January 5th, 2012

Would a weak economy and a weakened level of personal popularity compel Putin to change his strategy?

Economist Ed Dolan

Writing in his “Econ Blog” for Nouriel Roubini’s EconoMonitor, economist Ed Dolan cautions readers that Putin’s regime may no longer be able “to offer growth and rising incomes in exchange for a monopoly of political power, as it has in the past.”

During his first term, for example, Putin promised that economic output in Russia would double in 10 years, and while Russian GDP increased by 82 percent from 1999 to 2008, the situation has not been as rosy since then, with the IMF forecasting growth of less than four percent for the next five years, meaning the next doubling of the Russian economy may take closer to 20 years than 10.

Oil exploration in E. Siberia

Additionally, Renaissance Capital reports that Russia must drill 5,000 to 6,000 new oil wells each year just to keep output from falling. Increasingly these wells will have to be drilled in more treacherous areas like Eastern Siberia or offshore in Arctic waters. Higher production costs also means the price of a barrel of oil needed to balance the state budget is climbing.

This phenomenon, Dolan writes, may also lead to the so-called “Dutch Disease,” where large natural resource exports “drive up a country’s real exchange rate, making the rest of its economy uncompetitive on world markets.”

Dolan closes by wondering aloud if a weaker economy, and a weakened level of personal popularity, will compel Putin to change his political strategy when he returns to the presidency this spring, either through privatization or by focusing attention on industries outside of the natural resource sphere. Don’t count on it, Ed.

Read the full article here.

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