That 70’s Show in Russia

MOSCOW – Can Russia escape the “resource curse” implied by high oil prices, or will it succumb to what we call a “70-80” scenario? That is the question confronting Russians today, and we fear that their fate will be the latter: if oil prices remain at $70-80 per barrel, Russia is likely to relive key features of the Brezhnev era of the 1970’s and 1980’s – with a stagnating economy and 70-80% approval ratings for its political leaders.

The resource curse means, of course, that Russian elites will prefer to postpone restructuring the economy and modernizing the country’s political and economic institutions. This will undermine economic performance, making it very unlikely that Russia will catch up with the advanced economies in the next 10-15 years, as officials promise.

Fast and sustainable economic growth requires the rule of law, accountable, meritocratic, and non-corrupt bureaucrats, protection of property rights, contract enforcement, and competitive markets. Such institutions are difficult to build in every society. In Russia, the task is especially problematic, because the ruling elite’s interests run counter to undertaking it.

In post-crisis Russia, the resource curse is reinforced by two factors. First, massive renationalization since 2004 has left state-owned companies once again controlling the commanding heights of the economy. These firms have no interest in developing modern institutions that protect private property and promote the rule of law. Second, Russia’s high degree of economic inequality sustains the majority’s preference for redistribution rather than private entrepreneurship.