The Real Price of $80 Oil

Economists Aleh Tsyvinski and Sergei Guriev have a new article on Russia’s resource curse, arguing that sustained high oil prices combined with a stagnating economy may create a repeat of the Brezhnev era, causing economic modernization and political reform to be delayed.

Even the recently announced privatization of non-controlling stakes in the largest state-owned firms ― while timely and laudable ― will not create an irreversible commitment to reform. So far, the government does not want to let control over these firms get into private hands. Hence, the sales that Prime Minister Putin announced will not increase the demand for pro-market institutions.

By contrast, the “70-80″ scenario seems increasingly likely. In June, during the St. Petersburg Economic Forum, participants in two sessions ― Russian government and business leaders, as well as influential foreign players ― were asked about the future of Russia’s economy. The results were drearily similar.

In one session, 61 percent of participants foresawstagnation in thenext 2-5 years (33 percent predicted growth and 5 percent expected acrisis). In the other session, 55 percent of participants foresawstagnation in the next 10 years (with 41 percent projecting growth and 4percent expecting collapse).

The factors that drove the Putin era of rapid economic growth ― high andrising oil prices, cheap labor, and unused production capacity ― areall exhausted. Russia will thus be forced to start spending the reservesthat saved the economy in the recent crisis.

The “70-80″ scenario will preserve the status quo, but eventually theeconomy will reach a dead end, at which point the only choice will begenuine economic reform or decline and dangerous civil disorder.