Is Russia on its way to becoming a “petrostate,” consigned by its oil-and-natural-gas riches to a future of political corruption and underdevelopment? That’s a question raised by many economists who have followed the country’s recent boom.
No one disputes that oil has fueled Russia’s return to international prominence. The country has the world’s second biggest oil reserves, behind Saudi Arabia, and its largest natural gas reserves. Since 2003, oil’s price has more than doubled, rising from about $25 a barrel to about $60 a barrel today. In 2006, it soared even higher, hitting a record of nearly $80 a barrel.
Each uptick in the price pumps billions of additional dollars into the Russian economy. “They’re floating on an enormous pool of petrodollars,” says Harley Balzer, a professor of government and international affairs at Georgetown University. The money courses through the economy in myriad ways: in surging consumer spending, in a growing middle class, in soaring Moscow real-estate prices, in a burly group of Russian energy companies with international ambitions and in the country’s reborn assertiveness on the international stage.
The problem is that oil-rich nations seldom transform their resource endowments into the sort of innovative market systems that characterize the world’s most developed places. “Countries with a high level of dependence on natural resources tend to perform poorly no matter how you measure it — stability, corruption, human-capital development,” says Serguei Netessine, a Wharton professor of operations and information management. Oil producers like Saudi Arabia and Iran, on the one hand, and Venezuela and Nigeria, on the other, are known more for repression and political unrest than for their economic diversity and entrepreneurial culture. With a few exceptions — Norway is most often cited — petrostates don’t take steps to prepare for the day when their wells run dry.
For now, Russia’s leaders and corporate chiefs are enjoying their country’s new wealth and power. “They feel that oil gives them some cards to play,” says Valery Yakubovich, a Wharton management professor. “They want the West to feel like it needs something from Russia. Think about where countries’ power tends to come from. Today, it’s usually intellectual capital and high technology. But Russia doesn’t have those. It has oil.”
Russian President Vladimir Putin has made it clear that he sees his country’s resource riches as the key to re-establishing the “Great Power” status that it enjoyed during the Cold War. To that end, he has rapidly ramped up the state’s ownership in the oil sector. If the government ends up taking half of the assets of Yukos, an oil firm that’s being dismantled after a tax dispute that put its CEO in prison, its stake in the industry could climb to 40%, says a report from the Paris-based Organization of Economic Co-operation and Development (OECD).
Putin’s government also has forced the renegotiation of several high-profile development deals with Western companies. State-owned Gazprom, the world’s largest gas producer, last year stunned such giants as Conoco-Phillips and Chevron by saying that it would scrap the bidding process for the right to co-develop the Shtokman field — situated in the Barents Sea, near Russia and Norway — and proceed alone. As of early March, Gazprom had softened its stance, saying it might invite in foreign companies but wouldn’t give them ownership in Shtokman,
The government likewise pressured Royal Dutch Shell to relinquish its controlling stake in the Sakhalin II oil-and-gas field. Regulators had accused Shell of environmental violations and suspended its permits, thereby freezing development. Earlier this year, Shell agreed to sell half of its stake, dropping its ownership from 55% to 27.5% and enabling Gazprom to step in as the controlling partner.
These sorts of moves have aided Putin’s push to create “national champions” in key industries and reassert control of his country’s strategic resources. But one Wharton scholar wonders whether they will undercut not only the fields’ productivity, but also Russia’s long-term economic strength.
“You have to wonder about Russia’s capacity to develop these fields without Western help,” says Wharton management professor Witold Henisz. “You’re talking about tens of billions of dollars. The Russians have the capital now, but is it enough for a decade of investment? And do they have the managerial and technical capacity to invest in a way to get the highest returns? They’re maximizing control, but they’re giving up some of the opportunity to get Western capital and technology.”
Yet Russia may be able to have it both ways, maintaining control and getting the money and know-how it needs. Many of the world’s oil companies are desperate for new reserves, and Russia is one of the few politically stable countries that can offer them. “Say you’re a vice president at Exxon Mobil,” says Georgetown’s Balzer. “Where can you go to look for hydrocarbons? Nigeria? Venezuela? Compared with those places, Russia doesn’t look so scary.”
In addition, some scholars are sympathetic to the Putin government’s position, pointing out that Shell had originally negotiated a one-sided deal at Sakhalin when oil prices had sagged to about $20 a barrel. “Back then, Russia got the best deal it could,” says James R. Millar, an emeritus professor of economics and international affairs at George Washington University. “Now the price of oil is in the 50s, and the government looks at it and says, ‘We got screwed.’ It’s common to renegotiate deals like this when prices go up.”
But doing so isn’t without risk, Millar points out. Oil companies may be accustomed to operating in hurly-burly markets. But other industry leaders like, say, Microsoft, General Electric or Johnson & Johnson might be reluctant to make big bets in a place where the government appears to act arbitrarily. “You have to ask, ‘Will this discourage foreign direct investment in other parts of the economy by the most proficient producers in the world?’” Millar says.
The “Dutch Disease”
Just as troubling for Russia’s future is the so-called resource curse, which can be split into separate, but related, challenges. One of them is purely economic, and the other, political.
On the economic side, gushing oil revenues can atrophy an economy, making it less competitive overall, says Yadviga Semikolenova, an economist at the Colorado School of Mines. “When you start exporting huge amounts of oil, your currency appreciates, and that hurts your exports from non-oil sectors. And labor moves to the oil sector, which hurts the non-oil sectors even more. So the booming sector gets too much investment and the other sectors don’t get enough.”
Economists call this phenomenon the “Dutch disease,” after Holland, where it was originally observed. There, manufacturing withered after discoveries of gas in the North Sea. Prudent fiscal policy can manage the risk, and so far, the Putin government has shown an ability to do so. It has parked a big chunk of the government’s oil revenues in a special stabilization fund, and it has paid down its debts.
“Paying off foreign debt is one of the few things you can do with petrorubles that doesn’t cause inflation,” points out Georgetown’s Balzer. “But it’s also a way of walling yourself off from the international economy. I think part of why Putin is doing it is [because he doesn't want to] have to explain himself to foreign bankers.”
Balzer also wonders whether the government will relax its fiscal responsibility as next year’s presidential election approaches. “It has socked away $80 billion in the stabilization fund, but as a proportion of GDP, it’s a tenth of Norway’s. Keeping the politicians’ hands off of the money will be one of the hardest things [the government does].”
Indeed, the political temptations of easy oil money represent the other half of the resource curse. Simply put, in places like Russia that lack strong regulators and courts, people in power will try to grab as much of the oil wealth as they can for themselves, rather than investing for the country’s future.
“Russia would have a corruption problem even if it didn’t have wealth in oil and natural resources,” says Bill Tompson, an economist and Russia expert at the OECD. “But the oil aggravates it.” Oil riches, which are finite, give people the incentive to try to finagle money for themselves, and Russia’s lack of political and corporate transparency gives them the cover to do so. “You’re talking about an environment where a lot of decision-making is opaque, and systems that run on informal rules will always favor insiders.”
The 1990s in Russia “were wild, crazy and disorderly,” Tompson adds. “There was a breakdown of any official ethics, of the norms and understandings of what you could and couldn’t do. And you don’t have a free press — or at least it doesn’t get far when it tries to pursue these matters.”