THE BLOG
09/15/2008 05:12 am ET | Updated May 25, 2011

Russia and the Limits of Oil Wealth

Cross-posted at the NDN Blog.

New York City - The reappearance of a belligerent Russia on the world stage, buoyed by high oil prices and newfound wealth, would appear to signal a new era in global politics. For anyone still clinging to the idea of the unipolar moment, the spectacle of Nicholas Sarkozy brokering a deal between Russia and Georgia, shows that the moment of a single superpower is probably over, and something like a return to the era of the Great Powers, at best, or the Cold War, at worst may be in store--absent real U.S. leadership to the contrary.

Nor is it an accident that high oil prices have ushered in the return of authoritarianism to the global stage. Securing and maintaining oil wealth has never been pretty or conducive to democracy. The huge payoff from controlling the wealth has always encouraged factions to vie for its control and, once they obtain it, quash opposition. So it was throughout Central Asia during the years of the Great Game and remains today, not only in Russia, but also in Saudi Arabia, Iran and even Venezuela. From Putin to Ahmadinejad to Chavez, oil-emboldened strongmen are again asserting their power.

However, as glamorous as unbounded oil wealth inevitably seems, it equally comes at a tremendous cost that in a modern economy, can entirely cancel out its benefits. That is because through the phenomenon of Dutch Disease--the phenomenon noted in Holland after the discovery of North Sea oil, it has an incontrovertible tendency to undermine the rest of a nation's economy. The high profits obtainable through oil, gas, or indeed any valuable commodity, tend to make other industries non-competitive by driving up costs. This is the dark cloud that threatens Russia's future.

Indeed, as Philip Stepens notes in today's Financial Times, Russia faces a raft of deep-seated economic problems that belie her new found swagger. Russia is losing population at an alarming rate due to low birth rates. Infrastructure is crumbling. And the corruption problems that have plagued her for decades have only grown worse as she has become more dependent on oil and gas revenues. Indeed, Russia's decision yesterday to suspend Robert Dudley, the British head of its TNK-BP oil venture, for trumped up reasons, testifies to the absence of the rule of law, likely continued capital flight, and corruption that still characterizes commercial dealings in the country.

Oil wealth always tends to contain the seeds of its own destruction. Were it not so, countries like Iran, Venezuela and Mexico would dominate the global economy. Thus, Russia is riding high for now. However, with her econmomy increasingly dependent on oil and gas, a drop in prices would have strong and swift effects. Russia, herself, would benefit in the long term from diversification away from oil but this is a goal that has always eluded those who worship at the altar of oil.

From a U.S. strategic point of view, shifting energy consumption away from oil and gas toward renewable energy that is not tied to any one geographic locations can, thus have important strategic as well as economic benefits.