In Background, Russia

By Mark Adomanis, Forbes Magazine, April 24, 2015

Russia’s economy doesn’t get a lot of love. It’s “Nigeria with snow,” “Burkina Faso with rockets,” or, in John McCain’s oft-repeated quip, “a gas station masquerading as a country.”

To be sure, natural resources genuinely play a large role. It would be foolish (and inaccurate!) to try to totally discount the huge influence of companies like Gazprom, Rosneft, and several other state-run resource extractors. The Russian state’s finances really are based on the heavy taxation of energy producers, and the Kremlin would be in a world of trouble if the oil/gas spigot ever truly ran dry.

But Russia, despite what you often hear, is more than just a gas station. Its manufacturing and service sectors aren’t particularly competitive by world standards (very few people in North America are buying Russian cars) but they do exist.

Using World Bank data on natural resource rents, officially defined as “the difference between the value of commodity production at world prices and total costs of production,” it’s instructive to compare Russia’s level to those in the members of OPEC, the prototypical petro states.

Russia vs OPEC, GDP per capita

As is clear from the chart, natural resource rents are a non-negligible percentage of Russian output. But these rents are nowhere near as high as in many of the world’s largest oil producers. Russian resource rents aren’t even particularly large compared to other post-Soviet states: Azerbaijan (36%), Kazakhstan (29%), and Uzbekistan (20.1%) all had proportionally larger rents.

It’s also interesting to compare Russia’s actual GDP per capita with what it would have been if all natural resource rents were eliminated. Here, again, Russia just doesn’t appear to be particularly exceptional when compared to OPEC members.

Russia natural resoource rentsIndeed after adjusting for resource rents, Russia’s GDP per capita would be roughly $19,000, a level that is broadly similar to post-communist countries like Bulgaria ($15,600), Poland ($22,800), and Romania ($18,000). Russia’s adjusted GDP per capita also compares reasonably well with adjusted per capita incomes in other resource-dependent post-Soviet states like Azerbaijan ($10,500) and Kazakhstan ($15,500) or major oil producers to which it is often compared like Libya ($12,000), Venezuela ($13,500), or Iran ($9,000).

So what is the takeaway? Is it that Russia’s economy is some kind of budding hegemon? No. The important thing to remember is that, when you compare it to those of other post-Soviet states or OPEC members, Russia’s economy is not uniquely primitive or resource dependent. We need to keep this in mind not to bolster Russians’ tender feelings but because if you formulate policy based on the assumption that Russia is a “gas station masquerading as a country” that policy won’t work very well because Russia is much more than just a gas station.

Indeed, as shown above, Russia minus all of its income from oil, gas, timber, and minerals is basically a much larger version of Romania. Romania, of course, isn’t exactly an economic miracle, but it is a democratic member in good standing of the European Union and NATO.

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