EH 7: Resource curse and patrimonial capitalism in Russia Flashcards
Background on Russian hydrocarbons
-Late 19th century: oil exported from oil fields in Baku (today‘s Azerbaijan)
-Up until Russian Revolution 1917: Russia and USA largest oil producers
-Soviet Union 1950s: oil production surges, discovery of new fields
-Later: oil price shocks, low prices
-Since 2000 (Putin comes to power): prices rise (and with them GDP and living standard) -> association of Putin with economic success (but mainly due to global rise in oil price)
-Russia is the major producer of oil and gas worldwide + huge pipeline network
-Hydrocarbon trade is the main modus of Russia‘s integration into world economy
-Oil and gas in Russia today:
20% of GDP
40-50% of budget revenue
60-70 % of exports
-Gazprom (gas) and Rosneft (oil) as main economic players
Patrimonial capitalism
strongly relies on Patron-client relations
Ruling group: control over economy
-> Private appropriation of public resources, for example natural resource rent
lots of Informality
->Corruption
->Rent-seeking from natural resources
Patronage of society
Patrimonialism by Max Weber:
-form of political power
-authority rests on the personal power of the ruler
-domination is secured by a group with no independent power-base
-ruler extends personal grace and favours
-absence of a rational-legal state may be a hindrance to the development of modern (Western-type) capitalism
-> How is resource wealth connected to patrimonial capitalism?
-> Is resource wealth conducive to aggressive foreign policy?
Adverse effect of natural resource abundance
Oil wealth may be connected to patrimonial capitalism through
-Effect on political regime (resource curse)
-Effect on the economy (Dutch disease)
General empirical evidence: countries with large natural resource endowment perform worse in terms of economic development and governance than those with fewer resources.
Resource curse
Delay of modernisation
-Notorious underinvestment and innovation gap
Repressive state apparatus
-Rise and consolidation of the authoritarian regime
Rentier effect
-State relies on revenues from commodities instead of taxing citizens -> Why bad?
-big ressources to fund social services
Corruption
-Rent-seeking
-Patronage
-Private enrichment of ruling elite
-Public procurement contracts awarded to cronies, e.g. large construction projects like Nord Stream pipelines or Sochi Olympic games (astronomical scale of kickbacks = state pays for contracts, but part of it comes back as bribe)
Dutch disease
Oil weath <-> non-diversified economy
Natural resource exports (for dollars-> larg inflow of petro dollars) -> local currency overvaluation -> other exports become uncompetitive -> de-industrialisation (can’t export competitivly, doesnt make sense to produce)
Indicators:
-Overvalued currency
-High inflation
-Small share of manufacturing in GDP
Bottom line: Russia may not be suffering de-industrialisation especially because of recent war efforts (manufacturing, industrialization)
But Russia certainly suffers from low diversification of the economy
rents from oil and gas sector subsidises uncompetitive industries -> heavy state interference
Russia and sanctions since Feb 2022
russia most sanctioned country
Sanctions from USA, EU, Canada, Switzerland, Australia et al
Individuals (politicians, oligarchs, military personnell)
Freezing of accounts, travel bans
Entities (banks, defence companies, media like RT)
In addition:
EU bans on coal and steel imports + Russian ships forbidden from entering EU ports
SWIFT ban
many Western companies left the Russian market
very steep decline in Russian energy exports to the EU, largest part of the reduction: cuts to oil imports
but: Impact of EU decoupling was limited: Russia’s mineral fuel export earnings are at the level of 2019 (driven by a shift to Turkey, China and India
after invasion EU didn’t really sanction Russia gas, but Russia cut supplied to EU
Gazprom cut deliveries if not payed in Rubels
Big winner: USA with LNG
China cannot replace EU in terms of Gas because of lack of pipe lines in the short term
what are sanctions
foreign policy tool to put economic pressure on people/states
withdrawal of customary trade and financial relations for security and policy purposes
can be
-trade embargos
-ban on participation in pay systems
-targeted sanctions against individuals (asset freezes, blocking of transactions in foreign currency, travel bans, restrictions on trade)
purpose:
change of behaviour (rarely work)
signaling
evolvement of sanctions
after cold war many more sanctions, because within the UN there were no more 2 blocks -> easier to agree
through more globalizations easier to hurt countries by sanctions -> increase of sanctions
today: deglobalization at the same time as increase in sanctions -> question of causation
Lessons from sanctioning Russia
Hopes for effectiveness of sanctioned are dashed (“crush the Russian economy”)
Russia is not isolated. Is it at all possible to isolate a big economy in times of globalisation?
Russian economy is adaptive
-Import substitution (in place since 2014: domestic production instead of import)
-War economy, military production
Cooperation with like-minded (munition from North Korea, drones from Iran)
-Localisation (e.g. Iranian shahed drones)
-Evasion through countries that sense a business opportunity (from the Caucasus to Central Asia to China)
West does not sanction what it urgently needs: uranium, nickel, gas
Asset freeze confiscation could send shock waves and diminish trust in $/€
-> Policy implication: Is it nevertheless necessary to uphold sanctions?
