Putinomics: Oil and the Russian Economy

If people know anything about the Russian economy, they may be aware of its corruption problems, an issue that permeates every layer of its society.   They might have learned (or are old enough to remember) Russia’s economic upheaval during the 1990s – hyperinflation, massive recession, insider privatization – that resulted from their attempted transition from a centrally planned to a free market economy.  However, if there is one thing most everyone knows about the Russian economy, is that it is fueled by oil. 

To be fair, it is not just oil; natural gas and other resources have powered Russia’s recent economic boom.  In fact, having the state consolidate control over oil and other resources is the central part of Putin’s economic policy, and it has served him well.  In his 1997 dissertation (yes, he might add “PhD” to his list of other accomplishments, like whale harpooner and racecar driver), Putin advocates the creation of “national champion” companies: basically, partially re-nationalized companies that exert control over Russia’s vast mineral wealth.  Gazprom, the largest natural gas extractor in the world, is the crown jewel of this strategy, but other companies like oil giant Lukoil are also very “Kremlin friendly.”

From the World Bank blog post, “Russia: A Study in Numbers.” You can read the full post at http://blogs.worldbank.org/voices/russia-a-study-in-numbers

Russia has left behind the “quaint notion” of free markets and replaced it with a mercantilist economy that focuses state resources in the energy business, and the results have been very impressive.  According to most recent World Bank figures, Russia’s GDP is roughly $1.8 trillion (USD), making it a top 10 global economy.  In 2007, oil and natural gas accounted for almost 2/3 of Russia’s exports.  Up until 2009 (and the global financial crisis), Russia’s growth averaged 7% each year, and this rate was driven by global demand for energy resources (and some significant policy reforms by the Russian government).  Even after the economic crisis, oil has allowed Russia to bounce back to almost pre-crisis economic levels.

Gazprom Logo (from Wikipedia Commons)

Oil and natural gas has also supported Russia’s political aspirations.  Gazprom’s resources have been used as a bargaining chip, most recently to put pressure on Ukraine to join a Russia-led customs union.  And we can look to the upcoming Sochi Olympics to see how these energy giants are helping to build the “new Russia” that Putin seeks to put on display to the world.  Gazprom, for instance, has built most of Sochi’s ski venues, and we will likely see the company logo almost as much as the Olympic rings.

Scratch beneath the surface, however, and this oil-fueled growth loses its luster.  While an economy of $1.8 trillion is very impressive, once controlling for population (GDP per capita PPP), Russia drops to be more similar to Poland or Hungary…or even fellow post-Soviet state Lithuania, which has been struggling in recent years with some of its own economic problems.  Inequality remains very high in Russia – one of the highest rates in the world – and only a select few Russians have directly benefited from this recent growth.

The World Bank is also predicting a decline in Russia’s economy; demand for Russia’s energy resources (especially natural gas) is lessening in the key markets of the US and European Union, and even energy hungry China is unlikely to make up for this gap. As a new member of the World Trade Organization, Russia will also be forced to open its economy and lower its tariffs, meaning that its nascent high-tech industry and other sectors are likely to take a hit from a new import market.   The Putin government is trying launching a number of political reforms to make the Russian economy more attractive to foreign investors, but the aforementioned corruption issues, lagging labor productivity, and infrastructure problems are likely to be a big hurdle for future growth.

Oil has fueled the Russian economy thus far, but the big question is: for how long can they run on this tank of gas?

 


References


A Teaching Sample Post

I wrote this post as a sample for my post-Soviet students as the are preparing their own posts on the political economic systems.  In this post, they were to include the following information:

  • How rich is your country?  How successful has it been at achieving growth?
  • What is the dominant industry in your country?
  • How much of a role does the state take in shaping the economy?  Is your country a free market, capitalist system or a state-run mercantilist economy?
  • What is the most serious challenge your country is facing, economically?  (Hint: you could also discuss the political, ecological, or social consequences of your countries economic system).

As you can notice in my own post, the order itself does not matter, as long as I can see all the information in there.  I start with the dominant industry, then move into the role of the state, before concluding with the wealth/growth issue and the economic challenges.  The last two points were written so they demonstrate a debate: the good and bad of Putin’s economic policy.

Students must keep their post less than 2 pages (here is the Word File I used to make sure I kept to this rule myself!), but their references could be on a separate page.

The big tip from this sample?  A good information post presents the required info, but focuses on why it is so important.

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