The Foreign Service Journal, December 2003

the success of the oil sector after privatization, and the huge increases in oil exports that coincided with the eco- nomic recovery after 1999. A certain self-congratulatory tone emerges from spokes- men of parts of the Russian government and industry, cheered on by the self-inter- ested financial investment community, in discussing the impressive economic perfor- mance of the oil sector bol- stered by historically high world oil prices. Of course, a longer-term perspective shows that the flood of exports has been at the expense of domestic oil demand, which has collapsed to half of Soviet levels since the late 1980s. This was due primarily to the continued breakdown of the real economy outside of oil and gas, and only marginally reflected conservation and efficiency gains resulting from better price signals. The pertinent policy question is whether an oil and gas dominated economy is a good basis for long-term sustained economic growth for a country where industrial production is still a fraction of what it was during the Soviet period. President Putin has set a modest goal of doubling GDP from its current low levels by the end of the decade (in order to catch up to Portugal!), and is nonetheless criticized for unreal- istic expectations by his own economic team. Is the natural resource-based economic strategy an engine for growth or a restraint on growth in the long term? With a well-educated population of 145 million and important agricultural and industrial potential, Russia certainly has advantages and policy choices that other natural resource-based economies do not have. Still, one is hard-pressed to find in history an example of a country that achieved economic takeoff on the basis of a natural resource boom, with the possible exception of the U.S. between the Civil War and the Great Depression. Among oil-producing countries, Mexico and Indonesia successfully diversified their economies only after oil prices collapsed in the mid-1980s. Today, Nigeria is alone among populous countries pursuing such a narrow economic strategy. Russia’s position is not unlike that of Britain and Norway after major oil pro- duction started in the North Sea in the 1980s, and OPEC tried to convince those two countries to restrain produc- tion and help prevent an oil price collapse. Ultimately London and Oslo decided that their economic futures lay with the industrialized world. Britons and Nor- wegians, in spite of being major oil exporters, are also better off with stable, low to moderate oil prices just like Americans and Japanese. Canada is also a major oil- and gas-exporting country, but not too many Canadians argue in favor of high energy prices. Russia has a vast territory and consequently faces daunting transportation challenges, as well as a very cold climate. It also needs to reindustrialize in order to provide gainful employment for its people, some- thing the capital-intensive oil industry is notoriously bad at doing. Russia’s population needs affordable energy just like ours. Cheap energy benefits farmers, manufacturers and consumers in Russia just as it does in America. And yet, today, the prospect of the world oil price slipping from an artificially high level of $30 per barrel to a more sustainable level of $20 or lower is often cited as the single biggest threat to the Russian economy. Is this an economic posture worth preserving? The answer would seem clear. A productive econ- omy cannot be based solely on the production of oil and gas. If Washington wants to bring future Russian business leaders to Texas, it would be better if they meet Michael Dell in Houston and wheat or cotton farmers in West Texas than the CEOs of ExxonMobil, ChevronTexaco or ConocoPhillips, who are already all too familiar with leaders in the Russian petroleum sector. Policy Reform or Project Promotion? Long-term economic growth is much more likely to be enhanced and sustained by government policies that remove structural impediments to balanced F O C U S 36 F O R E I G N S E R V I C E J O U R N A L / D E C E M B E R 2 0 0 3 Long-term economic growth is more likely to be enhanced by government policies that remove structural impediments to balanced growth than by picking the right economic projects.