Can Russia diversify away from oil and gas?

SR-russia-economic-freedom-2014-chart-2-825

Russia is a land rich in natural resources and human talent.  It has been an industrial nation for more than a century.  Why hasn’t it developed a world-class manufacturing industry in anything but armaments?  If it had, Russia would not be jeopardized by falling oil prices.

russianexportschartOne explanation is that Russia has been held back by world trade treaties, which restrict Moscow’s right to subsidize its infant industries—even though that has been the method by which every new industrial nation, except Great Britain, which was the first, has made up the head start of the older industrial nations.

During the Napoleonic Wars, the young United States was cut off from trade with Europe, which New England manufacturers used as an opportunity to develop our domestic manufacturing industry.

RUSSIA_CORRUPTIONAnother is that the Russian economy is controlled by a corrupt financial oligarchy, which is interested only in extracting profit for themselves and not in building for the future.   Probably the truth lies somewhere in between.

I don’t think that having a strong oil industry in itself is a curse that prevents development of  manufacturing.

The United States was a leading oil producer and exporter in the first half of the 20th century, and Americans leveraged that advantage to develop an mass-produced auto industry, a chemical industry and other industries based on cheap and plentiful oil.

To the extent that Russia is shackled by the international economic system, the current crisis represents an opportunity to break free of that system.

To the extent that Russia’s problem is its own dysfunctional political and economic system, it means the country must either reform or become a satellite of China or the West.   Or, in the worst case, Russia could become a Ukraine writ large, a prize for other, more powerful states to fight over.

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Plummeting Oil Prices Could Bring Radical Change to Russia.  What Comes Next? by David M. Kotz for The Nation.  [Hat tip to Bill Harvey]

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6 Responses to “Can Russia diversify away from oil and gas?”

  1. Bill Harvey Says:

    The current squeeze on Russia is business as usual- speaking here in Big Picture terms, over a period of centuries- for western imperialism’s (with the US at the helm at the moment) design on Russia. If we take as our runway the last century, as you suggest, let us not leave out the destructive effect of WWII and the effects of Cold War era western aggression in helping re-direct Soviet resources toward the military.

    Chicago School- directed shock therapy of the 1990s is another chapter along the way in which much of the Soviet- built industrial base was gobbled up by the Chicago school’s benefactors, European capital, and the Yeltsin-sponsored oligarchy. David Kotz on this:
    “The current crisis, like the two before it, demonstrates the peril facing any petrostate, which is always vulnerable to events outside its control. Oil and gas revenues bring about 60 percent of Russia’s export revenues and fund an estimated 50 percent of its federal budget. Western commentators often criticize Russia for its oil export dependence, which shows a failure of historical memory. It was the post-Soviet Russian regime’s slavish following of the neoliberal “shock therapy” policies urged by the IMF and US Treasury Department that transformed Russia’s economy from the diversified industrial economy inherited from the Soviet period into a giant-size version of Kuwait, but with some 145 million people, a big army and nuclear weapons.”

    The comparisons to New England in the early 19th C and the US oil boom period are strained at best- worse, they distract from the particularities of actual Russian/ Soviet development as a highly desirable picking grounds for western capital.

    Finally, the situation in Ukraine cannot be understood without reference to this overarching framework. Just one piece in the puzzle: NATO, which might not exist without the US driving it, grew from 16 members in 1999 to 28 members in 2009- all to the east.

    Bill Harvey

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    • philebersole Says:

      Bill, thanks again for the link to the article that inspired this post.

      I want to mention a couple of things by way of clarification.

      1. Vladimir Putin has stated that his government will build up Russia’s domestic manufacturing industry as an offset to US and EU economic sanctions. His critics, such as Maria Gessen, author of Putin’s Kleptocracy, ask that why his government hasn’t done this already.

      I suggest two possible reasons he hasn’t done this—one external, the World Trade Organization system which forbids subsidizing home industry; and one internal, Russia’s corrupt financial oligarchy.

      Given the financialization and corruption of the US economy, I write this in no spirit of self-righteousness.

      2. Some economists say that there is a “curse of oil” that prevents nations with economies based on sale of oil or other natural resources from developing a diverse manufacturing industry.

      The basis of the so-called curse is that the oil industry is so profitable that it draws investment away from manufacturing, and that oil exports cause the oil-producing nation’s currency exchange rate to rise, so that its manufacturing products are priced out of world markets.

      This may or may not be true of countries such as Saudi Arabia or Nigeria, but I don’t think it is true of a large and diverse country such as the USA or an even larger and more diverse country such as the Russian Federation.

      I don’t think there is any law of nature or economics that prevents Russia from becoming an important industrial power.

      I am, as I hope I’ve made clear in other posts, opposed to waging economic, propaganda and covert war against Russia, and to military confrontation with Russia over matters that are not of vital to the United States.

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  2. tiffany267 Says:

    Interesting thoughts… I always just thought of Russia’s economy as stunted by its own politics (and to some extent its geography and climate). Did life under the czar provide a comparable atmosphere for entrepreneurship, innovation, and creative productivity to the relatively laissez-faire US of the 1800s and early 1900s? And of course certainly several decades of militaristic centralized planning, including such atrocities as forced labor camps, not to mention the imperialistic forced social and economic integration of satellite states with widely different histories and cultures, cannot be brushed over with regards to paralyzing healthy economic development. And the outright lack of civil liberties during this time, while perhaps not immediately relevant to industry, cannot have helped cultivate entrepreneurship. These influences naturally did not vanish in 1990 as the USSR crumbled. Personally I’ve never had any illusions of hope that Russia would ever resemble the economies of other Western nations.

    I’ve always wondered how Russia would have turned out had it not been for Lenin and the Communists, had the White Russians been successful in creating an organic republic. I constantly wonder the same about Spain 2nd Republic and other countries around the world whose democratic movements have been sabotaged by collectivism and conservatism.

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    • philebersole Says:

      It is interesting to speculate how Russia and also Spain might have developed if there had been no world wars and if they had been free of foreign interference.

      But by the times of the Russian Civil War and Spanish Civil War, I think any chance of a peaceful development of a liberal, democratic free-market society had been lost.

      I find it more interesting to speculate what might have happened if the Social Revolutionary Party, a radical agrarian non-totalitarian party, had triumphed in Russia.

      The SRs and not the Bolsheviks won the most votes in the Russian Constituent Assembly, which was the only democratic election Russia had prior to 1991 and may have been the most democratic election ever.

      Similarly in 1930s Spain, the anarcho-syndicalists had a larger following than the Communists, whose power was based on the dependence of the Spanish Republic on Soviet aid.

      The Spanish anarchists believed in a democracy based on workers councils, and not in the centralized state.

      The Russian SRs and the Spanish anarchists would have been perceived as just as much of a threat to the capitalist order as the Bolsheviks were.

      Could they have maintained themselves against external threats? Were their ideas workable at all? I don’t know, but I’d like to think so.

      Liked by 1 person

  3. peteybee Says:

    Yes, very interesting article and blogpost and discussion.

    I would put a lot of significance on Russia’s society taking no less than 4 potentially society-destroying hits in the last century or so — first the revolution, second Stalinist purges (and the ongoing disaster of soviet organizational methods extending thru the 1970s), third WWII, the home-field version, and fourth the “privatization” / kleptocracy period of the 1990s. Not sure the US experienced an episode comparable to any of these since the civil war.

    As to the natural resources being a “curse”?

    I see Russia is something like a bigger version of Canada or Australia or Norway or Texas or Argentina, but with better success at fighting off foreigners.

    I don’t think Russia will make it on industrial ability like China, Japan, Germany, or South Korea. It’s not going to make it on finance. And despite its military, it’s not going to make it as an imperialist either — heck, the US can’t even do it right, despite the mother of all head starts.

    But there’s nothing wrong with the natural resource game. Take the first and third option from the article in the Nation. Norway might be a good model. State supports empowering individuals by taking care of them. NOT a member of the EMU. NOT a participant in geopolitical struggles.

    So if Russia wants to have a more active role in defending itself, it should work on that, and taking care of its citizens so the best ones don’t leave, and developing a more effective buffer for its financial system.

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