Russia's Pipeline to Riches

The unexpected willingness of Russia to join the U.S.-led coalition against terror signaled its return to the international strategic stage. But from an economic perspective, the sight of Russia dueling with Saudi Arabia over oil prices is perhaps equally significant. It's a sign that Russia, the No. 2 producer, is finally beginning to take a higher profile in the world economy. That's something Western countries should welcome and encourage.

For one, oil is giving Russia its first real stake in the health of the global economy. All other things being equal, oil prices rise and fall with world growth, so that Russia benefits when the global economy does well. That's something to which Russian President Vladimir V. Putin is paying attention. In a Nov. 20 speech to Russian energy executives, he said that Russia should develop its oil and gas industries to stimulate world economic recovery.

Moreover, Russia's oil industry is mostly in private hands. While Putin has enormous power, he can't simply order companies to raise or lower production--and that sort of decentralization is a healthy harbinger for the Russian economy. By contrast, in Saudi Arabia and most other OPEC countries, oil production quotas are set at the government level.

Still, there are two clear and present dangers to the economic resurgence of Russia. The first danger is that Putin could be tempted to exert control from above. He recently put his own person in charge at Gazprom, which is 38% owned by the government. The intention was good--to reduce corruption and provide access to Gazprom's monopoly pipeline system to all gas producers. Putin is doing the same thing in the defense industry, pushing for consolidation among many small and unprofitable private firms to create a viable set of competitors. But as attractive as this sounds in the short run, such top-down management runs the risk of backsliding to a command-and-control economy.

The other problem is that excess reliance on oil revenues could get Russia stuck in the same trap as Saudi Arabia. Historically even the most successful commodity-based economies have had a tough time industrializing. In Russia today, energy sales contribute 16% of gross domestic product and generate one-third of federal budget revenues. That could potentially lead to over-dependence on oil and gas production as an economic engine. Western economies can help avoid this by putting investment dollars into other industries in Russia besides energy.

But unlike Saudi Arabia, Russia has an enormous wealth of human capital in the form of educated, technologically skilled workers, which should pay off in the long run. In the end, an economically vibrant Russia is in the West's best interest.

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