Will the curse of oil drag down Vladimir Putin?

We will look back at 2014 as the year Russian President Vladimir Putin pushed all his chips into the center of the table — risking everything to make Russia a world power again.

Even his apologists now acknowledge that Putin wants to resurrect the Russian empire with most of the Soviet Union’s lost territories either incorporated into Russia, as with Crimea, or in its orbit, similar to eastern Ukraine and Belarus, as well as the Caucasian and Central Asian states. The range of Putin’s geostrategic tools is also on display: the Eurasian Union, military brawn and proxy militias in the near abroad, and Russia’s petroleum exports as the main source of income and leverage.

A cornerstone in Putin’s power play, Russian oil and gas supplies are essential to a resurgent Russia. Only Saudi Arabia exports more oil than Russia, which boasts nearly a quarter of the world’s (non-OPEC) oil production. But Russia’s lopsided dependence on its petroleum revenues (which account for 70 percent of the country’s annual exports and 52 percent of the federal budget) undermines its political stability in the long run. Putin’s recapture of the mineral extraction industry from the private sector has hastened the country’s slide into authoritarianism and state-controlled capitalism.

Moreover, given an unstable global market, Putin’s gambit stakes economic performance on variables beyond Moscow’s control. Unless he takes radical measures to diversify Russia’s economy in the near future, its bottom will eventually fall out, facilitating his demise.

As witnessed in the Ukraine crisis, the clout Russia packs with its petroleum resources, at least in the short term, is undeniable. Precipitous price hikes on petroleum exports were used to discipline the unruly post-Maidan Ukrainian leaders, while Ukraine’s pre-Maidan Russian loyalists were rewarded. Russia’s leverage reverberates far beyond gas-dependent Central Europe. In March, as the United States and the European Union mulled punitive action against Moscow in the wake of the Crimea annexation, Germany’s reluctance was difficult to overlook. More than a third of its imported gas comes from Russia. And with Russia’s 30-year, $400 billion gas deal with China signed last month, Putin tried to show the U.S. that it is not the only superpower he can do business with.

At home, the Kremlin’s recouping of petroleum riches for the purposes of the state and its elites paved the way for Putin to remake Yeltsin-era Russia into a centralized, autocratic regime under his control. When Putin first came into office in 2000, the spoils of the Soviet Union had been divvied up among the oligarchs — understandably provoking the ire of an impoverished population, especially one weaned on statist, anti-market thinking. Moreover, the constitution allowed the state to reserve ownership over subterranean resources. This enabled the Kremlin to wrest control of the bulk of gas and oil industry revenues from the privatized oil companies, tycoons such as Mikhail Khodorkovsky and foreign oil companies.

By the mid-2000s, Russia’s oil production was surging, as were prices for petroleum products on the international market, which laid the basis for economic recovery and stability in Russia. This was a welcome relief from the hardship caused by the implosion of communism a decade before. Finally, average Russians could buy smartphones and new cars and take vacations abroad. While Russia’s ascent slowed during the 2008–09 financial crisis, it bounced back quickly, continuing to bolster the middle class, swell state coffers and enhance Putin’s popularity. This relative economic improvement catapulted the Russian leader into an undisputed position of power as both president and prime minister. 

Yet energy experts argue that Putin’s solid-looking fortress is built on sand. The “curse of oil,” a phenomenon in which mineral wealth corrupts autocratic states and often leads to civil strife, is usually the misfortune of underdeveloped countries. While Russia is not a classic example of such a country, it clearly has many of the same risks as the “petrostates”: namely, lack of democracy, domestic conflict, stunted reforms, high corruption and economic disarray.

In the past 25 years, Russia’s petrochemical resources have lifted the country out of the dumps but also brought it crashing down. They also created favorable conditions for Putin to amass power in an ever more centralized state, silence the opposition and civil society and, as of 2014, assert a claim to great-power status by annexing a sovereign territory.

According to Michael L. Ross, the author of “The Oil Curse,” petroleum-rich states that rely on extraction of rents from state-owned assets, rather than the tax revenue of their wage earners and productive sectors, tend to be more authoritarian. Those states, for example, are not beholden to their citizens in terms of expenditures. Accountability is indefinitely suspended while social services and infrastructure projects are given or taken away arbitrarily by a paternalistic state.

Moreover, oil-addicted countries are constantly at the mercy of the world market, which makes long-term planning impossible. Their economies are extremely sensitive to marginal shifts in supply and demand. In a volatile industry such as energy, the country’s fate is determined by prices, which can mean boom or bust. The lack of transparency inherent in petrochemical industry dealings facilitates corruption and conceals incompetence. In 2010, for example, Putin pushed through laws halting publication of information about the government’s oil and gas businesses, making the records off limits to critics and the media.

In his book “Wheel of Fortune,” Georgetown University professor Thane Gustafson argues that “inherited wealth from Soviet oil supports a comfortable systems of rents that is all too tempting to linger. Yet precisely because oil is a wasting asset, any prolonged stasis is not sustainable.” Gustafson recommends continually modernizing the hydrocarbon industry in order to avoid economic decline. In the same vein, if profits are not reinvested in improving measures to diversify the overall economy, other sectors will inevitably become less competitive.

Bound by Soviet-era logic, however, Putin won’t pursue these kinds of reforms. The high-tech sector suffers acutely from lack of innovation and investment. Gustafson claims that Russia’s oil industry “lags behind the rapidly moving front of a global oil business that is in the midst of a technological and managerial revolution.” This stagnation, he argues, is Russia’s bane, and petroleum wealth has only exacerbated it.

Putin has relied upon the inherited wealth of the hydrocarbon sector to circumvent change and shore up his power. His fortunes are now tied to oil and gas more than ever before, despite the fact that Russia is quickly running out of cheap oil. In the near future, petroleum reserves will become much harder and more costly to access. The gas deal with China underscores Russia’s vulnerability. After more than a year of haggling, it is clear that Putin signed up for low-priced gas deliveries that depend on a yet-to-be-built costly infrastructure from a position of weakness.

If 2014 is the year that Putin officially revealed his intentions, in retrospect it might also be viewed as the pinnacle of his power and Russia’s global pretensions. But there is nothing inevitable about the curse of oil: It afflicts those who don’t heed the lessons of others.