Even a casual observer must conclude that there’s no direct – and necessary – correlation between natural resources and wealth. In the end, a strong economy and wealthy society have more to do with ’software’ than ‘hardware’. In my mind, ’software’ consists of intangibles like a country’s political institutions, law, civic culture and morals. Take Japan or Hong Kong for instance: neither possess any significant natural resources yet both have built themselves into industrial and financial powerhouses.
Yet countries with great natural wealth endure poverty and instability. Like Russia. From today’s Moscow Times:
Anyone who thinks that oil and wealth automatically go hand in hand obviously hasn’t been paying attention to export revenues in recent months.
Producers of crude lost an estimated $3.3 billion on exports in September and October, according to Alfa Bank, and the losses have continued to mount this month.
The financial difficulties come at a hard time, as production will fall this year for the first time in a decade, threatening the country’s share in the global market. But the government continues to press for production to grow and guarantee Russia’s place as the world’s second-largest exporter — a factor that has underpinned the country’s growing international clout.
“Suppose that global crude prices recover in a couple of years and we have dwindling production,” said Alexandra Yevtifyeva, an economist at VTB. “We would lose our significance as a reliable supplier of energy.”
Falling production would mean a reduced ability to influence international prices, a goal that the government has articulated of late, said Igor Lotakov, a partner at PricewaterhouseCoopers.
“If we begin a rollback now, our position will no doubt grow weaker,” he said. “If we give up everything, revenues will drop, and we will still be unable to influence the situation [with prices], much as we are unable to now.”
The reason for the financial difficulties is that while oil prices have fallen by about two-thirds since their summer highs to just below $50, the fall in export duties that the government charges per barrel of oil has lagged behind.
I had previously noted Russia’s oil export difficulties and loss of foreign exchange. This inability to sell oil at a profit abroad is compounded by falling production and currency instability – itself a product of overdependence on oil and gas revenues. Again, from today’s Moscow times:
As oil prices have dropped below key fiscal support levels over the last few months, the outlook for the ruble has become a national concern. The currency rose steadily for five years but reversed course in July. Since then, it has given up most of its gains. After proudly portraying the ruble’s strength as a sign of economic resurgence, the government has sent confused messages about its decline. These have ranged from ardent declarations that there would be no devaluation to more earnest admissions that devaluation appears inevitable. In a recent speech at a United Russia congress, Prime Minister Vladimir Putin took a balanced position, stating that there would be no dramatic devaluation.
The prime minister’s remarks came after months of reserve depletion and a widely criticized devaluation, when the Central Bank widened the ruble trading range by 2 percent. The market knew that the new level was indefensible, and it subsequently doubled its bets on further devaluation. Sure enough, the Central Bank broadened the trading band again this week, and further steps are likely to come.
Not widely reported in the West is Russia’s inflation problem – the central government has never been able to bring it under control and a devalued ruble could well exacerable the problem. And the squeeze gets tighter on a Russian population deeply suspicious of banks and financial institutions and on an already fragile economy.
But back to software. Instability tests every country’s software differently. In the U.S. ‘instability’ usually means cutting back on our Christmas shopping. In Russia, however, it means citizens withdrawing all their cash savings from banks and ultranationalists clashing with riot police. It means a society where Hobbesian chaos constantly threatens as in this picture I took last year in Moscow of the same ultranationalists. (Click photo to enlarge).
Ask yourself: when the real crisis comes, whose operating system will crash – and why?
