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?