Nature's Evil [calibre 5.27.0]

The history of economic thought did not foresee anything like the ‘sterilisation’ of huge streams of income, which are comparable in value with national revenue. The classical economists could never have imagined that the crucial question of the new era would be exactly the opposite of theirs: how to take wealth out of the economy? Since this extra wealth has already been created, would not it be better to share it out equally among all citizens? This is how a similar fund in Alaska works – it pays out an annual dividend to all Alaska residents. Calculated through a transparent formula, the amount fluctuates between $1,000 and $2,000 a year. Created in 1977, the fund has a lot of experience and little bureaucracy. In Russia, the Stabilisation Fund was created in 2004 following the Norwegian model. Its aims were similar – the sterilisation of the income from gas and oil. However, the Russian fund lacked stability, and sterility too. The fund was divided up, merged and restructured several times; no institution in the Russian Federation has been renamed so often. It pays out money under the supervision of the president and the government; calculated in dollars, the fund has seriously shrunk in recent years. There are similar funds in other oil-extracting countries, from the Arab Emirates to Venezuela.

As economists say, it all depends on the institutions, though, I would add, in radically different ways. In the countries with ‘bad institutions’ – in Russia, Iran, Venezuela, Nigeria, Libya – we see the vicious circle of resource dependency. Extracting raw materials and failing to sterilise their rents, these societies are devaluing their human capital. Undermining their institutions, they depend still more on their resources. Going from one crisis to another, such societies pollute the natural and the human environment. The result is demodernisation – the loss of previously attained levels of education and equality, a creeping paralysis of society, and arbitrary activity by the state. 34 With its resource wealth, uncertain property rights, political authoritarianism and record levels of inequality, Russia is the model of ‘bad institutions’. If the combination of resource dependency with good (or just about acceptable) institutions is called the Dutch disease, let’s agree to call resource dependency in combination with bad institutions the Russian disease.

Following the price of a barrel, the role of gas and oil in the Russian economy changes every year. In 2013, the extraction of oil and gas made up 11 per cent of the GDP of the Russian Federation, while their sales abroad made up two-thirds of export revenue and half of the state budget. But these are only the direct receipts from foreign trade; a large share of the oil and gas is consumed within the country, often at subsidised prices. To estimate the rent that the state receives from the sale of energy, one needs to multiply the volumes of gas and oil sold inside the country by world prices. Such a calculation gives a figure in the order of a third of GDP. This income increases still more due to internal expenses and subsidies: for example, when the state uses the money made on oil to pay wages or supply fuel to agricultural enterprises, it then skims off a portion from them which returns to the exchequer in the form of taxes. But these taxes are laundered oil revenue. Heavy and military industries, metal factories and railways all get electricity (or gas that is burnt to produce electricity) at subsidised prices. These subsidies alone make up 5 per cent of GDP. Agriculture receives fuel at discounted prices and exports grain at global prices: this is how oil income proliferates. Even more important is the fact that the Russian currency, the rouble, is relatively stable only on account of the export of oil and gas; it is just impossible to imagine a convertible rouble without this export. 35 A stable currency is a public good, and the state has taken responsibility for it. Billions of the dollars and euros received from the sale of oil and gas are spent on this task. But in 2020 the Russian rouble fell by more than a fifth against the euro. The Marxist historian Mikhail Pokrovsky, working in the 1920s, noted that, the higher the global grain prices were, the more aggressive the politics of the Russian Empire. The rise in the export of wheat paved the way for the Crimean War. 36 The same logic was repeated in the twenty-first century, again in connection with Crimea. The higher the price of oil, the more aggressive the words and deeds of the Russian authorities. And, conversely, when prices fall, the authorities relax.

Discussing the Russian economy, the American academics Clifford Gaddy and Barry Ickes compare the petrostate to an inverted funnel. 37 Energy and capital enter it through the narrow neck; as the funnel widens, industries use them to manufacture arms, pipes, tractors or railways; the workers in these sectors receive wages, which they spend on services and consumer goods that form the widest part of the funnel. Taxes from these transactions finance the security services: energy streams have to be defended, conflicts resolved, property protected. The leftovers go into ‘the social sphere’ – schools, hospitals, pensions. Inefficiency, corruption and tax evasion divert a portion of these revenue streams into a subsidy for the elite. The funnel is a resonant image, but I would rather compare the resource state to the human body, with its two distinctive loops of circulation – the pulmonary circuit that oxygenates the blood and the large systemic circuit that feeds the rest of the body. In the smaller circuit, which passes through a network of boreholes, pipelines and export operations, arterial blood gets charged with fresh and convertible capital. Through the large circuit, this oxygen reaches all other organs and limbs, stagnating in the capillaries, clogging veins, settling in the walls of moribund vessels. The two circuits meet in the heart, and its valves determine how much will be delivered to the humble periphery of the system.