Boom Time: Russia’s Abundant Oil and Gas Reserves Are Powering up the Economy
The Big Bear is roaring in the first decade of the 21st century. Sixteen years after the collapse of the Soviet Union, Russia is once again making a play for Great Power status. In addition to its massive stockpile of nuclear arms, the country has resources that may give it even more leverage in the post-Cold War world — one of the world’s biggest reserves of oil and its biggest reserve of natural gas, as well as abundant supplies of aluminum, titanium and timber. The key to Russia’s future will be transforming this commodities wealth into the kind of high-tech development that the world’s strongest economies need. Knowledge@Wharton looks at the strengths and weaknesses of Russian industry, including its dependence on oil revenues, and analyzes the consumer goods and real estate sectors as well as the impact of the country’s demographics on its economic health.
Twenty years ago, few would have predicted that Russia would soon experience an economic boom. The country’s economy had been shackled for decades by Soviet rule. It managed to produce oil, nuclear warheads, Kalashnikov rifles and very little else of interest to the market economies in the West. Then came the reforms of former Soviet President Mikhail Gorbachev, perestroika, the revolution of former President Boris Yeltsin, free markets, and billion-dollar fortunes for at least a few. But how are average Russians faring under these changes, and what challenges lie ahead in areas like health care, education and employment?
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. Each uptick in the price pumps billions of additional dollars into the Russian economy. The problem is, however, that oil-rich nations seldom transform their resource endowments into innovative market systems or branch out into other industries. Indeed, “petrostates” usually don’t take steps to prepare for the day when their wells run dry. Will Russia be any different? Experts weigh in.
Pent-up demand for consumer goods is surging in Russia, thanks to seven years of oil-lubricated economic growth. After decades of privation under the Soviet system, many Russians now find themselves with rubles in their wallets, eager to buy a range of newly available items ranging from IKEA furniture to designer watches to expensive meals at restaurants. It’s a retail revolution — helped along by credit cards and a more efficient banking system — that shows no signs of slowing down. As one investor in Moscow puts it: “Oil prices could drop to $40 a barrel. Russians are still extremely rich.”
For all of its economic advances, Russia remains mired in a demographic crisis brought on by a combination of low birthrates and premature deaths. Russians spend more of their lives sick than their peers in the United States, Western Europe and Japan. If current trends don’t reverse, Russia’s population will drop to about 100 million from its current level of about 143 million by 2050, causing a shortage of workers that would choke off the country’s growth. By simply addressing preventable deaths and raising life expectancy to the average level of Western Europe, Russia could give its gross domestic product a huge boost, according to a World Bank report entitled, “Dying Too Young.”
Las Vegas has nothing on Moscow. The City of Sin is America’s hottest urban real-estate market. But prices there pale compared with those in the city that Stalin built. According to at least one consulting firm, Moscow is the most expensive city in the world for expatriates, and soaring real estate prices have largely propelled its rise to the top of the list. The reason is simple: Demand is outstripping supply. Moscow simply doesn’t have enough safe, modern and spacious apartments that foreigners and rich Russians want.