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It’s Not Oil That’s Russia's Curse, It’s Excessive Imports

RI features yet another perspective in the ongoing debate about the future of Russia's economy 

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This post first appeared on Russia Insider

The author is director of the Institute of Economic Forecasting, an influential academic think tank.

A widespread explanation of the economic crisis is that it’s Russia’s resource curse, and we’ve arrived at the day of reckoning. Of course, this a metaphor; everyone knows that to have resources is not a curse, but a gift from God. But resource availability can work against the economy.

Let’s imagine a state that has great quantities of gold, metals, diamonds, oil and gas. One day a foreigner comes along, organizes exploration, production, imports equipment and specialists, and the local population works in menial jobs. The proceeds from the wealth hidden in the ground go to the foreigner, with the country receiving only a royalty - rent  - with which it goes on a buying spree. That’s a catastrophe.

Bearing this in mind, let’s look at Russia. In Soviet times, the country produced over 600 million tons of hydrocarbons a year. But due to a desire to get at the oil quickly, the recovery factor was below 40%. Even the Samotlor field was utilized very inefficiently, ecology barely counted, and an enormous proportion of revenue was spent on defense needst.

On the other hand, we can only be grateful to our geologists and oil workers, who gave us the opportunity to survive in the heady 90’s and begin to move forward in the 2000’s.

With the collapse of the Soviet Union, a series of mistakes were made that put us in a raw material dependency, like being on an oil needle. We started to use the proceeds from oil and gas to pay for large-scale imports.

Instead of producing our own food, we started buying it overseas, with up to 60-70% of the products in major cities imported. When old oil fields were depleted, we moved on to those whose difficult geological conditions required new exploration and production technologies. But instead of developing these, we almost destroyed the domestic research centers that could do the job, buying so-called oilfield services from the West. Using imported technologies, our own geological exploration capability was almost ruined.

In the zero years, rather than correct the trade imbalances, we claimed we were exporting too many raw materials.  But we needed products with high added value, good machinery and equipment. Decision-makers at the time said we had to stop doing simple things like oil and gas production, and have everyone writing computer programs. Those who believe that the production of hydrocarbons consists of a few uncomplicated manipulations, should go to Yamal.  It’s a super high-tech affair.

What is happening now is that oil and gas prices fell, yet production is increasing.

Now let's imagine that cars dominated our exports.  When demand was low, half the country would be out of work. It’s true that raw material prices are extremely volatile, but demand is amazingly stable. Therefore, we need to sell things that are in steady demand. In today's world, that’s oil, gas and metals - our main export products. Machinery and equipment, of course, must also be sold, bearing in mind that demand can fall two or three times in succession. It’s naive to assume that if we produce machines of unsurpassed quality cheaper than our competitors, they will open their doors. It’s very difficult to enter these markets, impossible without strong financing.

It’s absolutely right for us to specialize in the export of raw materials, but we must resist excessive imports. We need to regain our markets for energy equipment and services, pharmaceuticals and medical equipment, as well as food – where imports developed dramatically. It’s clear that a country that can create space vehicles and build nuclear power plants can do this. There should be no dependence on imported components in the military-industrial complex.

With the help of import substitution, Russia can get off the oil needle and maintain a modern export structure. Of course, this will not happen tomorrow, but the idea that it will take decades is ridiculous. We only need a few years of sound policies to beat the so-called oil curse. All the more so that we are capable of real economic miracles. From 2010 to 2014, poultry production in Russia increased by 40% and pork by 25%, and now Russia is close to becoming a net exporter of food.

All this in no way means that we want to return to autocracy, like the USSR, producing everything we need. Russia is part of the international division of labor and will stay there. We shouldn’t confuse import substitution with import displacement; but we should no longer depend on imports in the most sensitive areas. 

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