Caught in the Bear Trap: why Russia never grows

(Business New Europe – bne.eu – December 17, 2013) Below find the link to a new paper from academics Clifford G Gaddy and Barry W Ickes, the men that brought us the term “virtual economy” in the 1990s the defining idea of the Yeltsin-era.

In this new paper the thesis is that Russia suffers from the oil curse, but the way it manifests itself is a little differently from simple Dutch disease problems.

Free markets lead to the efficient distribution of productive resources based on cost, access to markets etc. The trouble with Russia is that it was industrialised by Stalin and the factors of production were places on the basis of security and control rather than profits.

Since 1991 the oligarch have taken over and economics demands they move their factories to where they “should” be. However, this could obviously destroy entire cities of voters so the Kremlin has lent on them to remain where they are. This is possible as the factory can maintain its profitability thanks to low energy costs.

So the bottom line is that oil provides a decent standard of living but it also ironically prevents true prosperity.

A real stocking filler for Xmas beach reading:
http://www.li.com/docs/default-source/country-growth-reports/pid-2013-russia-caught-in-the-bear-trap.pdf?sfvrsn=4