Is Russia trapped in the (Dutch) resource curse?: an economic analysis.

– Budie, T. (2015)


Without any doubts, Russia can nowadays be called as an ‘energy superpower’. Estimates say that it possesses the world’s largest gas reserves, seventh-largest oil reserves, and the second-largest coal reserves (Oomes & Kalcheva, 2007). Furthermore, it is the largest exporter of natural gas and second-largest exporter of oil (International Energy Agency, 2005).

As one could expect, this produces high economic profits and political power, and it could lead to domestic economic development. Data shows that the production of these fossil fuels account for 60% of Russia’s export revenues, while it encompasses 20 to 25 percent of the Gross Domestic Product (GDP) (Oomes & Kalcheva, 2007). All of this sounds very positive, but economic dependence on natural resources could result into unfavorable conditions. Russia could be a perfect example of such oil-addicted states. Therefore, this blog will examine to which extent Russia is trapped in the (Dutch) ‘resource curse’.

Currently, the oil prices are staggering low, but only ten years ago the oil market experienced price records. Despite the generated revenues, export growth declined significantly in these years (see figure 1): 2,5% in 2005-2006 in contrary to 10% in 2003-2004. The reasons behind this are growing state ownership, increase in oil taxation and diminishing returns in oil extraction (approaching peak oil) (Oomes & Kalcheva, 2007).


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Figure 1: export and output of oil 1995 – 2005 (Oomes & Kalcheva, 2007).


Additionally, based upon other resource-rich countries, the abundance of natural resources could also lead to declining growth rates in non-resource sectors (Sachs & Warner, 2001). This phenomena is called the ‘resource curse’, which arises through three mechanisms.

Firstly, large revenue from resources results into renting behavior and leads to conflicts over its distribution, which affects growth. Secondly, these rents are volatile, which hampers growth. Finally, the export of resources results into the appreciation of the real exchange rate (currency rate), which impedes the competitiveness of other sectors since their products are becoming more expensive in the global market (Kutan & Wyzan, 2005).

This article focuses on the last mechanism, including four indicators that should conclude whether Russia is trapped in the (Dutch) resource curse or not: real exchange rate appreciation, declining manufacturing growth (non-resource tradable goods), increasing service sector growth (non-tradable goods), and increase of wage level.

The relationship between these indicators and the resource curse is that the oil revenues generate high profits and wages in the oil sector, increasing the general demand. This affects the service sector, while prices of manufacturing goods are not influenced, as they are determined abroad (Corden, 1982). This in turn induces real exchange rate appreciation in terms of inflation (Oomes & Kalcheva, 2007).

According to Oomes & Kalcheva, 2007, the real exchange appreciation is positively influenced by oil revenues, but it can not be used as full evidence for a resource curse. This is because other factors, such as government consumption; net international reserves; productivity differential and corruption have an influence as well (figure 2).


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Figure 2: Estimated vectors (bold numbers are the increases of real exchange rate in % at a 1% increase of Ln) (Oomes & Kalcheva, 2007).


With respect to the manufacturing and service sectors, it can be easily concluded that the manufacturing sector declined relatively to the service sector (Oomes & Kalcheva, 2007).

However, this could be the case due to transition-related aspects: in contrary to other resource-rich countries, Russia has experienced huge changes since the collapse of the Soviet-Union. For instance, many factories that relied on state support disappeared as soon as capitalist competition emerged (Treisman, 2010).

After Oomes & Kalcheva corrected this transition effect, there was no significant negative correlation between oil revenues and the manufacturing sector (figure 3). Furthermore, Russia’s growth in its service sector shows no different pattern compared to other transition countries (figure 4).


Schermafbeelding 2015-10-18 om 17.14.35

Figure 3: Estimated vectors (equations 1-5 are the indices of the five main industrial sectors, 6 is the index that is corrected with the transition effect) (Oomes & Kalcheva, 2007).

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Figure 4: Correlations between service sectors in percent of GDP (most other transition countries show increasing shares of service sector since 2000) (EBRD transition reports and WDI World bank). 


Finally, the overall increase of wages is significantly huge in all sectors, but this could be because of many other factors than the resource curse. According to Oomes & Kalcheva these include: the rebound from the 1998 crisis, productivity growth and the revealing of unrecorded wages.

In conclusion, Russia shows a clear correlation with each indicator for the resource curse, but more research is required whether these are present due to other factors or not. Nonetheless, Russia should be careful and become less dependent on natural resources anyhow.


Bibliography

Corden, W. (1982). Booming sector and Dutch Disease economics: A survey. Canberra: Australian National University, Faculty of Economics and Research School of Social Sciences.

Kutan, A., & Wyzan, M. (2005). Explaining the real exchange rate in Kazakhstan, 1996–2003: Is Kazakhstan vulnerable to the Dutch disease? Economic Systems, 242-255.

Oomes, N., & Kalcheva, K. (2007). Diagnosing Dutch Disease: Does Russia Have the Symptoms? SSRN Electronic Journal SSRN Journal.

Sachs, J., & Warner, A. (2001). The curse of natural resources. European Economic Review, 827-838.

Treisman, D. (2010). IS RUSSIA CURSED BY OIL?. Journal Of International Affairs, 63(2), 85-102.

774 words (94 words in figures/tables).

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