product
prices, and also average standard of profitability on branches of economy. As it was already told
earlier, the investment income of an oil complex - it is excess by the total primary income of its
standard value. Authors showed how to count average profitability of branches with a small share
exports and not having a natural rent. The formula 14-b with the relation of the sum of primary income
without the export income to fixed assets gives the closest value. Having increased coefficient of Кf by
the sum of fixed assets, we will gain standard income. Having subtracted the standard income from
total income, we will receive approximate value of a rent in the sum of all income.
2.3. Selecting and describing of the models for analyzing oil and gas rent
We will examine a variety of different models for panel data. Broadly, they can be arranged as
follows:
1. Fixed Effects: If zi is unobserved, but correlated with xit, then the least squares estimator of β
is biased and inconsistent as a consequence of an omitted variable.
However, in this instance, the model:
yit = x’it β + αi + εit,
(16)
27
where αi = z’iα, embodies all the observable effects and specifies an estimable conditional mean.
This fixed effects approach takes αi to be a group-specific constant term in the regression model. It
should be noted that the term “fixed” as used here signifies the correlation of ci and xit, not that ci is
nonstochastic.
2. Random Effects: If the unobserved individual heterogeneity, however formulated, can be
assumed to be uncorrelated with the included variables, then the model may be formulated as:
yit = x’itβ + E [z’iα] + {z’iα − E [z’iα]} + εit
(17)
= x’itβ + α + ui + εit,
that is, as a linear regression model with a compound disturbance that may be consistently, albeit
inefficiently, estimated by least squares. This random effects approach specifies that ui is a groupspecific random element, similar to εit except that for each group, there is but a single draw that enters
the regression identically in each period.
Again, the crucial distinction between fixed and random effects is whether the unobserved
individual effect embodies elements that are correlated with the regressors in the model, not whether
these effects are stochastic or not. We will examine this basic formulation, then consider an extension
to a dynamic model.
The equation in this work will have the following view:
Yit = ∑𝐾
𝑘=1 𝑥𝑘𝑖𝑡 𝛽𝑘𝑖𝑡 + εit, i = 1, …, N, t = 1, …, T,
Where K – number of factors, N – number of objects, T – number of periods
(18)
28
CHAPTER 3. ANALYZING THE DEGREE OF INFLUENCE OF OIL AND
GAS RENT ON THE MONETARY POLICY IN HYDROCARBON-EXPORTING
COUNTRIES
3.1. Selecting of the factors and making of the regression
Regression analysis is a method of statistical data processing, by which is verified the existence
of links between two or more variables, it can determine the need for inclusion of certain factors in the
regression equation and estimate the resulting regression equation to meet the identified constraints
(using the coefficient of determination). The coefficient of determination is a kind of measure of a
random variable depending on many others.
For the purpose of determining the value of oil and gas rent in execution of monetary policy we
have to point the factors which may be significant in the future equation of regression on the examples
of Russia and Norway (Table 3.1, Table 3.2).
Table 3.1 — Factors for Russia
Nominal
Oil and gas rent Real effective
Inflation
Year
interest
per capita,
exchange rate,
rate, CPI
rate
thousands US$
2010 = 100
2000
950.00
35.16
20.78
0.36
53.05
2001
1000.00
19.38
21.46
0.38
62.37
2002
1050.00
15.82
15.79
0.37
65.14
2003
1120.00
9.12
13.68
0.48
67.29
2004
1200.00
8.29
10.86
0.70
72.52
2005
1280.00
8.11
12.68
0.92
79.41
2006
1390.00
6.98
9.69
1.19
87.28
2007
1500.00
6.72
8.99
1.25
92.04
Russia
2008
1580.00
7.52
14.11
1.74
98.35
2009
1460.00
9.87
11.67
1.04
91.73
2010
1520.00
7.83
6.84
1.20
100.00
2011
1590.00
8.06
8.43
1.93
104.91
2012
1650.00
8.15
5.08
2.07
106.49
2013
1670.00
7.33
6.78
1.91
108.40
2014
1680.00
8.46
7.81
1.73
99.21
2015
1630.00
10.89
15.53
0.88
81.90
Sources: World Bank, Central Bank of Russian Federation, Trading Economies, OECD Stata
Real GDP,
billion US$
29
Table 3.2 — Factors for Norway
Nominal
Inflation
Year
interest
rate, CPI
rate
2000
367.06
6.22
3,09
2001
374.71
6.24
3,02
2002
380.10
6.38
1,29
2003
383.60
5.05
2,48
2004
398.78
4.37
0,47
2005
409.25
3.75
1,52
2006
419.05
4.08
2,33
2007
431.33
4.77
0,73
Norway
2008
432.99
4.46
3,77
2009
425.96
4.00
2,17
2010
428.52
3.53
2,40
2011
432.68
3.14
1,30
2012
444.57
2.10
0,71
2013
449.01
2.58
2,13
2014
457.63
2.52
2,03
2015
465.00
1.57
2,17
Sources: World Bank, FRED, Trading Economies, OECD Stata
Real GDP,
billions US$
Oil and gas rent
per capita,
thousands US$
4.37
3.60
3.41
4.24
5.44
7.55
8.66
8.27
11.23
6.46
6.62
9.69
9.82
8.50
8.64
9.97
Real effective
exchange rate,
2010 = 100
87,69
90,73
98,47
97,30
93,70
97,32
97,20
97,69
97,75
95,20
100,00
100,58
100,27
98,90
94,03
86,26
In the full list of countries there are Russia, Azerbaijan, Algeria, Angola, Brunei, Venezuela,
Iraq, Iran, Kazakhstan, Qatar, Kuwait, Libya, Nigeria, Norway, UAE, Oman, Saudi Arabia, Trinidad
and Tobago, Mexico, Equatorial Guinea.
This list of countries was chosen for investigation, because in these countries Oil and Gas rent
per capita takes the biggest share in the total GDP per capita. Share of the total Oil and Gas rent in
total GDP is also very high.
The time period of 15 years is chosen for the analysis of monetary policies in hydrocarbonexporting countries.
There are following factors in the model:
1. Real GDP – is an inflation-adjusted measure that reflects the value of all goods and services
produced by an economy in a given year, expressed in base-year prices.
2. Nominal interest rate - refers to the interest rate before taking inflation into account.
3. Inflation rate - the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling. The aggregate index is taken for each year.
4. Oil and gas rent per capita - product of unit rents from oil extraction and production quantity.
World Bank staff estimates rent using data from GEM Commodities database, IMF World Economic
Outlook, International Energy Agency, Organization of the Petroleum Exporting Countries, United
Nation's Monthly Bulletin of Statistics, BP and IPE.
30
The formulas are:
Rents = Unit Rents * Production
Unit Rents = Unit Price – Unit Cost
5) Real effective exchange rate - is the weighted average of a country's currency relative to an
index or basket of other major currencies, adjusted for the effects of inflation.
In the Figure 3.1 we see a share of Oil and gas rent per capita in total GDP per capita in chosen
countries. In such countries as Kuwait, Saudi Arabia, Libya, Oman, Iraq and Angola oil and gas rent
takes a half of total GDP per capita. Especially, for Middle-East countries oil and gas rent plays an
important role. For example, in the USA share of the oil and gas rent per capita in total GDP per capita
is about 0,3%, that is absolutely insignificant. It’s important to notice, that the majority of countries in
the list are developing countries. This fact says that, perhaps, the oil and gas rent has an influence on
such macro indexes as interest rate.
Nigeria
Angola
Iraq
Algeria
Azerbaijan
Iran
Mexico
Kazakhstan
Venezuela
Libya
Russia
Trinidad and Tobago
Oman
Saudi Arabia
Equatiorial Guinea
UAE
Brunei
Kuwait
Qatar
Norway
15.3%
41.3%
60.6%
22.7%
37.3%
23.5%
6.4%
18.7%
15.2%
55.0%
13.8%
Oil and Gas
rent per capita
19.0%
55.0%
47.5%
23.5%
26.2%
24.0%
56.7%
21.4%
9.7%
0.00
20000.00 40000.00 60000.00 80000.00 100000.00120000.00
Figure 3.1 — Share of Oil and gas rent per capita in total GDP per capita, year 2012
Source: World bank
Starting with the construction of the analysis there is the basic multivariate model that shows the
link between the interest rate and all the factors that may influence this rate.
31
The model takes the following form:
Iratejt = β0jt + β1Iratejt-1 + β2GDPjt + β3Rentjt + β4REERjt + β5Inflationjt + εjt
(19)
Here:
Iratejt — Nominal interest rate (%)
GDPjt — Real GDP (in billions of US dollars)
Rentjt — Oil and gas rent per capita (in thousands of US dollars)
REERjt — Real effective exchange rate (2010 = 100)
Inflationjt — Inflation rate, consumer prices (%)
All variables will be taken in natural logarithms.
This equation is a Monetary Policy Rule taking into account the interest rate smoothing case, the
influence of exchange rate, besides the traditional GDP and inflation rate. When the Central Bank
chooses the interest rate, it is able to influence aggregate demand through the IS curve.
Taylor’s rule is a proposed guideline for how central banks should alter interest rates in response
to changes in economic conditions. Taylor’s rule, introduced by economist John Taylor, was
established to adjust and set prudent rates for the short-term stabilization of the economy, while still
maintaining long-term growth.
Taylor's rule has the set of modifications and any of rules including two variables (GDP gap and
Inflation), has a name of Taylor. Supporters of the Taylor's rule attribute it a set of advantages. First, it
has stabilization properties, i.e. the rule minimizes cyclic oscillations in economy. Secondly, it very
simple and to the central bank it is possible to put it into practice. In the third, ex post it’s is easy to
check its efficiency in practice. In the fourth, Taylor's Rule thanks to the simplicity serves as the fine
communication medium between the monetary authorities and the private sector, informing society on
monetary policy implementation methods. In the fifth, in the perspective version of the Taylor's rule
the expected inflation as the trigger of response of the central bank is used, and according to the
concept of the effective market (efficient market concept) Taylor's rule reflect all available economic
information.
So, on the example of Russia and Norway the final data representation will be the following
(Table 3.3). Full list of countries and data you can see in the Appendix 1.
32
Table 3.3 — Representation of the data for analyzing
Year
GDPjt
Iratejt
Inflationjt
Rentjt
REERjt
2000
950.00
35.16
20.78
0.36
53.05
2001
1000.00
19.38
21.46
0.38
62.37
2002
1050.00
15.82
15.79
0.37
65.14
2003
1120.00
9.12
13.68
0.48
67.29
2004
1200.00
8.29
10.86
0.70
72.52
2005
1280.00
8.11
12.68
0.92
79.41
2006
1390.00
6.98
9.69
1.19
87.28
2007
1500.00
6.72
8.99
1.25
92.04
Russia
2008
1580.00
7.52
14.11
1.74
98.35
2009
1460.00
9.87
11.67
1.04
91.73
2010
1520.00
7.83
6.84
1.20
100.00
2011
1590.00
8.06
8.43
1.93
104.91
2012
1650.00
8.15
5.08
2.07
106.49
2013
1670.00
7.33
6.78
1.91
108.40
2014
1680.00
8.46
7.81
1.73
99.21
2015
1630.00
10.89
15.53
0.88
81.90
2000
367.06
6.22
3,09
4.37
87,69
2001
374.71
6.24
3,02
3.60
90,73
2002
380.10
6.38
1,29
3.41
98,47
2003
383.60
5.05
2,48
4.24
97,30
2004
398.78
4.37
0,47
5.44
93,70
2005
409.25
3.75
1,52
7.55
97,32
2006
419.05
4.08
2,33
8.66
97,20
2007
431.33
4.77
0,73
8.27
97,69
Norway
2008
432.99
4.46
3,77
11.23
97,75
2009
425.96
4.00
2,17
6.46
95,20
2010
428.52
3.53
2,40
6.62
100,00
2011
432.68
3.14
1,30
9.69
100,58
2012
444.57
2.10
0,71
9.82
100,27
2013
449.01
2.58
2,13
8.50
98,90
2014
457.63
2.52
2,03
8.64
94,03
2015
465.00
1.57
2,17
9.97
86,26
Source: World Bank, Central Bank of Russian Federation, Trading Economies, OECD Stata
i
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
The panel data analysis will be done in the program Stata. There it is possible to use some
commands for the empirical estimation of different types of models: regression with fixed effects and
regression with random effects.
First of all, we have to give an i-number to every country in the list with help of the command:
egen countrynum=group(Country)
Then we have to check the balance of the parameters Country and Year with following
commands:
33
xtset countrynum
xtset countrynum Year, yearly
These operations showed that our panel is balanced
As we use natural logarithms, then we should generate them with list of commands:
gen ln_Irate=ln(Irate)
gen ln_Irate1=ln(Irate1)
gen ln_GDP=ln(GDP)
gen ln_Rent=ln(Rent)
gen ln_REER=ln(REER)
gen ln_Inflation=ln(Inflation)
Now it’s possible to make the analysis of models with fixed effects and random effects with the
list of commands:
1) For the model with one fixed effect
xtreg ln_Irate ln_Irate1 ln_GDP ln_Rent ln_REER ln_Inflation, fe
2) For the model with random effects
xtreg ln_Irate ln_Irate1 ln_GDP ln_Rent ln_REER ln_Inflation, re
Then, it is possible to make Hausman test to evaluate the models with fixed and random effects
using the following command:
quietly xtreg ln_Irate ln_Irate1 ln_GDP ln_Rent ln_REER ln_Inflation, fe
estimates store fix
quietly xtreg ln_Irate ln_Irate1 ln_GDP ln_Rent ln_REER ln_Inflation, re
estimates store ran
hausman fix ran
3.2. Influence of the factors in the regression
In this research the following model which is based on "Taylor's rule" has been constructed. It is
one of rules of monetary policy which defines how to change an interest rate in case of change of
indicators of GDP, inflation and other economic conditions. This model has included also an oil and
gas rent to define extent of its influence on change of an interest rate. The studied model is model of
panel data for 20 mainly developing countries, data on which are submitted from 2000 to 2015.
In this work it is supposed that rent per capita, its change, influences formation of an interest
rate. As factors the gap of GDP (in this case the natural logarithm of real GDP has been used), the rate
of inflation, an interest rate for the previous period and real effective exchange rate of national
34
currency have also been chosen. It is worth noticing that the gap of GDP and the rate of inflation are
important parameters which usually are always present at various variations of this model.
The equation can be written as follow:
Iratejt = β0jt + β1Iratejt-1 + β2GDPjt + β3Rentjt + β4REERjt + β5Inflationjt + εjt
(19)
Here:
Iratejt — Nominal interest rate (%)
GDPjt — Real GDP (in billions of US dollars)
Rentjt — Oil and gas rent per capita (in thousands of US dollars)
REERjt — Real effective exchange rate (2010 = 100)
Inflationjt — Inflation rate, consumer prices (%)
All sizes will be taken in natural logarithms, with the purpose to avoid a stationarity problem.
Also, the logarithmic form should be used where there is a basis to assume constancy of elasticity. In
other words, in this work there is a purpose to prove elasticity of an interest rate on oil and gas rent
therefore use of natural logarithms is quite justified.
In regression model with the fixed effects (Table 3.4) all factors, except for real GDP, were
statistically significant as p-value < 0,05.
The F-test < 0,05 that says about consistency of the model.
Table 3.4 — Panel model with fixed effects
20 countries (2000-2015, balanced panel, 320 observations)
β1
0,6049***
β2
-0,0446
β3
-0,1436***
β4
0,1848**
β5
0,0978***
F-statistics
F(5, 279) = 113,69 [0.0000]
R^2
67,8%
***, **, * - Significance at 1%, 5%, 10% levels
The variable Rent has a negative impact on formation of an interest rate (β3 = -0,1436).
Remaining factors have a positive impact. The greatest influence, obviously, has a value of an interest
rate for the previous period (β1 = 0,6049).
35
In regression model with random effects (Table 3.5) the GDP and REER variables are
statistically insignificant as P-value > 0,05.
Table 3.5 — Panel model with random effects
20 countries (2000-2015, balanced panel, 320 observations)
β1
0,8170***
β2
-0,0196
β3
-0,0505***
β4
0,0776
β5
0,0749***
Wald
2489,36
R^2
65,7%
***, **, * - Significance at 1%, 5%, 10% levels
In this model Rent is statistically significant with the negative influence on dependent variable
(β3 = -0,0505)
Expression of corr (u_i, X) = 0 (assumed) reflects the important hypothesis which is the
cornerstone of the model. Regressors shall be uncorrelated with unobservable random effects.
Otherwise estimation of the model will be inconsistent.
Further the test of Hausman which is intended to evaluate model with the fixed effects and
model with random effects and to select the most suitable was done (Table 3.6).
Table 3.6 — Hausman test
Coefficients
(b-B)
Sqrt (diag (V_b –
(b) fix
B (ran)
Difference
V_B)) S.E.
Irate (t-1)
0,6049
0,8170
-0,2121
0,0294
GDP
-0,0446
-0,0196
-0,0250
0,0774
Rent
-0,1436
-0,0505
-0,0931
0,0487
REER
0,1848
0,0776
0,1072
0,0403
Inflation
0,0978
0,0749
0,0228
0,0132
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
chi2(5) = 58,32
Prob>chi2 = 0.0000
36
In the test the following main hypothesis is checked:
H0: corr (ui , Xit) = 0 or
ui – can be considered as random effects;
at alternative
HA: corr (αi , Xit) ≠ 0 or
ui – should be considered as fixed effects
As p-level < 0,01, the main hypothesis is rejected.
The received results allow to make a conclusion that in our case the model with the fixed
individual effects approaches. It also should have been expected as for the research the concrete
countries were chosen, which weren't changed year by year.
3.3. Analysis of the results of the panel data modeling
In the model with fixed effects GDP was an insignificant factor. In the model with random
effects GDP and REER were insignificant factors. Results showed that the most suitable model is the
model with the fixed effects. The oil and gas rent in this model has a negative impact on formation of
an interest rate, coefficient β3. The coefficient of determination R^2 is equal to 67, 8% and shows what
share of a change of Y is considered in the model and explained by change of variables.
Table 3.7 — Comparison of two models.
Model with fixed effects
Model with random effects
β1
0,6049***
0,8170***
β2
-0,0446
-0,0196
β3
-0,1436***
-0,0505***
β4
0,1848**
0,0776
β5
0,0978***
0,0749***
R^2
67, 8%
65, 7%
***, **, * - Significance at 1%, 5%, 10% levels
It had been found that nominal interest rate depends on the oil and gas rent per capita. This is
being cleared out as β3 shows that 1% increase in oil and gas rent per capita giving 0.14% decrease in
nominal interest rate Moreover, one can see the coefficient of Real effective exchange rate β4 is
positive and equals 0,18 . You can also see that β5 is positive and equals 0,09.
One can see clearly the significant role oil and gas rent in setting nominal interest rate. As the oil
and gas rent grows the nominal interest rate go down and vice versa. No significant impact of real
GDP.
37
It’s important to mention, that Taylor’s rule works not well for the countries where nominal
interest rate is very low (for example, equals 0 like in Japan), but in countries in this work interest rates
are quite high, so the using of Taylor’s rule is reasonable. The influence of inflation on interest rate is
absolutely obvious: the higher inflation the higher interest rate. Real effective exchange rate plays a
role of additional factor which shows the real strength of national currency – whether overvalued it or
not. And if the currency becomes strong, the interest rate goes up.
38
CONCLUSION
In 2000 — 2012 there is sharp increase of the balance of payments due to increase in prices for
oil and gas resources. As a result actual effective ruble exchange rate has grown. The central bank of
the Russian Federation has chosen policy of partial control of national currency, increasing gold and
foreign exchange reserves with help of interventions in the foreign exchange market and softening a
monetary policy. As a result, increase of import and decrease of competitiveness of the Russian
economy became the main consequence of this policy.
The main instrument of control of negative influence of the strong balance of payments is the
policy of the government on saving of the part of the oil and gas income in Reserve fund and National
welfare fund. Level of savings for last period was insufficient because of continuous revision and
mitigation of criteria of reserve funds’ formation. Excess growth of the money supply became an
additional consequence of policy of the Central Bank of the Russian Federation and government. They
mitigate the monetary policy that didn’t allow to reach target indicators of inflation and to lower credit
rates in the market.
Saving of part of the income in reserve funds carries out the stabilizing role both for
macroeconomic indicators, and for the budgetary system. But even after that the increase of money in
the economy was excessive and additional source to inflation.
Growth of quantity of money in economy much more exceeded the volume which it could
accept. For the entire period of 2000 — 2012, despite savings in reserve funds, the quantity of money
in economy never decreased.
At the same time oil and gas rent must be invested into institutes, human capital, science, social
sphere. High oil and gas prices keep rents high despite flagging output. And as long as rents remain
extraordinarily high, political actors continue to be consumed by the struggle for control of distribution
of rents.
In works of various researchers it is possible to see that the oil and gas rent plays an important
role in economy and even policy of the state. Rab Arezki and Markus Brückner believe that increase in
an oil rent promotes corruption growth, deterioration in a political situation, at the same time leads to
significant increase in civil liberties.
Adam Ondo and Zachary Taylor claim that mechanisms of increase in capital outflow at
increase in a share of a rent in GDP are corruption, economic and political instability. The corrupted
power controls oil-extracting sector that gives them the chance illegally to take out profit from the
country. Economic stability of the country suffers because it actually becomes dependent on the only
resource – oil. It can lead to devaluation of currency that makes citizens and companies to save and
39
invest the capital in other countries. It means that direct foreign investments from oil-producing
countries increase, thereby being added to capital outflow size.
Professor Suslov in the research says that the rent gives a strong impulse to development of
economy. The rent can influence quality of institutes: to improve them or to brake institutional
development. On average, each dollar created in oil and gas sector of average economy adds 1,86
dollars to GDP without the interactive member which corrects this communication for the concrete
countries.
The rent can be used less effectively. Despite of that fact, that oil and gas often are generally
exported the rent concluded in them can be used for the benefit of the state and society. But at bad
investment climate such phenomenon as flight of the capital is shown, and a part of a rent can be taken
out and invested abroad. Besides, in economies with bad institutes the most part of a rent can go for
non-productive consumption of elite.
Subsidizing of inefficient sectors of economy - one more factor of decrease in efficiency of use
of a rent. For example, in Russia via the mechanism of cut prices for energy and tariffs for production
services a considerable part of the Russian rent goes on support of the inefficient industrial enterprises
and other sectors of economy which differently would be unprofitable. Here a problem not only that
rent subsidies don't give effect of growth, but also that at the subsidized subjects incentives to
investment into new technologies decrease. As a result the effectiveness ratio of use of a rent in Russia
is not 2,28, as in Norway, but only 1,704 – lower than an average in the world.
In this research it has been shown that in the majority of the countries participating in the
analysis, the share of oil and gas rent per capita in the general share of GDP per capita in 2012
occupied from 6 to 60% that is , naturally, a lot. In six countries this share reaches 50% and more.
Obviously, it can't but have impact on the economy of the countries.
On the basis of models of panel data with fixed effects and random effects the econometric
analysis has been done. Results have shown that the most preferable is the FE-model in which the oil
and gas rent has a negative impact on formation of an interest rate. The coefficient at a regressor 0,14
says that at change of size of oil and gas a rent per capita by 1%, the nominal interest rate is corrected
approximately by 0,14% in the opposite direction. The coefficient seems low, but if to consider that in
many countries the oil and gas rent per capita increased even by 50% to previous year, then its
influence on formation of an interest rate becomes already more considerable.
Real GDP didn't justify the influence on dependent variable. The real effective exchange rate
and inflation have an impact on an interest rate with coefficients 0,18 and 0,09 respectively. Their
influence in this model is regarded as the positive.
For the analysis the countries where a rent share in GDP and in GDP per capita are the highest
were selected. These countries are in the top 30 of the countries by oil and gas production. Such large
40
players as the USA weren't taken because of extremely low share of a rent in GDP. For comparison, in
the United States, the share of an oil and gas rent per capita in the general share of GDP per capita is
only 0,3%.
This work is useful that it explains the degree of influence of an oil and gas rent on monetary
policy of the hydrocarbon-exporting countries, namely on formation of an interest rate. Increase in oil
and gas rent per capita leads to gradual decrease in an interest rate that positively influences an
economic environment within the country, providing the population and the companies with the cheap
credits. Also, it positively influences unemployment rate, leaving it at rather low level even in
comparison with the European developed countries. The exception is only made by the countries
enduring political shocks (wars, civil revolutions), such as Libya, Iran, Iraq. However, a low interest
rate negatively influences investment. In addition, a low interest rate may cause increase in prices for
the real estate because of increase in demand.
Perhaps, this work will be useful for:
- monetary structures for correction of monetary policy taking into account influence of oil and
gas rent.
- investors who monitor changes in the market of oil and oil products.
- tax structures for correction of tax rates for production and export of oil and gas.
- institutes dealing with issues of effectiveness of using oil and gas rent, transparency of its
distribution for branches of the economy.
41
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