Economic development is a necessary condition for a country to become a world power. That is why numerous states try to improve their economic indicators, and there are many ways to achieve it. Some countries rely on small businesses, others allure foreign investors, while a few states use their natural resources to develop an economic sector. Thus, many tend to believe that those nations that can impress with large deposits of various natural resources show increased economic growth. However, it is not always accurate because the phenomenon of resource curse exists. It denotes that resource-dependent states are often doomed to witness slower economic development in comparison with those countries that do not have so many resources. Thus, oil and gas abundant states in post-Soviet space grow more slowly than other economies, and it is explained by their political regimes, banking sectors, GDPs, and the amount of foreign investment.
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The Post-Soviet Case
To begin with, one should explain why the post-Soviet countries deserve attention in this case. The Soviet Union was a state that both appeared and collapsed in the 20th century. It consisted of 15 socialist republics, and each of them had only limited powers. Since the USSR covered significant parts of Europe and Asia, it was not a surprise that the state accommodated many natural resources, including oil and gas. When the Soviet Union collapsed in the late 20th century, newly created independent nations were left with the deposits that had been discovered within their borders. Consequently, those countries could use the resources to expand their economies on their own. Nevertheless, particular examples prove that those large deposits of oil and gas did not lead to significant benefits for the post-Soviet countries. Since 1991, Russia, Ukraine, Azerbaijan, and Kazakhstan have had a bit fewer than 30 years to turn the deposits into economic development, but they have witnessed specific problems that will be described further.
There is no doubt that oil and gas have always been crucial assets, which means that they require wise and attentive governance. That is why the post-Soviet countries needed stable governments and appropriate organizations that would convert the resources into economic benefits. That issue was a central idea of many election campaigns when politicians promised that they knew how to expand economies. However, resource abundance has resulted in the authoritarianism of different kinds in some of the countries under consideration. According to Brooks and Kurtz (2016), this political regime is not beneficial because it hampers development. For example, each of the countries that have been mentioned has state agencies or organizations, such as Russian Gazprom, that deal with the issues of resource extracting and allocating. State governance implies central planning and the absence of competitors, which is not productive for economies. Thus, the post-Soviet countries have understood the importance of these resources and tried to get advantages from them.
In other words, resource abundance launches a complex process that implies negative consequences. Firstly, large deposits make countries establish strict political regimes with state bodies to manage these resources properly. Secondly, these governments exercise full control over this sphere and do not allow private ownership or competitors to arise. Finally, the absence of competition does not stimulate the governments to implement innovative policies or appropriate changes to increase the benefits of using the resources. At the same time, resource-scarce states understand that they should look for the sources of their economic development in other spheres. It results in more prudent and versatile decisions that should contribute to further development. This idea can be exemplified by numerous European countries, including Luxemburg and the Netherlands, that obtain significant economic benefits from tourism, and it is possible only in democratic societies. Thus, the resource abundance inevitably influences political regimes that, in turn, hamper economic growth.
It is difficult to overestimate the significance of a banking system for the economic development of a country. The system is responsible for allocating capital, monitoring investments, mobilizing savings, and others. The more developed and diversified the banking sector is, the more significant benefits it can produce for both economies and citizens. It refers to the fact that the banking system should meet the needs of various economic spheres to provide them with the necessary resources and contribute to their prosperity. When it comes to the resource-dependent countries under consideration, however, their banking sectors play smaller roles. Kurronen (2015) argues that it is so because these sectors are shaped to satisfy the needs of large state corporations, such as Gazprom in Russia or Naftogaz in Ukraine. Since the given countries focus primarily on their resources, they need to create supplementary establishments that would provide them with necessary assistance, and field-specific banking sectors are the most suitable option here.
Even though the financial sector described above seems to generate some advantages for the state companies of oil and gas industries, it creates some drawbacks for representatives of other spheres of the economy. For example, the emphasis on the oil and gas producers can result in higher interest rates for small and medium businesses. It will be financially dangerous for them to borrow money because repaying will involve a higher burden. In this case, such companies will not resort to loans, which will not have positive results. Consequently, this situation will lead to “hampering economic diversification and reinforcing the resource curse” (Kurronen, 2015, p. 208). That is why the resource-abundant countries in post-Soviet space tend to have narrow banking sectors and, consequently, economies. This information also proves that shaping the banking sector solely according to the existing resources is not a useful idea because adverse outcomes in other industries will outweigh all possible advantages.
Gross Domestic Product
The idea that large deposits of gas and oil are significant advantages have appeared due to the fact that these resources can be used both to develop domestic industries and for export. Thus, resource-abundant countries experience an economic boom as soon as they discover these deposits, but the development rates decrease crucially in a while. It refers to the financial benefits obtained from exporting the resources. Oil and gas have their prices, and these prices are significant for economic growth in the post-Soviet countries. On the one hand, when these prices are high, the states obtain many revenues that will contribute to their development. On the other hand, should these prices fall, the countries witness an essential economic decline. Since the resource-dependent states base their economy on oil and gas, it is difficult for them to recover from the problem.
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GDP is one of the leading indicators that describe the state of various economies. It is reasonable to consider the Russian GDP to see how oil and gas dependence influences its economy because the situation in other post-Soviet countries is similar. According to official data from Figure 1, the Russian GDP was continually increasing from 1998 till 2013, reaching its peak of more than 2,200 billion dollars in 2013 (Trading Economics, 2019). 2014 witnessed a geopolitical crisis that resulted in various consequences, and a significant drop in oil prices was among them. It led to the fact that the Russian GDP was approximately 1,300 billion dollars in 2016 (Trading Economics, 2019). This state of affairs demonstrates that the Russian economy relies on its energy resources, and this reliance can have adverse results for such economies under certain conditions. Thus, the presence of many natural resources reduces the rates of economic development in the post-Soviet space.
Foreign Direct Investments
As has been already mentioned, foreign investments are essential for developing economies. It refers to the fact that people or organizations invest their money in particular industries of foreign countries to get some benefits in the future. Inevitably, this tendency also has some positive outcomes for target countries because they obtain funds to improve and upgrade various economic spheres. There is no doubt that such investors enter those markets where they see the potential of generating some revenues and where domestic legislation allows and even stimulates such an activity. Thus, the amount of foreign investment that is necessary for economic growth reflects the country’s image and reliability in the modern world.
Okafor and Webster (2015) report that the resource-abundant post-Soviet nations witness a decreased amount of foreign investment in comparison with other economies. Even though the presence of large oil and gas deposits can serve as an attraction for investors, their abundance and accompanying factors do not result in much foreign money. It refers to the phenomena that have been described above. Firstly, the authoritarianism and state corporations in the gas and oil spheres mean that foreign individuals and organizations do not have many possibilities to invest their money in these industries. Furthermore, this political regime often results in instability, and numerous revolutions in the post-Soviet countries prove this idea. Secondly, a field-specific banking sector does not welcome foreign investors, which creates higher financial burdens and many challenges for them. Thirdly, fluctuating GDPs are another aspect that prevents investors from entering the markets in the post-Soviet space. Since they see that the changes in oil and gas prices can significantly worsen the economic situation in these countries, many investors will refrain from cooperating with them. The absence of such investments, in turn, will result in slower economic growth.
Economic development is a complex phenomenon that consists of various aspects. It is impossible to state which of them are more detrimental to growth, but their overabundance can result in significant drawbacks. Thus, the gas and oil abundant post-Soviet states demonstrate that large deposits of natural resources can have harmful effects on their economies. The resource-dependence makes these countries establish authoritarian political regimes and create field-specific banking sectors. These phenomena result in the fact that foreign investors do not want to enter such markets because of possible risks. Finally, the countries under consideration base their economies mainly on the available resources, which results in economic decline once these resources become cheaper. This information proves that the phenomenon of economic curse influences appropriate states negatively.
Brooks, S. M., & Kurtz, M. J. (2016). Oil and democracy: Endogenous natural resources and the political “resource curse.” International Organization, 70(2), 279-311.
Kurronen, S. (2015). Financial sector in resource-dependent economies. Emerging Markets Review, 23, 208-229.
Okafor, G., & Webster, A. (2015). Foreign direct investment in transition economies of Europe and the former Soviet Union. In J. Hölscher & H. Tomann (Eds.), Palgrave dictionary of emerging markets and transition economics (pp. 413-434). London, England: Palgrave Macmillan.
Trading Economics (2019). Russia GDP. [Graph]. Web.