Russia and the 'Resource Curse'

By Jeremy Lott

Russian President Vladimir Putin has extracted immense profits from his country's abundant oil and mineral deposits. He nationalized part of the oil industry and forced private energy firms to pay a pretty penny to do business in, beneath and just offshore of his once-great country.

Because of Russia's great oil wealth, and possibly owing something to his own autocratic personality, Putin had great interest in Hugo Chavez's resource-rich Venezuela. One time, an agent was dispatched to Caracas to talk with the Chavez government about oil exploration or some similar subject. The Russian's flight got in late, so he took a room for the night on the top floor of a Venezuelan hotel.

The Russian soon put in a call to the front desk. He asked if there was some national celebration going on outside. The front desk said no. He asked if they were sure about that. The front desk didn't budge. He insisted there must be some celebration because of all of those fireworks he could see and hear from his window. Oh that, the front desk said, "Those are actually gunshots."

Peter Kaznacheev delivered that droll punch line at a small lunch a few weeks ago at the Cato Institute in Washington, DC. Kaznacheev is a former adviser to the Kremlin. These days, he runs a natural resources consultancy out of London. He was in DC to present an ambitious working paper.

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Are countries blessed with abundant oil and mineral deposits actually afflicted with a "resource curse"? That's what many development economists -- including his eminence Jeffrey Sachs -- have argued for years, until it became something of a consensus view.

Count Kaznacheev an unbeliever. For him, curses belong to folklore, not economics. "Not all countries are cursed," he told the small room full of policy wonks chowing down on catered pasta, sandwiches and cookies.

Sure, according to the Index of Economic Freedom, nine out of the 10 least economically free countries are also resource-rich countries, Kaznacheev said, but that doesn't tell the whole story. Look up, says Kaznacheev: half of the 10 most economically free countries at the top of the list are resource-rich as well.

The more economically-free, resource-rich nations tend to be wealthier, have lower crime and higher literacy and life expectancy rates. How can oil be a blessing for them but a curse to others?

"I don't think it's a resource curse, but maybe a resource issue," Kaznacheev framed the problem, before guiding us into the heart of his analysis.

He advocates what he calls a moderate (pronounced "mow-der-aat") institutional approach to solving the problem. He crunched an unfathomable amount of data and found that those countries with generally good governance and well-established property rights are going to be able to handle oil, gas and mineral revenues with little difficulty. They simply treat resource extraction much like they would any other industry.

But if you strike oil in countries without well-developed institutions, that's where things can hit a snag. Local strongmen will try to corner the market and spread the profits around to buy more support, thus shoring up their rule. This not at all uncommon scenario convinced Sachs and company that the resource curse was a real thing.

Kaznacheev is no strongman denier. He readily admits that his old boss Putin has benefitted from natural resource revenues, but he argues that the effects are overstated and don't account for changes that come with even crony prosperity.

One reason Kaznacheev doesn't fear the black gold is that governments are just not very good at extracting oil. Their margins-per-barrel are almost always much lower than profit margins at privately run oil companies. State firms can buoy their governments when oil barrel prices run high but their contributions turn negligible or even negative when the price plummets.

He pointed out that GDP in Russia has just about tripled under Putin, and a lot of that is due to natural resource extraction. Sure, this prosperity has helped out the Russian president, but it has also enriched a lot of other folks who would not have had two rubles to rub together otherwise.

Kaznacheev pointedly denies that Putin could be knocked off his horse, so to speak. That, however, doesn't mean that resource rich countries aren't starting to change, he explained. So I pressed the point a bit: what happens to Russia after its strongman's strength fails?

Well, then things may be different, he suggested. After all, "It is easier to control miserable people than wealthy people."

Jeremy Lott is editor at large for RealClearPolitics.

(AP Photo)

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