Dutch disease: the Russian case and the treatment for resource-dependent economies

The Russian ruble has been crumbling for quite a time and prospects for the recovery is still rather bleak. Alone in 2014, the currency lost 25% of its value, and the economy felt the severe impact of this incidence. However, several economists have been observing it as a half-cup-full situation: here lies the chance for a cure for Russia’s Dutch disease – a curse to many countries blessed with abundant resources [1].

‘Dutch disease’ is a term first coined by The Economist to describe the unpleasant experience of the Dutch economy starting from 1959, when the newly discovered natural gas reserves paved way for an unexpected economic downturn. Initially and naturally, the country’s export skyrocketed, leading to an influx of foreign currency [3]. Demand for the guilder (the native currency back then) soared, which in turn made the currency stronger. However, this appreciation of the guilder weakened the competitiveness of other industries on the international market, increased the unemployment rate, drained Netherland of its needed investment, and therefore, sabotaged the low country’s economic potential. The phenomenon has been repeating in many other commodity-rich countries and proved itself not to be an unfortunate one-time event, but a very probable risk for any country which depends too much on its resources.

While it is hardly deniable that without its vast reserve of oil and natural gas, Russia would have fared worse on the world map of economic prosperity, this blessing turns out to be a curse when we look into the nature of the price for commodity: it is very volatile and susceptible to change, and oil price in particular has been fluctuating in a downward trend recently. The booming oil industry and the tremendous gains from oil export have insulated the country from the danger of the weak back-up industries system. These days Russia has seen its faults: underdeveloped manufacturing, excessive import, a lagging economy when oil prices are down. Oil-and-gas exports make up 70% of Russia’s annual exports and 52% of the federal budget. These are the alarming signs of an economy ridden with the Dutch ailment. The disease will continue to be detrimental to the health of Russian economy unless the country uses its accumulated wealth to divert from the current unsustainable path.

The world experience on the Dutch disease is plentiful, ranging from the third world countries which easily fall into the trap of wealth mismanagement such as Indonesia and Botswana, to the more geographically-similar Norway and Netherland themselves, all of which are very useful cautionary examples for Russia to learn from [2]. There are two basic ways to reduce the threat of Dutch disease: by slowing the appreciation of the real exchange rate and by boosting the competitiveness of the manufacturing sector. The first way is more of a therapeutic measure that is actually very efficient for the country. But it will be better suited for Russia when its economy is still thriving on a stable oil price. Common sense let us know that it is always preferable to take the preventative measure and minimize future risks provided that another oil crash is looming ahead. This can be done by taking the second aforementioned solution: the competitiveness of the manufacturing sector should be improved. Russia can use the gathered oil wealth to develop the infantile manufacturing and service sectors; or follow the Norwegian example – one of the rare exception in the oil-producing countries that is almost immune to the Dutch disease, to focus on the education of its population and address social problems to upgrade and rejuvenate its workforce. The growth of manufacturing and service industries is of utmost importance to Russia right now, as it serves not only as a cure for this disease, but also from a political point of view, alleviates the problem of a great dependence on imported goods and the constraints which this dependence put on the Russians when economic sanctions are in the picture.

In conclusion, in a better time for the average Russian, when oil price was stable and rising, it would be much harder to convince Russia to steer to some different directions, but now it is high time the policy makers and businesses started to actively tackle the problem from its root and create a more healthy, well-balanced economy. Meanwhile, the oil industry needs not to fear its fate in new Russia with many highly competitive industries, as they will only serve as a firm back-up system for its growth, whereas the risks are minimized.