The Russian paradox is that the country’s power rises as the price of energy resources increases, but its long-term economic prospects and geopolitical influence seem to rely on lower oil and gas prices. High prices destroy the incentive for necessary economic reforms.
“Russia’s economy remains dominated by oil and gas, and its overall government policies depend heavily on the global oil price,” argues Anders Åslund, a senior fellow at the Peterson Institute for International Economics, in The Moscow Times. “The critical insight is that the higher the oil price is, the lower Russia’s long-term economic growth is likely to be, because the ruling elite will thrive on energy rents rather than pursue reforms or invest in human capital.”
The country is underperforming as Russia’s gross domestic product fell by 10 percent in the first half of 2009 and is set to shrink by 8.5 percent this year. This is compared to forecasted growth rates of 8.4 percent in China, 6.2 percent in India and a one percent fall in Brazil.
“Economic disaster is obscured by Russia’s success as an energy exporter, which fuels an unrealistic dream that it can prosper as a ‘petro-superpower,’” writes David Ignatius, a columnist for The Washington Post. “The numbers show that today’s Russia is a declining power, not a rising one.”
And US Vice President Biden recently commented – causing a controversy and diplomatic headaches despite the validity of the arguments – in an interview with The Wall Street Journal that Russians “have a shrinking population base, they have a withering economy, they have a banking sector and structure that is not likely to be able to withstand the next 15 years, they’re in a situation where the world is changing before them and they’re clinging to something in the past that is not sustainable.”
But Russia still has its hold over Europe, right? Russia is Europe’s single largest source of imported gas and Russia’s monopoly control over gas pipelines forces Europe to depend on Moscow. “The Russians exploited energy to divide and rule their Western neighbors.”
Actually, its grasp could be slipping. The Russian industry is plagued by poor management and through market liberalization, new sources of supply and progress on the Nabucco pipeline (see related video above), Europe can improve its energy security. The Nabucco pipeline will link Europe to Azerbaijan and Central Asia, bypassing Russia. Once unlikely, Nabucco received formal backing from transit countries last month. Still, the pipeline’s construction is not certain and could only supply a fifth of what Russia exports to Europe.
Video from The Economist.
