Putin’s Russia: An Exemplary Case of Hyper-Extractive State

By Alexander Etkind

Due to Russia’s geographic scale and military might, it amplifies typical problems of many petrostates from Venezuela to Nigeria to Iran. In an attempt to theorise these multiple problems Alexander Etkind introduces the concept of a hyper-extractive state, whose elite gets their wealth directly from natural resources with miniscule participation from the people. Is demise inevitable for these hyper-extractive states?

In modern Russia‭, ‬one percent of the population participates in the extraction‭, ‬transportation‭, ‬and trade of oil and gas‭. ‬These chosen people provide about half of the state revenue and two thirds of national export‭. ‬Boom and bust in this country have both‭ ‬been conditioned by the in-and-outflows of petrodollars and gaso-euros‭. ‬In all this Russia is not unique‭; ‬it is rather exemplary‭. ‬Due to its geographic scale and military might‭, ‬it amplifies the typical problems of many petrostates from Venezuela to Nigeria to Iran‭.‬

Political scientists have written about the “oil curse” – the non-democratic governance, administrative corruption, and social inequality that are typical for petrostates. Economists have written about inclusive and extractive states: while inclusive meritocracies build productive institutions, exclusive states suppress such institutions because they undermine profits and privileges of predatory elites.1 Combining both traditions, I introduce the concept of a hyper-extractive state, whose elite gets their wealth directly from nature with miniscule participation from the people and institutions of the state.

Russian Disease

In 1977, The Economist described the “Dutch disease”, which resulted from the development of gas fields in the Netherlands. Appreciation of the national currency boosted unemployment and damaged everyone who worked for internal markets. However, developed resource-rich countries such as Holland, Norway, Canada, and Australia, have successfully overcome this disease. Economists explain their successes by the preexisting “good institutions” – courts, parliaments, democracy and civil society. It has not been clarified what happens to resource-rich countries with “bad institutions”. Is their disease the same or different?

Disguised by exorbitant oil prices, Russia’s decline had started well before its current crisis. The state has saved much wealth, but it does not rely on the labour and knowledge of its people. Typically for a hyper-extractive state, human capital decays in a vicious circle: the more the state depends on its natural resources, the less it invests in human capital; and the more primitive the human capital, the more the state relies only on natural resources. In such a country, human growth, healthcare, and education are not necessary to the national economy. The population becomes economically superfluous and politically irrelevant for the purposes of the “elite” that runs the state. Rather than being the source of wealth, the population depends upon the charity of this elite. Coming from above, corruption destroys trust even on the pedestrian level. John Maynard Keynes described “a multiplier” that works in a national economy when it gets a financial boost from the state; in Russia, it is better to talk about a “divider”, because more money disappears with every state expenditure. Formally or informally, all the credit in this country comes from the state. Common people pay outrageous interest to the chain of the state-run, state-supported, and state-controlled banks; even in better times mortgages in Moscow cost more than 15-20% annually, and at the end of 2014 the base interbank rate was 18%. With its messy property rights, political authoritarianism, aggressive foreign politics and vicious attacks on its own society, contemporary Russia is an exemplary case for the malignant type of resource-dependency: Russian disease.

A hyper-extractive state does not need its population, and people are disappearing – culturally, socially and, finally, physically.

Exporting about two-thirds of its oil and gas, the country sells the rest domestically at subsidised prices, which are less than one-half of the world market price for oil, and one-fifth for gas.2 Providing these subsidies to state-controlled industries from electric plants to agricultural farms to railways, the government makes them all vitally dependent on the extractive and exporting sector of the economy. Being the only source of these subsidies, the state turns itself into a mega-corporation that supports or banishes whatever it wishes on a huge territory under its control. Working like oxygen in a suffocating body, rents from the carbon trade circulate in two loops, one that earns money by selling the carbon products on the external market and another that distributes parts of the profits among various systems of the national body. Delivering rents through the sclerotic veins and petrified capillaries to every living cell, this latter circle feeds all social, commercial, and military activities that do not pay for themselves. Of course the scale of these activities grow every year, and their inefficacies as well.

 

Oil-info

 

Petromachismo

The largest state by territory, Russia has 2% of the world’s population. Due to its energy trade, it creates 3% of the world’s GDP. Featuring extreme inequality, Russia consumes about 4% of the world’s luxury goods. However, it generates just over 1% of the globe’s service exports, which depend on human skills. For its medium-level average income per capita Russia shows a uniquely high mortality rate: now even in Afghanistan, a 15-year old would live longer than his peer in Russia.3 A hyper-extractive state does not need its population, and people are disappearing – culturally, socially and, finally, physically.

Carbon profits inflate rents and devaluate work. Until the financial crash of 2014, real estate prices in Moscow were not much different from the prices in Tokyo. A medical nurse needed 21 annual salaries to buy a studio in Moscow; in the oil-drilling Tumen’ region, it would take her 12 years, and in an average province of central Russia, just about four. 4 While the city budget of Moscow largely depends on the oil and gas companies that are taxed there, many Muscovites survive by renting their inherited apartments to the newcomers who work in these companies, their banks, and security services. While the rich become extraordinarily rich, even the poor feel some improvement; but because rents do not depend on work the poor do not feel any respect towards the rich. Neither the tsars nor the commissars were as distant from the common people as the current oligarchic “elite”, who have become indistinguishable from the extortionist state.

 

bigstock-Aerial-Moscow-City-panorama-29286362

Arieal view of Moscow City

 

However, a hyper-extractive state does need its population for protecting the vital flows of commodities and money. Extraction is capital-intensive and does not need much labour; in contrast, protection is labour-intensive and does not need much capital. But all three essential functions of the resource-bound state – extraction, transportation, and protection of commodities – require labour that is performed almost exclusively by men. Less than 1% of Russians work for the extraction of fossil fuel, and about 5% more work for security services. Almost all of them are men. Women are exiled to secondary sectors, which recycle the rents extracted by men. Promoting petromachismo – archaic values of aggressive masculinity that are connected to oil and gas industries – Russia’s overreliance on natural resources and security services denies the role of women as the critical drivers of human capital.

Studying oil-rich and poor countries of the Middle East, Michael Ross showed that women have higher education, better employment, and more legal rights in those states that do not have much oil.5 In Eastern Europe, similar factors explain the fact that even though the majority of the protesters in the Russian democratic movement of 2011 and in the Ukrainian revolution of 2014 were men, the most successful symbols of these movements were feminine. From the Pussy Riot group in Russia to the Femen group in Ukraine, from Yulia Timoshenko in Kiev to a bunch of pioneering female journalists in Russia’s anti-Putin press, symbolic leadership of the protest belongs to woman. When rebellious, exaggerated femininity confronts the overbearing masculine state, manifestations of femininity act as the all-embracing political symbols. Victims of the regime, women become the heroes of the resistance.

 

Oil, Coal, and Shale

In 2014, a war in Eastern Ukraine stopped on the boundaries of coal basins there. The miners of Donbass and Lugansk are truly different from the Ukrainian farmers and traders who populate the surrounding regions. Traditional coal mining in these rebellious areas has produced a particular culture that is collectivist and disciplined, blindly obedient to authority, and dependent on the state subsidies. Recent events in Donbass should be understood, I think, in the historical context of the coal miners’ fights against the oil-supported states. Such were the miner’s strikes in the UK and the Solidarity movement in Poland. The difference is that Russia’s oil-dependent state provokes and supports, rather than suppresses, the coal miners’ resistance to global modernity. Timothy Mitchell demonstrates that different commodities such as oil and coal have different political features. In the 19th century, which was the era of coal, the miners’ labour held serious power; a strike could paralyse the economy of the region.6 Oil and gas, on the other hand, require few people to work the drills and pumps. The real challenge with oil is the security of delivery lines. Tankers on the high seas and pipelines in a vast, empty terrain are vulnerable to the enemy. If, in the coal economy, the miner was the major figure and a strike was the major threat, in the oil economy, the central figure is the security guard and the major threat is a terrorist attack. Since security costs play a major part in the price of oil, security specialists like Vladimir Putin gain unusual power in an oil-dependent economy.

Global transition from coal to oil has changed many parts of the world in a neoliberal direction; England under Margaret Thatcher is exemplary in this respect. However, there are countries like Ukraine, Poland, Kazakhstan, and China that still rely on labour-intensive coal. Moreover, American shale is changing the familiar pattern of traditional, distant and monopolised oil. In Russia, there are 3,000 licensed slots that are issued to 500 legal entities. Producing roughly the same amount of liquid fuel, the US has 65,000 licensed slots and 17,000 drillers.7 The shale industry is geographically dispersed, knowledge-intensive, and sensitive to demand. In its political qualities, shale is closer to coal than oil.

In the crisis of 2014, Russia and Ukraine confronted one another as two types of political economy. Largely deprived of oil and gas, Ukraine stands against Russia as a labour-bound country against a resource-bound one. Though before the current crisis, Ukraine had received some profit from the transit of the Russian gas and mined significant amounts of its own coal, Ukrainian politics followed the desires of the people who create national income by their labour.

 

Outsourcing Profits and Families

Resource-bound and labour-bound states are ideal types, of course; what we see in the real world are mixtures and hybrids between these types. However, theorists of international trade have stated that the countries use their comparative advantages to the effect that their one-sided specialisms increase and sharpen with time. Mixed states exacerbate their comparative advantages: resource-rich states develop into even more resource-bound, and countries that rely on labour and knowledge of their people become even more labour-bound.

Trading their valuable resources with their neighbours, the rulers of hyper-extractive states amass large, potentially unlimited capitals. They shape a small, cohesive elite whose life is radically different from the rest of the population.

In my simple model, hyper-extractive and labour-bound states are connected by economic exchange in such a way that the former sells a valuable resource that it pumps from the earth and the latter exchanges this resource for the products of labour. Classical political economy teaches us that for the sake of efficiency, modern states secure property rights, develop public goods, encourage technological progress, become socially inclusive, and create democratic institutions of power. All this is true, but only for labour-bound states. As we have seen in Russia and other countries, abundance of natural resources allows certain countries to make themselves exempt from these neoclassical mechanisms. Looking at oil and gas, for example, we see that their production in Russia, Iran, or Venezuela has been growing despite the fact that the state has monopolised or nationalised these commodities. Of course it never happened, in Russia or other countries, with the production of food, cars, or computers: nationalisation of these industries invariably meant their decay. Historically valid in respect to the products of labour, neoclassical theory meets multiple problems when applied to commodities such as oil and gas. Economics cannot predict changes of their prices or even explain their past and current movements. If the neoclassical apparatus works well in labour-bound states, it is an open question how the deepest ideas of political economy – property rights, fair competition, independent courts, technological progress, social inclusion, codependence of economic growth and democratic development – apply to the resource-bound, hyper-extractive state.

Trading their valuable resources with their neighbours, the rulers of hyper-extractive states amass large, potentially unlimited capitals. They shape a small, cohesive elite whose life is radically different from the rest of the population. However, this elite has its share of problems. Since these rulers have not secured property rights in their domain, they cannot rely on their own capital, keep it in their country, and pass it to their children. Along with their subjects, the rulers lack public goods such as fair courts, clean air, or good healthcare, because the people have had no rights to demand them. The rulers’ wives need private goods that only a labour-bound state can manufacture, and their children need education that is available only on the other side of the border. In response, the elite of the resource-bound state deposits its capitals in the labour-bound state. Curiously but logically, this elite invests abroad into those very institutions that it does not support, or actively destroys, at home: fair courts, good universities, safe hospitals, and nice parks. This is the situation that we observe in the relations between Russia and the West, from Finland to England to the US.

If it were an abstract game, one could expect equilibrium between the two states, which would continue as long as there is peace and trade between them. Since the labour-bound state receives its capital back in the forms of deposits and investments, it does not mind the rise of the commodity prices. In response, it inflates its real estate, tuition fees, and court bills. But is it a stable, win-win situation? What are the possible sources of change in this two-state system? It could be an actual exhaustion of the basic resource, or technological progress that dumps the demand for it, or an external constrain such as climate change. Even without a depletion of the resources in the foreign land, scientific discoveries and secure copyrights in a labour-bound country would eventually produce local substitutes for foreign raw materials. An intrinsic problem of the hyper-extractive state is its leadership. Denying the principles of law and competition, the trade-and-security elite refuses to follow the rules of political change, which have been crucial for the stability of modern states. Worshipping the revenues of the state and wisdom of its rulers, the hyper-extractive elite insists on its unchangeablity, which is justifiable only in sacral terms. While the efficiency of the hyper-extractive state is falling, its elite becomes arrogant, desperate, and irrational. At some point, these rulers become intolerable to their international partners and then, to their own population. There is something of religious fanaticism in the behaviour of these irreplaceable rulers, something that savours of political suicide. This is what has already happened with Putin’s Russia, and we are in the middle of the process.

About the Author

my-photo-from-fbAlexander Etkind is Professor of History at the European University Institute at Florence. He has just moved to EUI after many years of teaching as Professor at the University of Cambridge, where he also was a fellow of King’s College. Etkind was born in St. Petersburg and defended his PhD in Helsinki. He is the author of several books including Warped Mourning: Stories of the Undead in the Land of the Unburied (Stanford University Press 2013). His most recent book is a biography of William Bullitt, first American ambassador to Soviet Russia. Etkind is working now on a new project, A Cultural History of Natural Resources: Postsocialist and Postcolonial Perspectives.

References

1. Daron Acemoglu, James Robinson. (2013) Why Nations Fail. The Origins of Power, Prosperity and Poverty. (New York: Crown).

2. Clifford D. Gaddy, Barry W. Ickes. (2013) ‘Russia’s Dependence on Resources’. In Michael Alexeev, Shlomo Weber (eds). The Oxford Handbook of the Russian Economy. (Oxford University Press ), pp. 309-339.

3. Nicolas Eberstadt, ‘Putin’s Hollowed-Out Homeland’, The Wall Street Journal, 7 May 2014. In his recent statement, the leading Russian demographer Anatolii Vishnevsky has confirmed this conclusion: http://award.gaidarfund.ru/articles/2133.

4. http://journal.mirkvartir.ru/analytics/2013/11/26/kopit-na-kvartiry-raznih-professii/

5 Michael L. Ross. (2012). The Oil Curse. How Petroleum Wealth Shapes the Development of Nations. (Princeton UP), ch.4.

6. Timothy Mitchell. (2013). Carbon Democracy. Political Power in the Age of Oil. (London: Verso).

7. http://www.resfo.ru/actual/128-neft-sibiri-re sursov-mnogo-zapasov-malo.html.