Russian Oil Curse Part II

Putin has relied upon the inherited wealth of the hydrocarbon sector to circumvent change and shore up his power. His fortunes are now tied to oil and gas more than ever before, despite the fact that Russia is quickly running out of cheap oil. In the near future, petroleum reserves will become much harder and more costly to access. The gas deal with China underscores Russia’s vulnerability. After more than a year of haggling, it is clear that Putin signed up for low-priced gas deliveries that depend on a yet-to-be-built costly infrastructure from a position of weakness.

If 2014 is the year that Putin officially revealed his intentions, in retrospect it might also be viewed as the pinnacle of his power and Russia’s global pretensions. __ Paul Hockenos from Berlin

Why is Putin in such a hurry?

Russia Oil Curse Economy Wikipedia: Russia Export Treemap

Russia Oil Curse Economy
Wikipedia: Russia Export Treemap

Russian president Vladimir Putin is in a hurry to re-build the grand Russian / Soviet empire. In doing so he is taking shortcuts and using hasty strategies that make Russia a less pleasant place to live, and weaken the long-term prospects for the Russian economy to develop into a diversified, self-organised entity.

We will look back at 2014 as the year Russian President Vladimir Putin pushed all his chips into the center of the table — risking everything to make Russia a world power again…

… A cornerstone in Putin’s power play, Russian oil and gas supplies are essential to a resurgent Russia. Only Saudi Arabia exports more oil than Russia, which boasts nearly a quarter of the world’s (non-OPEC) oil production. But Russia’s lopsided dependence on its petroleum revenues (which account for 70 percent of the country’s annual exports and 52 percent of the federal budget) undermines its political stability in the long run. Putin’s recapture of the mineral extraction industry from the private sector has hastened the country’s slide into authoritarianism and state-controlled capitalism. __ Paul Hockenos: Russia’s Oil Curse

Since the days of the Tsars, Russia has always had an authoritarian, top-heavy government. Under the Soviets, central dictatorial control of the economy and society went to extremes — like a body-builder taking too much steroids and other artificial stimulants. Although outwardly healthy, the Soviet system began a long implosion — hastened by volatility in global energy prices.

The “curse of oil,” a phenomenon in which mineral wealth corrupts autocratic states and often leads to civil strife, is usually the misfortune of underdeveloped countries. Russia … clearly has many of the same risks as the “petrostates”: namely, lack of democracy, domestic conflict, stunted reforms, high corruption and economic disarray.

In the past 25 years, Russia’s petrochemical resources have lifted the country out of the dumps but also brought it crashing down. They also created favorable conditions for Putin to amass power in an ever more centralized state, silence the opposition and civil society and, as of 2014, assert a claim to great-power status by annexing a sovereign territory.

According to Michael L. Ross, the author of “The Oil Curse,” petroleum-rich states that rely on extraction of rents from state-owned assets, rather than the tax revenue of their wage earners and productive sectors, tend to be more authoritarian. Those states, for example, are not beholden to their citizens in terms of expenditures. Accountability is indefinitely suspended while social services and infrastructure projects are given or taken away arbitrarily by a paternalistic state. __ Oil Curse of Petroleum Dictatorships

Oil dictators have more power to dictate the terms of existence for the citizens of oil dictatorships. When an oil dictator also displays megalomaniacal tendencies, interested observers should take warning.

… oil-addicted countries are constantly at the mercy of the world market, which makes long-term planning impossible. Their economies are extremely sensitive to marginal shifts in supply and demand. In a volatile industry such as energy, the country’s fate is determined by prices, which can mean boom or bust. The lack of transparency inherent in petrochemical industry dealings facilitates corruption and conceals incompetence. In 2010, for example, Putin pushed through laws halting publication of information about the government’s oil and gas businesses, making the records off limits to critics and the media.

In his book “Wheel of Fortune,” Georgetown University professor Thane Gustafson argues that “inherited wealth from Soviet oil supports a comfortable systems of rents that is all too tempting to linger. Yet precisely because oil is a wasting asset, any prolonged stasis is not sustainable.” Gustafson recommends continually modernizing the hydrocarbon industry in order to avoid economic decline. In the same vein, if profits are not reinvested in improving measures to diversify the overall economy, other sectors will inevitably become less competitive. __

Russia is dependent upon western energy companies such as BP and Exxon, to modernise Russia’s decrepit Soviet-era oil & gas infrastructure. But since it is certain that Putin will sooner or later seize back all infrastructure, invested assets, and foreign ownership from BP and Exxon, it is not clear how far the charade can be played out.

BP and Exxon are merely searching for profits where energy can still be tapped — having been pushed away from the US and other western countries by energy-phobic policies being instituted by Obama and other ideologues. Nonetheless, they will discover that there is a painful price for partnering with a power-mad neo-imperialist.

Putin has been pushing the development of new generations of intercontinental ballistic missiles, and has been modernising aspects of Russia’s conventional military. Whether this brave new investment in aggressive power is meant for intimidation — or for actual use in warfare — remains to be seen.

But Putin is painting himself into a corner by isolating Russia from most of the world — and by making his strongest alliances with other nations that maintain a hostile stance toward outside nations.

As long as western leaders remain weak — such as energy delusionists Obama, Hollande, and Merkel — Putin is reasonably safe in pushing his one-trick-pony weight around. Problems will arise if significant numbers of western governments break out of their PC propaganda shells, and begin focusing on their own best interests. If such a thing were ever to happen, Putin wouldn’t be the only precarious dictator to find himself in a pickle.

The curse of oil afflicts those who don’t heed the lessons of others

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2 Responses to Russian Oil Curse Part II

  1. jabowery says:

    Anyone seriously interested in what is going on in Russia regarding its “resource curse” owes it to themselves to read this recent paper by Peter Felixovich Kaznacheev of RANEPA.

    If its recommendations are adopted it is going to rocket Russia to world prominence as it breaks ranks with the global socially imposed microcephaly in political economics regarding private sector rent-seeking (which, in this case, includes treating the natural resource monopolies as quasi-private since their revenue does not derive from taxes — distinguishing it from public sector rent seeking).

    Howevever, as this focuses on natural resource rents, it is likely the US’s microcephaly will remain impervious as the US’s primary “curse” is not natural resources but the world reserve currency status of the US dollar.

    One must understand that the microcephaly of economists is socially imposed by those funding the economics profession out of the proceeds of rent-seeking, so any excuse, however tenuous, to ignore empirical results from experiments in political economy, will be seized with all the academic rigor that can be achieved by the misapplication of human intelligence to rationalize the centralization of rents in the US.

    Resource Rents and Economic Growth. Economic and Institutional Development in Countries with a High Share of Income from the Sale of Natural Resources. Analysis and Recommendations Based on International Experience.

    Peter Felixovich Kaznacheev
    Russian Presidential Academy of National Economy and Public Administration (RANEPA)

    December 1, 2013

    “Resource curse”, “Dutch disease”, “gold rush”, “blood diamonds” – those are just some of the epithets used to characterise the role of natural resources in economic development. They certainly do not set a positive tone for a constructive discussion. The purpose of this report is to change that attitude and lay a foundation for a policy roadmap based on success stories of economic development among resource abundant countries. This report presents the argument that resource economies with better economic and political institutions are more capable of managing their resource revenues, and can achieve superior results in economic growth and social development.

    To support that argument, we have used empirical evidence and analysed the relevant research that has been conducted on the subject to date. We compare performances of resource economies in different parts of the world depending on their institutional rankings, property structure of their extractive industries and other key parameters.

    Quoting from the body of the paper:

    Recently, more and more people (including those in government) have started to realise that de-monopolising gas exports and allowing access to the domestic market for independent producers might actually benefit the Russian economy and the government itself. It remains to be seen whether inertia can be overcome to introduce the required changes. In order to increase Russia’s share in the international market of liquefied natural gas, it is important to encourage the construction of new gas liquefaction terminals in Russia. The approval of legislative amendments in November

    5. National Oil Dividend (NOD)

    Russian stabilisation funds have so far provided an important balancing tool and an emergency reserve for the economy….
    …We believe that a broad public discussion should be launched in Russia about the possibility of introducing a National Oil Dividend (NOD) modelled on the oil dividend paid by the State of Alaska to its citizens. The NOD would be paid annually to all citizens of Russia from the time of their birth.

    • alfin2101 says:

      Kaznacheev seems to make an interesting argument for optimism in the face of the dismal track record of oil dictatorships around the world. And there are many potentially positive aspects of natural resource wealth under government control — at least for those who control that wealth or who have political connections to the wealth-controllers. It’s good to be king. And it’s good to have plenty of apologists in media, academia, and any other denizen of self-interested intellectuals, when one is king.

      Seizing control of natural resource wealth from private companies who develop those resources, then using the wealth from those resources to tighten control over the entire society — thus reducing personal and economic rights of the people and squashing opportunities for a diversified economic system of free actors — does not seem to be a good first step in making a society more livable. But one can paint a happy face on just about anything if one is fluent in Russian.

      Meanwhile, young, able, fertile, and wealthy Russians are moving themselves and their capital out of Russia. Could a plan like Kaznacheev’s slow that exit of human resources? Perhaps, temporarily, in the manner of shutting the barn door after the horses have departed.

      Putin requires very high global oil prices — close to $150 bbl or even more — to meet his spending needs. Smart people might be concerned about just what Putin is willing to do to move oil prices to those levels.

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