Libertarian Jackass

"Life is short, but truth works far and lives long; let us speak truth." -- Schopenhauer

Friday, October 31, 2003

Russia and The Extraction Of Natural Resources

After the arrest of Khodorkovsky, the richest Russian and largest stockholder of the YUKOS oil company, it should be clear how the Russian "government" operates. As the Russia Journal writes:

According to it, Russia is a rentier state, which lives off the extraction and sale of its oil, gas, metals and other natural resources. Although Soviet-era industrial plants are producing once more, an appreciating ruble is starting to expose their lack of international competitiveness - highlighted this week by the World Economic Forum report that shows Russia dropping to 70th place (from 64th) in its business competitiveness ranking. The old edge in science and technology is gone, as top-level researchers have left the country. Even Russia's armaments industry cannot hold on to its markets. Russian military hardware has to be upgraded with Western European and Israeli electronics to find clients even in the developing world.

Don't tell me the thousands of missiles produced during the Cold War are out of style!

Natural rent that accrues to nations fortunate enough to have natural resources on their sovereign territory. Norway and Alaska spread their oil revenues liberally among their citizens in a system that suspiciously resembles socialism. Saudi Arabia, meanwhile, exemplifies the feudal stage in history: its oil wealth belongs to the House of Saud, whence it trickles down to its sundry vassals.

In Russia, many ordinary people believe that the natural rent is distributed unfairly. In their view, it goes to a handful of oligarchs, who fraudulently bought up natural resource companies in the early 1990s. This is why attacks on oligarchs are so popular. However, while the oligarchs are obviously wealthy, they are not the main recipients of Russia's natural rent. The bulk of oil and gas revenues go to Russia's extensive government bureaucracy.

In Russia, the old Soviet-era bureaucracy not only remains in place, but it has been the main beneficiary of the economic reforms of the past decade. It expanded by nearly 15 percent in the second half of the 1990s, even as the overall population declined. The number of employees at various government agencies now totals some one-tenth of the population.

Mikhail Khodorkovsky became an integral cog in this corrupt machinery. For over a decade, every Russian oligarch has been feeding a small army of officials - all those who issued permits to set up private banks in the early years of reforms, signed off on cheap government loans and sold off resource companies for a fraction of their actual worth. But once Mr. Khodorkovsky learned more about business, he and the bureaucrats parted ways. Milking the cash flow at YUKOS may be lucrative, but it doesn't create true wealth, whereas by making his company honest and transparent an oligarch can realize billions on the stock market. At the same time, transparency and accountability precludes slush funds for paying protection and grease money to officials.

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