Low Oil Price – BAD for Russia. High Oil Price – Bad for Russia Too!

I’m sure that you remember how back in 2014 the oil price collapsed and pundits left, right, and centre lined up to tell us that Russia was doomed. The Russian economy was overdependent on hydrocarbons, they said. They constituted most of Russian exports and provided the Russian state with most of its funds. Before long, Russia would be bankrupt. The state would have to use up all its reserves. In two years, they’d be exhausted, and there would be nothing left to pay anybody. Social discontent would explode. Yada yada yada.

It was true in part: the collapse of the oil price caused a huge drop in the value of the ruble, creating inflationary pressures, to which the Russian central bank responded by shoving up interest rates, so dampening consumer demand, and causing a recession. The impact was indeed bad.

But it wasn’t nearly as bad as we were told to expect. Incomes stagnated, but unemployment stayed low. Inflation was kept under control. And the state budget hardly suffered at all – indeed, before long, state reserves were as full as ever. Russia learned to cope with lower oil prices, and until the covid pandemic came along and messed things up again, life seemed to be returning more or less to normal, even if not quite up to the boom times of the 2000s.

Like me, you may have noticed that filling up your car has become more expensive recently. The reason is simple. The price of oil has gone back up again, albeit not as far as before 2014. And guess what? Whereas once I read lots of articles telling me how low oil prices were bad for Russia, now I’m seeing articles telling me the opposite – high oil prices are bad for Russia.

Well, blow me down with a feather. Who’d have thunk it?

As a case in point, I draw your attention to a piece published this week on the website “Riddle” , a source of fairly consistent criticism of the condition of modern Russia. Written by the liberal Russian political analyst Vladislav Inozemtsev, it bears the title ‘The Perfect Trap’, and it’s full of foreboding about the dangerous long term implications of high commodity prices.

The danger, says Inozemtsev, is that with high oil prices, the Russian state becomes flush with cash, at which point it starts spending with abandon. Everything seems hunky dory, and the state becomes complacent and doesn’t bother about reform. Oil money is like a ‘magic wand’ and, says Inozemtsev, “The return of high commodity prices for the third time since the 2000s and early 2010s may finally convince Russian ­leaders that this ‘magic wand’ works without fail.” Consequently, the state will commit itself to ever rising expenditures.

The problem, Inozemtsev argues, is that the high commodity prices can’t last. Modern economies are switching to low-energy production as well as to non-hydrocarbon sources of energy. Down the road, the bottom will fall out of the hydrocarbon market and the Russian state will be left with enormous financial commitments it can’t afford. At that point, Russia will suffer the fate of countries like Venezuela that have fallen into a similar trap – i.e. that spent like crazy when prices were high only to then suffer a calamitous collapse once the price went down.

To be frank, I’m not totally convinced about demand for hydrocarbons being in long-term decline. Maybe that’s the case in Western Europe, but that’s hardly representative of the world as a whole, where poorer nations are growing fast and with that developing a powerful appetite for more and more energy. Inozemtsev is a typical Russian liberal who views Western Europe as the model of the world’s future. But if so, it’s a future the rest of the world is far away from.

But putting that aside, there is actually something to this analysis. Excessive reliance on natural resource income comes with potential problems, such as the infamous ‘Dutch disease’, in which oil profits drive up the value of the national currency and thereby ruin the profitability of domestic industry by making their exports more expensive while also making imports cheaper. There is also a link between natural resources and ‘rentier states’ – such states are often corrupt and autocratic in nature and survive by buying off opposition, a system that works until the cash runs out, at which point everything falls apart. Venezuela is a case in point.

Furthermore, it’s also true that the money from natural resource rents removes incentives for structural change that might be costly in the short term but are of long term benefit. Bit by bit, the country relying on natural resources can end up becoming less and less efficient relative to other states.

So, maybe Inozemtsev is on to something. But then again, countries like Norway and Canada rely heavily on natural resource exploitation without falling into Inozemtsev’s ‘trap’. So it’s not inevitable. It’s all dependent on the policies that states pursue. Inozemtsev thinks that the Russian state will ‘spend, spend, spend’. He writes that, “Expenditures will continue­ to rise (it is important to note that, unlike revenues, expenditures have never declined in the last ­20 years) until it becomes clear that the main source of Russian wealth has dried up.” But Russian state expenditure as a percentage of GDP is a fairly modest 35%, and state debt is one of the very lowest in the world. The scenario Inozemtsev describes is possible, but not in line with current levels of spending.

Anyway, I’ve allowed myself to be distracted a bit too much by technicalities. Maybe Inozemtsev is right; maybe he isn’t. Only time will tell. The really interesting thing about the article isn’t that. What’s actually of note is the article’s very existence – i.e. the fact that as soon as the situation changed, punditry switched 180% from saying ‘low oil prices bad’ to saying ‘No! High oil prices bad!’

To my mind, it’s kind of telling. Whatever happens, Russia is doomed. Is it? I’m not so sure. How about middling oil prices, anyone?

14 thoughts on “Low Oil Price – BAD for Russia. High Oil Price – Bad for Russia Too!”

  1. Inozemtsev is conveniently ignoring the tremendous growth and self sufficiency in basic food production, the establishment of infrastructure to promote future growth and the emergence of high value industries such as commercial aircraft production(MC 21), nuclear power production, not to mention the unrivalled calibre of the defence industry. With luck, Inozemtsev will soon land a job at the Atlantic Council.

    Liked by 4 people

  2. Well, that’s why they created OPEC: to keep the price not too low and not too high.

    Although, the idea that the “resource curse” is inevitable is indeed stupid. Or, in this case, probably just hackery. Yes, Canada, Norway. And in Alaska, afaik, they simply distribute part of the revenue to every resident. That certainly helps the economy.

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  3. I can understand why you have such a low opinion of think tanks and their “reports” and articles. The think tanks disguise them as research when they do not amount to more than opinions. They take single observation points and extrapolate them into a trend, and in general, they never account for the impact of time or society’s resilience.

    Why don’t we read such articles spelling doom for Saudi Arabia? In 2018, 56% of all Saudi exports were crude oil. For Russia, it was 25%.

    14% of all Australian exports in 2018 were coal, representing almost 40% of all coal exports worldwide. It is a commodity whose need is in rapid decline and where it is broadly agreed that its demand will entirely collapse in the coming decades. We do not see think tanks telling us that Australia is set for trouble.

    A similar case can be made for Norway, where 20% of its exports consist of crude oil. Can’t Russia become the next Norway? Why does it have to be the next Venezuela?

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  4. Oil prices. There seems to be a belief that spot oil prices really are the best prediction of where oil will be for the next decade. In fact they almost entirely reflect very short term gluts and shortages.
    Back a year ago, when Oil prices were negative (reflecting real storage shortages and speculators committed to take delivery but unable to), then WTI priced for Dec 2022 never fell below $36 per barrel.
    In recent times with short term oil reaching $76, Dec 2022 deliver has not been above $65.
    Most of the massive falls last year, most of the subsequent rally and most of the recent squeeze in oil prices has been about short term supply issues. The long term market (and end users mostly buy on long term contracts) has been remarkably stable.

    The WTI futures market: https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.quotes.html

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  5. Venezuela is a bad example to bring up here.When it went into a crisis, USA & Co did everything to exaggerate, worsen and prolong it. Between sanctions, *literally* stealing Venezuelan money and assets, sabotage and even organizing coup attempt, it becomes entirely incorrect to blame their current problems on their past spending strategies.

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    1. Without mentioning that consistently, for the past 20 years, 76% of all Venezuelan exports are crude oil. It is similar to a place such as Nigeria. Interestingly, Nigeria is held as a superpower of the future. In the end, it is all about the narrative. Facts do not matter.

      Liked by 1 person

    2. Totally agree, Aule! I was going to make that same point, but you did it first, and way better. Venezuela is not a “normal” case to cite, since it is the target of a vicious regime-change war. Which, sort of, changes everything and makes other comparisons meaningless.

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  6. Another thing to bear in mind is that unlike Nigeria, Venezuela Saudi Arabia Kuwait and some other countries Russia has a large domestic economy. The world Bank published a list of countries by resource rents as a percentage of GDP – Russia is at about 11% with oil at 6% and gas at 3%.
    The exports are dominated by hydrocarbons because Russia is better at producing hydrocarbons cheaply than most countries outside the Persian Gulf and Russia has been running a large trade surplus since the 1990’s. Other Russian exports are not as competitive overall with some exceptions.
    This surplus also has an added benefit of keeping taxes lower for the Russian population as the government gets more of its revenues from the oil companies rather ordinary citizens
    In terms of global oil demand people who have been predicting the end of oil for the last 100 years , However, looking at forecasters such as the IEA, EIA etc the main case forecasts foresee at least a plateau in global oil consumption for the next 20 years (fall in OECD balanced by a rise in developing world)

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  7. I think his analysis about the trap of oil revenue is correct, but what he predicts will happen has rather little basis in recent Russian or even in Soviet history. The danger is that Russia always can fall under a set of elites who would use the oil money to spend unproductively or not be as smart with it as they could be. The latter definitely applies to Russia, the former is extremely questionable given that while Putin did not do all he could have or should have done in the 2000s it was still a sensible policy to go for balanced or surplus budgets and use that to allow there to be low taxes in the rest of the economy to allow it to rebuild. The problem is in Russia this creates extremely bad incentives for the state as while building up other industries might help the country, they do nothing but drain the budget. Russia needs a more balanced fiscal system to be certain but the Russian state is not nothing but a kleptocracy under Putin. It certain retains many of those characteristics but it is not the 1990s anymore, and thank goodness for that.

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  8. Oil is not just an energy source, it’s also the basis of all things petrochemical. And plastics, rubbers, engine lubricants, perfumery ain’t gonna go away in the near future.

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    1. Well sure – but Saudi is reported to have 92 years of reserves. Do you really think there will be an oil market in 50 years time, or should they just stick it all on the market soon?

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  9. Off topic but sorry – after lifting myself off the floor after rolling with laughter I wanted to share this – for those who do not watch RT:

    The OPCW in her report mentioned under August 20 last year that at that day a team of chemical warfare specialist had been dispatched to Germany regarding a case against a person.
    This was the same day that Navalny showed symptoms by again being a person not killed by an absolut deadly chemical agent. Normally it takes at least days if not more to gather the specialist and send to an investigation. By that time – even considering the time zone difference – it was far from clear what actually happened to Navalny.
    However – the Germans seemed to have already been aware of some foul deed, while the Russian Doctors still were trying to find out the cause.

    Oops. So two things: The Germans knew something dastardly would be attempted (of course, if you are the one controlling the marionette Navalny you have to know) and secondly, that the OPCW must have been alerted even before the attempt to be on standby.

    The German answer: The date must have been a typo. (a freudian one?)

    There is a case to be made for a thorough investigation by Russia into previous connection by Navalny with foreign intelligence agencies and if proven there was collusion in his “poisoning” there is clearly grounds for charging him with treason, misleading the authorities and whatever else is there to throw the book at this guy.

    Overall it shows the quality of western interference: brutal, without long term considerations, miserably executed and nasty.

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    1. A Freudian typo – hahahah!

      Well, we already know that the OPCW is totally corrupt and in the pocket of the American imperialists. How do we know that? Among other things, because of the recent revelations (covered intensively by journalist Aaron Maté) how the OPCW bigwigs covered up their own investigators’ reports on the Douma, Syria chemical attack; in order to support the American narrative; in order to support America’s thirst to go to war against Syria.

      Congratulations, America, you have corrupted every single international agency that ever meant anything in the world, including the UN and the OPCW!

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