The Foreign Service Journal, April 2007

ground. At the same time, they employed such destructive practices in their haste that the wells were consid- ered ruined. Industry insiders ques- tioned whether the remaining oil could ever be lifted. Meanwhile, dur- ing the chaos of the post-Soviet Russian economy of the early 1990s, there was no effort to return to those wells to recover the bypassed oil. Output on the territory of the Russian Federation plummeted from a Soviet-era peak of 562 million tons per year (11.2 million barrels per day) to barely 300 million tons a year (6 mbd) in 1999. At the end of the decade, however, two circumstances changed the situation dramatically. First, the steady rise in world oil prices made even hard-to- lift oil more attractive. Second, sub- stantial parts of the oil industry had been put in the hands of new, private owners — the so-called oligarchs — whose more entrepreneurial outlook allowed them to re-examine the status of the old oil. New technology, it turned out, was available internation- ally that made it possible to lift oil from the “ruined” wells. Output rose year after year, reaching 480 million tons (9.6 mbd) in 2006. But with the good news came bad. With most of the bypassed oil now recovered, the question is, “where now?” Oil producers in Russia will now have to shift increasingly to new fields and new regions. The new oil, like most of the old, will be in Siberia, but where in Siberia? As in its previous oil boom, Russia is faced with critical decisions about Siberian development. The Challenge of Vast Spaces Siberia represents a real boon in the form of resource wealth. However, it does have great associated costs — costs that rise at an increasing rate the further east one moves. The first component of the increased costs comes from the climate. Cold temperatures add extra costs to all economic activity. In a normal market econ- omy, these costs are weighed against the benefits. Patterns of population settlement and location of indus- trial activity evolve accordingly. The Soviet economic system, however, largely ignored the issue of cost. Far too many people and too much manufacturing industry were moved to Siberia. As a result, Russia was made “economically colder” than it needed to be. (My col- league Fiona Hill and I discuss the cost to the Russian economy of the overdevelopment and misdevelopment of the region in The Siberian Curse .) The cold is not the only disadvantage of Siberia. Remoteness, or distance, is also important. Distance is the most basic obstacle to all economic interaction in market economies. Transportation costs are only part of the problem. When potential exchange partners are separated from one another physically, they are less like- ly to know about each other, to know what goods and ser- vices are available or needed. They are less likely to know each other’s reputation. They are less likely to share the same social networks. Therefore, the busi- F O C U S 34 F O R E I G N S E R V I C E J O U R N A L / A P R I L 2 0 0 7 Spatial misallocation is an often- underappreciated feature of the Soviet system. Figure 2 Figure 1