Two three-letter words sum up Russia’s economic good fortune under Vladimir Putin: oil and gas.

Russia was bankrupt just a decade ago, its economy in meltdown after the Government defaulted on its foreign debt and the stock market lost two thirds of its value in a single day.

Oil was just $11 a barrel in 1998, half the level of the year before, but the price rebounded sharply to $35 just as Mr Putin came to power in 2000. Foreign currency reserves tripled and Russia — the world’s largest oil producer and second only to Saudi Arabia as an exporter — has been awash with money ever since as the price of crude has risen to above $100 today.

It has wiped out its international debt and built up foreign currency reserves of $480 billion, the third largest in the world after China and Japan. It has also built up a vast stabilisation fund — worth $144 billion and growing — to support future investment and insulate the state budget against falls in the oil price.

Dmitri Medvedev inherits a country transformed by oil, though he cannot hope to enjoy Mr Putin’s luck in seeing revenues triple. One immediate challenge is to tame inflation at almost 12 per cent as the petro-fuelled economy threatens to overheat.

But the former chairman of Gazprom knows that Russia’s status as an energy superpower can only grow. Russia is the world’s largest gas exporter and has the world’s largest proven reserves. It supplies a third of the EU’s gas imports, a dependence that has triggered alarm bells in Brussels, and is extending its reach with new gas pipelines and deals to sell direct to consumers.

Critics say that the Kremlin is already using its energy influence to reassert political influence over its former Soviet neighbours, raising prices and manipulating supply. Russia replies that it is simply switching to market prices for everybody.

Some experts warn that Russia has become dangerously dependent on energy and that a dip in prices would hit the economy hard. Mr Medvedev has made diversification of the economy a central part of his programme, promising to encourage the growth of small businesses by slashing red tape and fighting bureaucratic corruption.

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