Streetwise Professor

March 10, 2015

Resource Rents, Russian Aggression, and the Nature of Putinism

Filed under: Commodities,Economics,Energy,History,Military,Russia — The Professor @ 9:00 pm

This nice piece from the WaPo points out the link between oil prices and Russian aggressiveness:

From this perspective, Russia is not so much an insecure superpower as it is a typical petrostate with a short-term horizon that gets aggressive and ambitious once it accumulates substantive oil revenues. Back in the early 2000s when the price of oil was $25 a barrel, Putin was a friend of the United States and didn’t mind NATO enlargement in 2004. According to Hendrix’s research, this is exactly how petrostates behave when the oil prices are low: In fact, at oil prices below $33 a barrel, oil exporters become much more peaceful than even non-petrostates. Back in 2002 when the Urals price was around $20, in his Address to the Federal Assembly Putin enumerated multiple steps to European integration and active collaboration aimed at creating a single economic space with the European Union among Russia’s top priorities. In 2014 – with the price of oil price around $110 – Putin invaded Ukraine to punish it for the attempts to create that same single economic space with the E.U.

I made these basic points eight years ago, in a post titled “Cocaine Blues.”

The graph depicts Gaddy’s estimates of the energy rents accruing to the Soviet–and Russian–economy. Each of the two spikes in the graph corresponds to a period of Soviet/Russian adventurism. The first shot of oil/cocaine during the 1970s oil shock fueled Soviet aggressiveness around the world. The second oil/cocaine shot–the post-2003 runup in oil prices–is powering Putin’s recent revanchism.

There were some follow up posts on the same theme.

This post from Window on Eurasia quotes a Russian social scientist who disputes the importance of oil prices in explaining Russian behavior in the Putin era. Instead, Vladislav Inozemtsev identifies the lack of formal institutions as the characteristic feature of Putinism.

But these things are not mutually exclusive. Indeed, another SWP theme from about this same time period (2007-2008) is that Russia is a natural state in which Putin uses control over resource rents to maintain a political equilibrium. Resource rents permit personalized rule and impede the development of formal, impersonal institutions.

In other words, in Russia, resource rents, and especially oil/energy rents matter, both for its political structure and evolution, and its behavior as an international actor.

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  1. This is all so blindingly obvious it barely needs saying.

    Only it does. It needs repeating, loudly and clearly, on a daily basis.

    Comment by Tim Newman — March 11, 2015 @ 12:33 am

  2. This is an oversimplification of a myriad of issues that probably has influenced the current state of Russian foreign policy. Here are a few caveats: 1) Russia is not a true petro state (surprisingly), although it fits the definition closer than other “high income” developed economies (definition: GDP >$14K per capita). Hydrocarbons represent 30% of Russia’s GDP and not 50%+ as in typical petro states in Africa or Middle East. It is dependend on oil prices but not solely dependent on it. As such can one make a generalization using two data points and one driver: price of oil vis-a-vis Soviet Union in 70’s/80’s and Russia in 2000’s and 2010’s? 2) Putin’s behaviour in early 2000’s and early/mid 2010’s: It’s too easy to generalize against what he seemed to want in terms of EU, integration with world economy, and NATO enlargement. For all we know, he may merely not have had enough leverage to go against interests that he felt were threatening. Now that some of the low-hanging fruit of structural changes made in first half of 2000’s and whose benefits have run their course, Putin had two new phases of ensuring continued reign: 1) tackle high hanging fruit of structure reforms and potentially weaken the power structure he has built for himself or 2) embark on adventurism to shore up domestic national support. I think we know which way he decided to go.

    Comment by Artur — March 11, 2015 @ 10:25 am

  3. SWP, your statement,
    “Resource rents permit personalized rule and impede the development of formal, impersonal institutions.”

    Perhaps, its the other way around, that is,
    A society where personal rule is the standard, it impedes the development of formal, impersonal institutions, and mainly has, (if it’s lucky), resource rents, for it’s basic economy.

    If America and the west had ruSSian culture we too may have been only a resource based economy, in fact we once were resource based. What made us develope?

    Comment by traveler — March 11, 2015 @ 5:16 pm

  4. Headline;

    “Stratfor predicts loose nukes in Russia will be ‘the greatest crisis of the next decade”

    I would correct the ending of this headline to, “the greatest crisis before the end of this decade”

    Read more:

    Comment by traveler — March 12, 2015 @ 3:24 pm

  5. In related news:

    Why are Russian markets not panicking when there are rumours that the balancer of resource rents may have been displaced? Do they know who will fill the role?

    Comment by Ivan — March 12, 2015 @ 4:00 pm

  6. @Ivan-ordinary Russians probably don’t really care who fills the role. One thief replacing another. The chaos that will likely accompany any struggle to become the balancer is probably their major concern.

    The ProfessorComment by The Professor — March 12, 2015 @ 8:02 pm

  7. bernard Lewis – the great ME scholar and bane of E. Said’s life (both good things) coined the expression, “no representation without Taxation” or in other words if the rulers do not require the output of the majority of the population, or the income derived from it, the population has little say short of open violence. Not that one cannot have a dictatorship without taxation, but that it is highly unlikely to have a representative democracy without it. As Russia is hollowed out, The model it approaches is that of an Arab petro state with delusions of byzantine grandeur.

    The reason that the US did not develop as Russia did was that the export base of the US was varied and diverse as to products, required a large part of the population to participate in it, and was ancillary to domestic industries. It was also not under direct government control, the cultural difference from the statist model found in Russia. In the areas of the US where representation was most stifled were where there was a mono economy: e.g. the slave states and King Cotton: in addition to disenfranchised slaves and bondsmen, indirect elections were carried to extremes: I defy anyone to read the S. Carolina State constitution and tell me this is democratic (with a straight face). Interestingly in slave states where the economy was much more diversified, e.g. virginia tennessee etc. one sees fewer restrictions on voting (property rights), fewer indirect election features, fewer restrictions on manumission, etc. When Wart came, many of these states split or were held to their nominal loyalties only by occupation.

    A rather impressive example of the effects of economies based on single export products

    Comment by sotos — March 13, 2015 @ 10:51 am

  8. I’ve just discovered this blog and there are so many amazing articles about me! It’s so good I’ve been taking a week off work to catch up with archives. Keep up the good work!

    Comment by Vladimir P. — March 13, 2015 @ 4:22 pm

  9. Sotos,you know that the popular view is that the people, and its culture and laws are the foundation of society, and their economy is the result. You an SWP apparently say, the economy dictates the culture.

    You point is interesting. I’d like to expand on your thoughts as to why resource based or monopolistic economies take on a totalitarian path.
    A single export economy is an simple way to make money and does not require alot of changes in techonology and thought. This relates to your statement on little economic diversity, if there was no simple way to make money you have to be creative and divesify. Another reason an economy takes a totalittarian path is that, when your income is dependendant on one product, wether you admit it or not, you are vulnerable, compared to a diversified economy. Between lack of change and vulnerability, this makes you fearful. Fear makes you want to control.

    I am still inclined to believe that the “cause” is the society and the effect” is the economy, not the other way around.

    Comment by traveler — March 13, 2015 @ 7:04 pm

  10. @traveler & @sotos. In complex phenomena like these, causation goes both ways. To the factors you identify, @sotos, I would argue that the fact that abundant (and diverse) natural resources were discovered in a country with a strong legal tradition, limited government, and republican system mitigated the resource curse. In Russia, there was no rule of law, and rule has always been highly personalized and devoid of institutional checks on the autocrat.

    And as Lewis notes, there is a strong connection between representative institutions and the necessity of funding government by taxes. When rulers need taxes, they have to bargain with their inferiors, and historically this has led to a broadening of representative institutions that check the ruler. Rulers who can fund themselves out of rents need not stoop to bargaining with or begging from the hoi polloi. That, @traveler, is the main reason why I think that resource rents are associated with undemocratic/autocratic/totalitarian systems.

    The ProfessorComment by The Professor — March 13, 2015 @ 11:13 pm

  11. SWP, thanks for that response. I still will have to chew on the difference between taxes and goverment imposed rents.

    Comment by traveler — March 14, 2015 @ 5:08 pm

  12. @traveler-You’re welcome. The history of England is illustrative. The main advances in liberty (e.g., the Magna Carta, the strengthening of the position of Parliament vis a vis the crown in the 17th century) occurred when the kings had to get money to finance wars. To get taxes, they had to bargain, and give up some powers to first the barons, and then the gentry.

    In contrast, resource rich states (think not just Russia, but Middle East petrostates, or Congo/Zaire) could finance themselves through control of the natural resources, so the rulers don’t/didn’t have to bargain with anyone.

    I’ve given some thought to why Russia (and eastern Europe generally) developed differently than western Europe and especially England/Britain. I think a crucial factor was that geographic vastness and lack of naturally defensible terrain made it impossible for local nobility to resist the tsar in the way that barons in castles could resist the kings in western Europe and England. The nobility in the west therefore had greater bargaining power than in the Russia, or the east. (Poland presents some problems for this theory.)

    The ProfessorComment by The Professor — March 14, 2015 @ 9:29 pm

  13. @traveler-One other interesting comparison (to me, anyways). Look at England vs. Spain in the 16th-17th centuries. Due to the mines in Mexico and Peru, the Spanish crown could finance its adventures without having to go hat in hand to representative institutions in Spain. This contrasted greatly with the crown in England, which had no such stream of rents to rely on. This contributed to the near absolutism in Spain, and the stunting of its representative institutions, in contrast to the English experience.

    The ProfessorComment by The Professor — March 15, 2015 @ 1:41 pm

  14. SWP, thanks again. I recall a concept that western Europe had more gold and silver in circulation, even prior to Spanish colonization of America. Also, western Europe had more of a market economy, including jewish merchants, which one of the early tsars of Moscow invited so as to create a market economy there. The vastness of Eurasia is not only difficult to defend , but dificult to provide cheap transportation for merchandise. Most of western Euorpe not only had shorter transport routes but most countries had great shipping ports. This goes back to the earlier discussion of diversity, which shipping port cities are the best example of. Then, there was the protestant reformation followed by the industrial revolution. Although that diversity has produce alot of wealth, it has produce a diveristy of behaviour that is undermining its own foundation.

    Comment by traveler — March 15, 2015 @ 3:56 pm

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