The American Interest
Analysis by Walter Russell Mead & Staff
Resource Curse Works for Putin

The West knows Vladimir Putin as a cold, calculating strategist, but in the run-up to this spring’s presidential elections, he has been putting on a different persona. Over the past few weeks, he’s made a number of generous promises, from increased salaries for public employees to cheaper healthcare. As a result, his once iffy poll numbers have been steadily rising. Most pollsters now estimate that Putin would avoid a runoff if the election were held today.

The rising price of oil lies just behind these promises. Rising energy prices may be political poison for American politicians, but it’s just the reverse in Russia, filling state coffers and funding new rounds of government giveaways to keep a restless population happy. The FT estimates that Putin needs oil to be at least $80 a barrel to keep this system functioning smoothly. Fortunately for Putin, oil prices are currently around $120 per barrel, and may go even higher due to the situation with Iran.

Besides relieving pressures for democratic change, high oil prices have another effect as well: Russian foreign policy gets a lot tougher.

This is a great example of the resource curse at work.

Published on February 24, 2012 4:00 pm
  • Jim.

    Are non-energy industries withering because the export of oil causes the value of the ruble to skyrocket, crowding out the possibility of other exports?

    Just curious; that’s the usual economic description of the Resource Curse.

    By the way, it doesn’t have to be an actual resource; the Chinese have been propping up the value of the dollar to manipulate our balance of payments by buying trillions of dollars of our debt.

  • KTINLA

    It is clear the wily Vlad has calculated that he can flout U.S. and European efforts to sanction Iran’s nuclear efforts not only with impunity, but with profit. Consider: cash on the barrelhead; greater economic distress for the U.S.and Europe; greater European dependence on Russian oil and gas – with the diplomatic leverage that entails – and a political advantage over his opponents on the Russian right.

    It makes one wonder if the Russian diplomatic initiative Mr. Gelb reports is not, in fact, a sham. If Israel does attack Iran and oil prices go through the roof there’s Vlad and his cronies rolling in dough, shedding crocodile tears and saying: “We tried, but you didn’t do enough.”

  • http://chicagoboyz.net TMLutas

    The problem for Russia is that every time they get oil prices going past substitute prices, a few more oil customers peel off into an alternate fuel. This isn’t alternative energy but more conventional coal or natural gas. Market forces are going to link natural gas, coal and oil in tighter and tighter embrace with one not being able to rise much beyond the penalty to convert one to the other.

    Oil at $120 is far beyond the price it costs to convert via Fischer Tropsch processes both coal and natural gas into liquid fuels that directly compete with oil. Major players like Peabody Coal are gearing up to make the FT market happen and to move coal into liquid fuels. This is a nice short term play for Russia but very risky in the medium to long term.

  • http://www.pacrimjim.com PacRim Jim

    Poor Russians.
    Their one-time windfall of trillions from oil will be wasted by their posturing Glorious Leader, on weapons rather than future technologies and infrastructure.
    Demographics and proximity to China are against Russia. Yet what Russians should do and what they will do are, as usual, mismatched.
    Poor Russians.

  • Ken

    The resource curse (also known as the Dutch curse after the effects of North Sea oil on the Dutch economy) refers to the economic stagnation affecting countries which depend too heavily the extraction of natural resources for their GDP. The author of the article seems to misunderstand the term. If the rise is good for Putin wouldn’t you say that the curse DIDN’T work on Putin?

  • Boobah

    Nobody every claimed the resource curse was a curse on individual politicians, especially in the short term. It is, in fact, a curse because the revenue encourages long-term unsustainable expenditures of resources. Some of that is to infrastructure that turns out to be useless once the valuable resource is either depleted or replaced.

    Of course, some of that money goes to an even worse group; the rent seekers, many of whom never really grasped where the money came from. For them, it’s just the right and proper way of things, and by the time the spigot dries up they’ve got an impressive constituency that’s more than willing to (accidentally) destroy their entire economy to hold onto their slice.

    Long story shorter, the very fact that Putin’s pandering is being enabled by Russia’s resources is an example of the resource curse in action; even if you don’t see Putin’s reelection as the curse itself striking, the long term obligations he’s offering to get support will do nasty things to Russia.

  • JM

    I suspect that Russian middle east policy is oriented towards propping up the price of oil by contributing to the unrest. Hence the carefully graduated support of Iran – enough to get them in trouble (Bushehr) but not enough to really keep them safe (latest SAM systems). A big mess in the Persian Gulf would make Putin, et al a bit pile of money. Also, given the corruption in Russia, I suspect their own production will not do so well long term, just like that had big trouble in the Soviet era.

  • Jim.

    Sorry, that needed a better explanation.

    The Resource Curse is not just a tenuous correlation between resource-rich countries and their tendency to have problems; it refers specifically to the case where a country has one export commodity that far outstrips its other potential export commodities in value.

    In this case the country in question has difficulty diversifying its production base, because the strength of its currency (set by the most valuable export) causes its other exports not to be competitive on the world market.

    In the worst case, soon the only profitable business possible becomes the Resource-based business, and the country’s fortunes rise and fall based on that commodity price. If you are an individual within that country, your fortunes rise and fall according to your relationship with the Resource-based business, making that a high-stakes proposition ripe for corruption.

    As I mentioned above, it doesn’t have to be a Resource commodity. This “curse” can be brought on by other exports — in America’s case, the export of our Treasury bills. To buy those bills, dollars have to be taken out of the hands of people who have dollars, and (in the case of the Chinese buying our T-Bills) yuan are put into those hands instead — yuan that will be used to buy Chinese (yuan-based) exports, rather than American (dollar-based) exports.

    This is a major contributor to the hollowing-out of America’s industrial base.

    (Of course, the oil exchanges are based in dollars, which is probably contributing to our strong-dollar Curse while someone else — the Saudis, mostly — runs off with all the money.)

  • Jim Whyte

    Sorry, late to the party here, but this might clarify things a bit. What Jim is talking about above is also called “Dutch Disease” and it’s a genuine economic problem. Unfortunately a lot of writing on the “resource curse” — scare quotes intentional — conflates Dutch Disease with the tendency of third world strongmen to get rich by skimming the resource industry. That’s a different thing (I’ve argued that elsewhere, but it’s behind a paywall).

    There is a body of thought in the academy that thinks resource extraction is Eeeeeeviiiil, and is quite happy to use the two sticks alternately to beat it.

    Fact is there is no “resource curse”. There is a Feudalism Curse, Totaliarianosis, a Plague of Kleptocrats, Spoils Syndrome, and the Heartbreak of Collectivism. Resources themselves are only the prize, not the cause. Greed and power have a lot more to do with it than resource endowment.