Consider there is a country that enjoys a massive natural resource abundance with oil, coal and natural gas available for immediate extraction and exploitation. The nation’s government is aware of the economic potential of these resources and devises a number of policy initiatives in order to capitalize on their fortunate circumstances.
Notably, this country is authoritarian, and the policies articulated by the ruling class and head of state go largely unchallenged. Based on the potential for profit and economic growth, this country nationalizes the oil and gas industry and imposes federal monopolies on virtually all activity associated with non-renewable resources. The capitalization of these natural resources does not allow for private sector involvement, and such free market activity is expressly prohibited.
This country’s economy is remarkably non-diverse in that non-renewables become the primary vessel of economic growth. The economy in this country has historically struggled with this problem in which there are very few booming industries to propel economic activity and GDP, so the discovery of non-renewables as a highly sought after and profitable industry becomes ever more tempting.
Yet, the decision to nationalize the natural resources paired with a poor institutional framework generates crippling over-dependence on non-renewables. As a result, the authoritarian state is highly susceptible to market fluctuations with barely any other industries to fill in the gap. In this scenario, the country’s economic potential remains unrealized.
This relationship is circular such that a non-diverse economy leads to nationalization of the most profitable industry which in turn makes the economy even less diverse than before. Once established, this curse is extraordinarily difficult to break.
This theoretical account of the resource curse is an accurate account of what has happened to many countries throughout the past century. As you have likely guessed from the title, this economic phenomenon currently plagues the Russian Federation and serves to suppress any potential to see consistent financial growth.
Intuitively, an abundance of resources of any kind, especially resources as lucrative as oil and gas, would foster positive economic growth. However, the nature of the recourse curse is such that it traps a country in exerting far too much time and money into the resource which is most easily accessible.
The most important problem with this notion is that a focus on merely one industry for economic prosperity does not work in a global and diverse economy. Instead, economic models must be multi-lateral and approach every angle in order to foster growth in GDP.
The Russian Federation was unable to resist the temptation to go all-in on the hydrocarbon industry, and they are paying the price now more than ever.
Last month, I wrote about how the current pandemic spelled major trouble for Russia’s fragile economy, and I discuss in detail how close to 70% of its GDP is directly or indirectly tied to the performance of the oil and gas industry. This means that when oil and gas are under-performing, or is in shambles as it has been for these past few months, Russia takes a massive financial hit.
The purpose of this article is to describe why Moscow cannot seem to break from the grip of the resource curse. The most reasonable prognosis is that most of the issues it endures from the oil and gas industry are self-inflicted. Not only did Russia’s leaders decide to only include one major industry in their economic model, President Putin continues to perpetuate the effects of the resource curse with an arrogant reluctance to stray away from tradition.
As a result, Russia depends overwhelmingly on non-renewable resources for three primary reasons: a non-diverse economy, nationalization of the most profitable industry, and poor institutional framework of government.
“The resource curse might as well be a state-ownership curse” — William Tompson
These are the necessary preconditions or structural factors that often precede, and demonstrably do in Russia’s case, an over-dependence on non-renewable resources. Unfortunately for Russia, these structural preconditions for over-dependence only get worse once the resource curse is in full effect, making the solution to the problem that much more elusive.
It is essential to highlight that the government initiative to nationalize the oil and gas industry in lieu of a free market alternative contributes to aggressive over-dependence.
The resource curse is more appropriately and fully described when it is analyzed in terms of state-ownership of the abundant resources with some scholars going as far as to claim that, “The resource curse might as well be a state-ownership curse” in its entirety (Tompson 2005).
Surely, other factors are pertinent, such as the previously discussed non-diverse economy, to the development of over-dependence; however, the nationalization of the oil and gas industry could be viewed as a major catalyst of the sub-optimal economic conditions present in Russia.
Further, when resources are under unilateral government control, state budget constraints may be softened, transparency weakened and an encouragement of fiscal mismanagement. I include Russia’s “poor institutional framework” as a cause for over-dependence for this very reason. Once the oil and gas industry was overhauled and consolidated into Gazprom, the largest company in Russia by revenue, it was ripe for administrative corruption.
So it goes in the Russian Federation.
Although generalizations cannot be made from one single case and data is limited on the effects of federal monopolies, Russia fits virtually every charge of fiscal mismanagement and lack of transparency that are possible due to the massive bureaucratic input Russia exerts.
This is best illustrated by the shareholders of Gazprom. This corporation is technically classified as a public company operating in a hybrid or transitional free market economy in Russia, yet the Russian Federation controls over 50% of the company shares and effectively owns the company as a result. 38.37% of the shares are owned directly by the Russian government and approximately 12% by two government controlled companies named Rosneftegaz and Rosgazifikatsiya (Gazprom’s Equity Capital 2018).
Nationalization of industry is often initiated to achieve a consolidation of power, and President Putin has made numerous moves to centralize the power of the Russian Federation during his presidency. Further, Gazprom is intricately connected to Russian diplomatic efforts due to its power to set gas prices and access to pipelines internationally.
The government’s intimate relationship with its most profitable industry brings with it the opportunity for corruption without any judicial check or balance on the consolidation of power taking place.
Over-dependence on oil and gas is difficult to deconstruct with such a massive concentration of wealth and power in the hands of the few.
A strong institutional framework, like the ability for an independent and unbiased party or branch of government to demand oversight and accountability, can be thought of as one of the mechanisms that can stop the resource curse before it takes root. Russia fails to have these safeguards, and as a result the President of Russia has immense capabilities to oversee the industry that brings the government the most revenue.
Without strong political institutions, oligarchs become integrally tied to sales and exports of non-renewables resources, as well. This concentration of power among a few powerful oligarchs and the president makes any effort to democratize and introduce different frameworks too difficult to realize.
Scholars writing on Russia’s intense resistance to democracy often claim that one of the key factors of this resistance is due to the close bureaucratic relationships among the government and oligarchs who profit on the industry. Statistically, oligarchs share 72% of all oil sales made in Russia, so there is virtually no incentive for a more equitable distribution of power (Guriev and Rachinsky 2005).
Over-dependence on oil and gas is difficult to deconstruct with such a massive concentration of wealth and power in the hands of the few. Competition between political parties and private sector growth free from absolute government input could see the rise of democratization and the fall of this crippling over-dependence, yet the bureaucracy displays little interest in doing so.
Russia is in effect its own worst enemy. There is no political will to alter the course of this overly-dependent economic model since any change would inevitably lead to less state-run control. Even worse, there are no institutions to force to government’s hand.
Thus, what keeps Russia from being the super-power they so desperately wish to become is not the rest of the world, but its own debilitating initiatives and political philosophy.
 “Gazprom’s Equity Capital.” Shares, Gazprom, 31 Dec. 2018, www.gazprom.com/investors/stock/.
 Guriev, Sergei, and Andrei Rachinsky. “The Role of Oligarchs in Russian Capitalism.” Journal of Economic Perspectives, American Economic Association, 2005, pubs.aeaweb.org/doi/pdfplus/10.1257/0895330053147994.
 Tompson, William. A Frozen Venezuela? The ‘Resource Curse’ And Russian Politics. Birkbeck Institutional Research Online, Oct. 2005, eprints.bbk.ac.uk/256/1/Frozen_Venezuela.pdf.