How can Russia overcome the “resource curse”? What countries should be an example for Moscow? What consequences can the Russian flawed economic policy lead to? Why could the authorities’ attempts to save their power by any means be dangerous for economic growth? Andrey Movchan, the director of the Economic Policy Pogram at the Carnegie Moscow Center, sheds light on these questions in the latest interview with the Russian edition of Forbes magazine.
Forbes: In a recent report, “Managing the Resource Curse: Strategies of Oil-Dependent Economies in the Modern Era,” you analyzed 10 countries that are facing the “resource curse” problem. In your view, the experience of which countries could be the most relevant for Russia?
Andrey Movchan: I would prefer not to prioritize: there is some positive experience; there is some negative experience. In my view, the most relevant cases in the sample include two countries: the United Arab Emirates (UAE) and Mexico.
The UAE, though producing much more hydrocarbons per capita than Russia, is the example of how one could foster development while keeping everything under state control, while Mexico exemplifies the use of an advantageous geographic location and the benefits of free trade with a dominant neighbor. For Russia, becoming a sort of Mexico for the European Union seems to be the best scenario. After all, the size of the economies as well as the populations is basically the same (in America and the EU on the one hand, and in Russia and Mexico, on the other). We have the same problems and to a large extent the same initial “set-up.”
In recent decades, Mexico succeeded in diversifying its economy (thanks to cooperation with the United States), while Russia has not done so, despite having a strategic advantage, which stems from the fact that the EU has a severe shortage of oil and gas and lacks diversification of supply.
While Mexico is a good example for Russia to a certain extent, Venezuela is the classic case of mistakes. Angola is also an important example, which illustrates the implications of a policy in which the authorities don’t hand over power to their successors and instead try to expand their political clout and control. Norway is an excellent example for those who believe that democracy is a panacea: indeed, democracy fostered development and provided for a decrease in inequality; however it did not save the country from resource dependency problems, in particular from lower industrialization speed, de-diversification, and slow growth.
Forbes: You said that in terms of the oil addiction, Russia is between Venezuela, Kazakhstan, and, in part, Iran. Could this conclusion be projected to politics? Does it mean that Russia is in an unstable position—somewhere between political stability and political upheaval?
A.M.: There is no witnessed direct correlation. If we are talking about the “Russian cluster”—countries with average per capita hydrocarbon extraction and a significant level of economic oil dependency (these include Iran, Kazakhstan, Algeria, and Russia), we see that the difference between the countries is a result of political decisions. Russia is free to move in the direction of any of our neighbors [on this axis system]: a move toward Venezuela means increasing economic populism and softening monetary policies, cutting off from foreign markets; going down [in the direction of Iran] would envisage further isolation, patriotism-based autocracy, further economic simplification, and increased controls.
Russia, indeed, could move in the direction of Canada [which has almost the same per capita oil production but a much lower level of oil dependency] or even Mexico—countries that use their oil to bolster GDP much more efficiently.
Forbes: You have repeatedly highlighted that oil is crucial for maintaining stability in Russia, and that one should not downplay its importance for Russia’s future. However, don’t you think this stability is transient? Don’t you think this stability is in fact false and just shows how the system is fragile—with the proverbial sword of Damocles hanging over it, ready to fall?
A.M.: Stability means stability. You can see this for yourself—look at the approval rating of the Kremlin, see how low the level of social activity is—despite the worsening situation in the country. Again, Russia is just stable for the current moment, and we can more or less reasonably predict the retention of stability for only a few years. Having said that, the lasting economic crisis and the future adverse changes in the economy might be triggers for a shift in the country’s economic policy. However, the chance that this transition will be smooth are low; hopefully it would not lead to the collapse of the country or a civil war, although we know just a few examples of countries that managed to avoid major conflicts on the way from the authoritarian resource-dependent model to a liberal diversified economy.
In certain sense, a type of a potential Russian future is indicated by Ukraine’s experience. Ukraine has never been rich in terms of resources in comparison with Russia. And the autocratic power in Ukraine has had less resources for financing the “power vertical” as it is called in Russia and for securing social support, because it has had fewer resources than its bigger neighbor.
In general, the picture can appear very similar: centralization of power is weakening over time, because you just don’t have the resources to buy loyalty; different political groups and business clans start emerging as independent forces no longer satisfied with the “rights for loyalty” pact with the central power, and quickly find themselves in the state of a tug of war. This could lead to the destabilization and even the disintegration of the country. After all, Russia was close to eastern Ukraine and used the situation to attempt to take over the region; the eastern part of Russia is located close to China—a country with similar foreign policy principles and clear interests in the “northern territories.”
Forbes: To what extent are the forecasts—that U.S. President Donald Trump’s aspirations to turn the United States into an energy superpower, as well as that another shale oil boom will dampen oil prices—justified?
A.M.: Turning the United States into an energy superpower is physically impossible, at the very least because the United States is already a superpower—a technological one. And technologies won’t give up no matter how much oil America might produce.
On the other hand, from the viewpoint of the oil market, America is a big, independent stakeholder, and it can balance out the Organization of the Petroleum Exporting Countries (OPEC). The production of shale oil in the United States is very flexible and responds quickly to price changes. If oil prices drop, this will mean that there will be less oil production. When prices go up, oil production goes up as well. Meanwhile, the total cost of shale oil production is declining while average output per rig per day is growing as a result of developing technologies. Major oil producers in the Gulf and in Russia have much lower costs and derive extra margins while the market price is dependent on shale oil costs. Now oil prices are between $50 and $55 per barrel. In five years, they might drop to $40–45 or even to $35–40 per barrel due to technological advances. And this trend is not related to Trump’s plans at all: It is just the large-scale market forces that are changing the game.
On one hand, this is a matter of the increasing efficiency of using oil; on the other, it’s a matter of boosting the oil output. For Russia, the effect of a downward slide in prices will be magnified by decreasing production. This means that in ten to fifteen years we will have to worry about the “Ukrainian syndrome.”
Forbes: Why do you think that instability in the Middle East doesn’t have an impact on oil prices as it did in the 1970s, when the prices of hydrocarbons increased almost threefold?
A.M.: Because there is no instability in the Middle East. Everything is stable to the extent that oil is concerned.
Forbes: Wait—what about Syria, the situation in Iraq, and the confrontation between Saudi Arabia and Iran?
A.M.: Syria is not a place that produces much oil; it cannot have a significant impact unless others are involved. Saudi Arabia is stable; it is an ally of the United States. Iran is maintaining the stability of its regime. Iraq is consistently producing oil despite the threat from ISIS. And even ISIS stably produces its own oil regardless of its status. Indeed, stability is fragile, as always in the region, but right now I don’t see a real threat to stability that could influence oil prices, and neither do the markets.
Forbes: Yet is Saudi Arabia really stable? There might be “black swan” events that could hypothetically lead to a regime collapse.
A.M.: Saudi Arabia is a very rich country. The individual incomes are high enough. The regime efficiently controls the country. Why would it collapse? Only if it found itself in a state of war with Iran, full-fledged war? However, Saudi Arabia is well armed and, moreover, it is an ally of the United States. Iran is hardly likely to start such a war. Saudi Arabia is not likely to launch a war either.
Forbes: You repeatedly say that a country’s political regime—be it a democracy or authoritarianism—doesn’t have an impact on economic growth. Does this mean that Russia will step up its authoritarian trends and refuse to conduct political reforms?
A.M.: A political regime by itself does not alter the state of the economy, but what does have an impact is the efficiency of the regime’s policy. The risks perceived by stakeholders have the greatest impact. And these risks stem from the regime’s moves that are counterproductive for the economy. When do the authorities take such actions? When the regime views self-preservation as the top priority rather than economic development.
Wasting power and resources, as well as destroying the economy by conducting populist measures; increasing political control; building up militarization; and corrupting the independent judicial system—such tactics become common for regimes when they lose confidence in their legitimacy, when they are afraid of changes and fear the loss of power.
When a regime is feeling stable, it does not need to care about self-preservation. Stable democracies, stable monarchies, and stable dictatorships don’t think about their viability and survival because they frequently deal with their economic development—to what extent dictatorships perceive themselves as stable is another question.
However, there are some indications that democracies are more effective on average than other regimes. Yet the comparison is imperfect as the concept of “other regimes” includes unstable, failed, and corrupt regimes that oppress protests and neglect the rule of law. On the other hand, stable undemocratic regimes may even have some advantages compared to democracies.
Forbes: The Kremlin seems to have effectively dealt with the “recourse curse,” as indicated by what you are saying now. Yet how long can it last?
A.M.: Well, it deals with problems effectively for its own sake, not for the country’s sake. How long will it last? We don’t know for sure. Of course, the situation will get worse. There will be ongoing economic decline. There will be a drop in consumption. There will be a decrease in personal incomes and investment. However, we still have very big reserves: we have a long way to go before reaching the levels that would cause the same turbulence as we witnessed in the 1990s.