Question

Why is Russia unable to use most of its natural resources?

Answer 1

Russia is a country that is well endowed with a variety of naturally occurring minerals and is thus subject to both the benefits and disadvantages associated with significant resource wealth. However, the country occupies a unique position when compared to many other emerging markets in the same naturally rich position and, as a result, needs to be assessed on the basis of its distinct situation. Its position opens the Russian economy to a number of detrimental effects that, if not dealt with effectively, could mean disaster for the country’s economy and its long term growth. The importance of efficient macroeconomic management is second to none, with the role of political economy in Russia’s development and sustained growth playing a crucial role. This essay will look at the effects of state control, rent seeking and the government’s fiscal policies, in an attempt to discover the nature of Russia’s resource dependency, and whether or not the country’s future success is jeopardised by the existence of natural wealth or political weaknesses.
One of the major issues associated with the presence of abundant natural resources such as oil, gas and other natural deposits, is the potential negative effects it can have on the rest of an economy. In other resource focused economies, a notable decrease in the manufacturing productivity has been noted as a direct result of the increased importance of resource exploitation in a nation’s exports (Dobrynskaya & Turkisch, 2010). This effect is present in a number of emerging markets that place an emphasis on the development of their natural resource sectors. The impact was most prominently noted in Holland after the discovery of natural gas deposits in the 1950s and 60s, leading to the development of the concept of ‘Dutch Disease’ (Powell, 2008). As a result, many economists have rejected the assumption that the presence of natural resources is beneficial to a nation’s growth, with the existence of raw materials becoming increasingly considered as an obstacle to successful future development (Ahrend, 2005). This is combined with an increasing amount of empirical work suggesting that resource rich countries are more likely to fall behind in terms of long term growth, leading to the syndrome frequently known as the ‘Resource Curse’ or ‘Paradox of Plenty’ (Ahrend, et al., 2007). However, in the case of Russia, economists are divided over whether or not the country is currently suffering from ‘Dutch Disease’, if it will suffer from the economic ailment in the future, or, if the theory is still in fact relevant considering the concept is just as frequently absent as it is present from resource rich countries (Powell, 2008).
Arguments suggesting that the country is currently in the grips of a severe case of ‘Dutch Disease’ (Sapir, 2005), are largely founded on Russia’s apparent dependence on oil for its economic growth from 1998 onwards, as well as the presence of a number of symptoms associated with the disease. Russia has suffered from the appreciation of the rouble due to high energy exports, a decrease in employment in the manufacturing sector and a rise in the country’s service sectors, all of which point to a country currently suffering from the effects of resource dependency and ‘Dutch Disease’ (Dobrynskaya & Turkisch, 2010). However, unlike the theory suggests, in many instances industrial sectors have grown and experienced increased levels of productivity (Ahrend, 2005). Until the financial crisis of 2008, there were two main factors supporting the strong development of Russian industry, booming internal demand and the good performance of Russian products on foreign markets, such as the Euro area and the Commonwealth of Independent States (CIS), regardless of their increasing prices (Dobrynskaya & Turkisch, 2009). Despite this, it has been suggested by Rüdiger Ahrend, that the growth achieved in the non-resource based sectors was a result of ‘passive’ restructuring, with its apparent growth only possible due to the high inefficiency experienced by industry during the Soviet period (2005).
As Ahrend suggests, much of Russia’s increased manufacturing productivity can be associated to the poor productive environment under communism and the de-industrialisation that occurred during the economic difficulties in the 1990s. There was a rapid process of recovery during the early 2000s which explains the increase in manufacturing despite the decrease in employment, with evidence to suggest that demand from China and the CIS for Russian goods also acted to prevent the decline of Russian industry (Dobrynskaya & Turkisch, 2010). Dobrynskaya and Turkisch (2010) argue that the apparent symptoms of ‘Dutch Disease’ could also be explained by other factors, such as the Balassa-Samuelson effect in relation to the rouble’s appreciation, and the rapid growth of services due to their under-development during the Soviet period (Dobrynskaya & Turkisch, 2010). Whilst economists may highlight the reasons for the continued industrial growth and competitiveness, despite the country’s dependence on oil exports to fund much of its development, the continued long term growth of Russia’s economy is dependent on the creation of sound monetary and macroeconomic policies as growth in the future will be significantly harder to attain. If the Russian government meets the challenge of resource dependency with good macroeconomic development, it will undoubtedly reduce the vulnerability of the country’s economy to external factors (Anon., 2006). It could be argued, that the future of Russian development is dictated by the government’s ability to manage the natural resources of the country, with effective administration ultimately negating the effects associated with an abundance of natural materials. It is therefore crucial that we recognise the role being played by the Russian authorities in resource management, if any kind of prediction is to be made regarding Russia’s future long term growth.
The Russian government has attempted to control the situation emerging in the country through a number of fiscal policies, with some being more successful than others. Attempts by Vladimir Putin to control the appreciation of the rouble against the Dollar in 2004, thus protecting domestic producers from growing imports, was largely unsuccessful, resulting in inflation, revived capital outflow and a liquidity crisis that affected several banks causing an almost complete halt in the economy (Aris, 2005). Russia has experienced significant difficulty with the appreciation of the rouble and it has led to some conflicting monetary policy, with Putin admitting in 2004 that the economy was struggling to maintain competitiveness due to the strong upward pressure on the rouble caused by the resource dependant nature of Russian exports (Anon., 2006).
However, the creation of the stabilisation fund, designed to provide a buffer against the inflow of ‘petrodollars’, protects the Russian economy from a decline in the price of oil and acts to sterilise the effects of excessive inflow when prices are high (Aris, 2005). Whilst providing financial security against fluctuating oil prices, the stabilisation fund is also the most efficient means for controlling inflation, playing a pivotal role in sustaining budgetary expenditure, growth and exchange rate stability in the event of developing ‘negative terms-of-trade’ (Gianella, 2007). The stabilisation fund partly controls the country’s money supply and, whilst not completely preventing it, goes some way to reducing the increase of inflation (Dobrynskaya & Turkisch, 2010). The structure of the tax system is critical in controlling the input of resource revenues, with the development of an effective taxing system ensuring that any excess profits are redirected into the stabilisation fund up to the value of 500 billion Roubles. The direct taxing of the resource sectors will allow the Russian authorities to relieve the tax burden on manufacturing, thus helping to ensure the continued competitiveness of industry (Gianella, 2007).
Despite this, a number of issues surrounding the stabilisation fund have become apparent. Initially it appears that the limit of 500 billion Roubles is likely only enough to offset the countries short falls for no more than a year at most. Neither is the fund indexed against inflation rates and, as a result, is falling in value relative to Russia’s GDP by around 15-20% per annum (Ahrend, 2005). Yet, the most notable issue and prominently debated question in the Russian government is, what should be done with the excess windfall? As there is no legislative mechanism to control the rapid spending of the stabilisation funds above the value of 500 billion Roubles, there is a real danger of ‘fiscal slippage’ (Gianella, 2007). Some have suggested the reinvestment of oil revenues into infrastructure, health services and education. However, the dangers of such reinvestment include pro-cyclical financial loosing and inflationary pressures, with former minister of finance Alexei Kudrin warning against such measures and encouraging the government to use the windfalls to pay off external debt, thus avoiding a pro-cyclical policy that would make the risk of ‘Dutch Disease’ more severe (Gianella, 2007). Thus far Russian authorities have taken account of this advice and used the excess cautiously to write off the country’s foreign debt (Anon., 2006). Without the creation of tough yet flexible restrictions on the use of the stabilisation fund[1], the endless speculation within the Russian government could in itself be enough to effect the management of the exchange rate, with expectations of a lapse in government discipline reinforcing pressure on the appreciation of the rouble (Gianella, 2007).From this it is clear, that the continued usefulness of the stabilisation fund in protecting the economy from the excessive input of resource revenues, is almost completely dictated by political will. As a result, Russia’s future financial stability and the maintenance of long term economic growth is vulnerable to changes in political goals, opinions and governments; making its position, without a significant increase in legislative restrictions, tenuous at best. The political danger is clear. The incentives for rulers who are unsure of the security of their tenure are more likely to manipulate and aggressively spend resource revenues in an attempt to secure their future political authority, asserting their position through tax cuts and public spending, as well as using such windfalls to appease social protest if it should occur. The temptation is to use the funds for immediate consumption rather than to support forward thinking reform (Tompson, 2005).
The implications of political economy are potentially one of the toughest obstacles faced by resource rich nations, as rent seeking and the negative effects associated with it play a prominent role in resource dependant countries’ development. In this respect Russia is no different. The allocation of talent to areas in the resource sector is commonplace, as individuals often chase the rents provided by Russia’s natural wealth rather than engaging in entrepreneurship in other non-resource based industries (Ahrend, 2005). Both the private and publics sectors in Russia are highly focused on securing rents created by resources rather than creating new wealth. As a result, contest over the control of the means of resource production has generated significant problems for the diversification of the Russian economy, acting as a major point of political conflict and causing economic production to suffer due to the unproductive nature of the struggles (Tompson, 2005). Such conflicts have resulted in the domination of resources by fewer, larger firms, increasing the political incentive to nationalise these companies, especially when they constitute a large proportion of the economy, due to the government’s fears of large and politically unmanageable enterprises. The reason for such intensive rent seeking in Russia is largely due to the general weakness of property rights and a legal system ill-equipped to deal with the contests that arise, rather than the nature of the natural resources. In this environment agents will be more likely to pursue prospects of short term profitability, rather than establishing uncertain long term enterprises (Tompson, 2005). It is clear that whilst rent seeking is a major issue for the Russian economy, it is not directly caused by the presence of abundant natural resources. The appeal of rent seeking will continue in Russia until there is some form of legislative intervention that drastically strengthens property rights and creates a legal system capable of effectively defending an individual’s right to ownership. It can thus be summarised, that the political issues in Russia are not caused by oil, gas or other mineral deposits, but by a flawed and inconsistent judicial system and weak legislature. So, it could be argued, that rent seeking in Russia and its political fallout are not the result of economic factors, but the consequence of a weak legal system that makes such economic activities viable.
Traditionally, resource dependant states suffer from under developed extractive institutions due to their ability to secure significant revenues from their primary sectors, thus reducing incentives for the development of elaborate fiscal institutions (Tompson, 2005). Such a scenario is potentially very detrimental for Russia’s political development, with their ability to fund activities without the need to tax the population reducing the government’s accountability to its people. However, this situation does not appear to represent or explain the conditions in Russia. Extremely weak extractive institutions after Communism meant that the government had to develop a system in which it could effectively tax all areas of society. Initially a policy of general taxation was pursued and little attention was devoted to securing resource rents, suggesting that until the tax changes in 2000-2003 the country’s political development was not negatively affected by resource rents (Tompson, 2005). In 2003, the Russian government’s tax revenues for export duties and resource taxes (20%) were lower than both social (22.2%) and consumption taxes (29.5%), clearly showing that the tax revenue collected from the resource sector is not the Russian government’s main source of revenue, with VAT in Russia acting as the single most important tax, accounting for 35.8% of the country’s tax revenue in 2004 (Tompson, 2005). Although there has been a distinct authoritarian shift in Russia’s governance since Vladimir Putin’s presidency, it cannot easily be linked to the development of a resource rent seeking tax system or fiscal policy. Instead, the contribution of resource rents to the erosion of political accountability has not taken place via the fiscal system, but is the result of growing direct state control of the fuel orientated resource sectors, seen prominently in the acquisition of Yukos’ assets in 2006 (Tompson, 2005). Whereas the tax system has developed in a transparent and efficient manner, government companies have not. It is unclear who is accountable within these organisations, with many suspecting their use to fund activities those in power would prefer not to appear on the budget (Tompson, 2005). The continued state control of the resources sectors will continue to have a detrimental effect on democratic and positive political development in Russia, as well as many negative economic ramifications.
One of the problems facing resource rich countries and threatening poor economic performance is not necessarily the presence of abundant natural resources, but instead the structures of control and ownership that these nations often choose to govern their resource sectors (Ahrend, 2005). It is commonly agreed that private enterprises are more efficient than state owned operations, and this contrast can be clearly seen in Russia between the largely state owned gas sector under Gazprom and, until 2005, the almost entirely privately owned oil companies (Anon., 2006). As a result, much of Russia’s development between 2000 and 2005 was largely due to the export of oil, with the oil industry experiencing significant growth of almost 70% compared to the stagnation taking place in the gas sector (Ahrend, et al., 2007). The Russian Government’s involvement in the certain strategic areas, especially the energy and financial sectors, has had a number of detrimental effects on the development of the resource production. In publically owned companies the state’s management of foreign investment has been poor due to excessive restrictions and unclear legislation surrounding foreign investment. This has resulted in discouraging outside investors from participation in Russia’s energy industries and ultimately inhibited the area’s potential for growth. The government’s reinvestment policies are also highly flawed, with the focus on the acquisition of assets abroad rather than the development of resource extraction within the country, undermining the sectors prospects for possible growth in the future (Dobrynskaya & Turkisch, 2009).
However, manufacturing industries were not subject to the same constraints due to the large proportion of privately owned companies. As a result the investment environment in the manufacturing industries improved, as did the perception of foreign investors who were attracted by the relatively moderate cost of production and the highly skilled Russian labour market (Dobrynskaya & Turkisch, 2009). It is clear from this that most state enterprises were under-achievers and subject to the often politically motivated goals of the government. However, ironically, the unattractiveness of the Russian energy sector to foreign investors, despite the potentially high profitability, allowed manufacturing industries to take advantage of this, achieving significant growth where the theory of ‘Dutch Disease’ predicted an erosion in manufacturing and eventual de-industrialisation. The privatisation of the oil industry is one example of how Russia was in a better position than most other resource dependant emerging markets, but it is also clear that the country is not without state management and has the potential to forsake productivity in favour of state control. Despite this, the mismanagement of public sectors has in many ways aided in the short term prevention of ‘Dutch Disease’. Nevertheless, it is unlikely that any such future mishandling will have any feasible future benefits, with the continuation of such policies probably resulting in economic stagnation, resource dependency and an inability to develop a fully accountable political system. It could be suggested, that many of the issues experienced by Russia are not the result of a ‘Resource Curse’, but are in fact the effect of the ‘State-Ownership Curse’ (Tompson, 2005).
It is very difficult to use the conventional explanations to understand the impact that natural resource abundance has had on both the Russian political system and economy. This is largely due to a number of distinct differences between Russia’s circumstances and those traditionally seen in other resource dependant emerging markets. Firstly, Russia is not a typical resource based economy as it did not suffer a ‘resource shock’ as the result of resource discovery, such as in the United Kingdom or the Netherlands, but instead it resulted from the adjustment of relative prices at the beginning of the country’s post-Soviet transition (Tompson, 2005). Secondly, the legacy of communism in Russia meant that there was a significant industrial base, infrastructure and bureaucracy within the country, thus removing one of the most significant obstacles hindering the development of resource dependant nations starting from scratch. Despite having some of the symptoms of ‘Dutch Disease’ and the obvious importance of resource exports in the country’s real GDP, the inheritance of an established industrial sector has gone some way in negating the potentially harmful impacts on the country’s growth, protecting Russia from the de-industrialisation commonly associated with ‘Dutch Disease’. It is clear that the effects of resource dependency on Russia can easily be exaggerated and, whilst there has been some good macroeconomic management of the system, with the creation of the stabilisation fund and an effective system of taxation, much of the economic difficulties being experienced in Russia are the direct result of the country’s political orientation and not the presence of natural resources. Weak legislative foundations, a lack of meaningful property rights and an ineffective judicial system have led to rent seeking, corruption, growing nationalisation and a decrease in the government’s accountability. However, much like the country’s economy, much of these political factors are not developing in the same way as other resource dependant nations. Nationalisation has not been outright, but is continuing to grow, rent seeking is the result of poor property rights rather than the nature of the resources, and the diminishing accountability of the Russia leaders is not the result of their freedom from the need to consult society or to negotiate the terms of resource production, but a result of the state’s growing control over the fuel based resource industries. Presently the country is not suffering from ‘Dutch Disease’, but the without the reform of legislature surrounding the country’s macroeconomic policies, the strengthening of property rights and the improvement of the judicial system, Russia’s economic future is unclear, not because of the presence of abundant natural resources, as when looking at Russia’s resource poor neighbours it appears that Russia would suffer from the same kind of political problems regardless of their resource wealth, but because of the fickle and potential self-destructive nature of the country’s political economy. Siberia, like "the cold," has for centuries been synonymous with the very image of Russia. From the tsars, who first planted the seeds of cities in Siberia, to the Soviet central planners, who moved masses of people and industry into its vast and remote regions, the exploration and development of Siberia have shaped Russia's sense of national identity. Siberia's "untamed frontier" has long promised wealth and opportunity for the rest of Russia.

Seventy years of Soviet rule, however, transformed that promise into something more akin to a curse.

Even though central planning has been abolished, its legacy remains—an almost unimaginably poor distribution of labor and capital that can neither be easily maintained nor adapted to the market. Today, thanks to Soviet economic policies, Russia has a severely distorted economic geography. In particular, a huge portion of modern Russia—cities, factories, and people—lost in the distance and cold of Siberia. Until Russia's leaders come to terms with Siberia's misdevelopment—and overdevelopment—during the 20th century, their efforts to build a competitive market economy and a normal democratic society are likely to fail.

The Bolshevik Legacy

Over the course of five centuries the tsars made Russia the world's largest country. They created a state defined by its physical geography, with a national identity rooted in territorial expansion, culminating in the conquest of Siberia. But it was the Soviets who shaped modern Russia's economic geography. Where the tsars had placed forts, villages, and towns in Siberia, Soviet rulers deployed millions of labor camp inmates to build giant power stations, factories, mines, and railways, as well as cities. The tsars bequeathed to the Bolsheviks a huge swathe of the world's coldest territory, but the Bolsheviks chose to defy the forces of both nature and the market in developing it.

Thanks to Soviet industrialization and mass settlement of Siberia, much of Russia's population today is scattered over a vast land mass in large but isolated cities and towns. Inadequate road, rail, air, and other communication links hobble efforts to connect those population centers, promote interregional trade, and develop markets. About one in ten Russians live and work in almost impossibly cold Siberian cities, places where average January temperatures range from -15 to -45 degrees Celsius (+5 to -49 degrees Fahrenheit). Because of their location, these cities still depend heavily, as they did in the Soviet era, on central government subsidies for fuel, food, and transportation. Costs of living are as much as four times higher than elsewhere in the Russian Federation, while costs of industrial production are sometimes higher still.

Siberia and the GULAG

At the end of the tsarist period, the interior of Siberia was barely charted, let alone settled. The large-scale settlement and urbanization of Siberia were not possible under the tsars. The costs of peopling, exploiting, and maintaining such a vast, cold area were simply too onerous for their market-oriented economy. Only the Soviet Union—a totalitarian state with coercion at its core, with its highly centralized control of production and redistribution of resources, and with absolutely no sense of cost—could conquer Siberia.

Like the tsars, the Soviet state used Siberia both as resource frontier and as penal colony. But the Soviets developed the tsars' Siberian penal system to levels previously unimagined. Under Josef Stalin, the government launched the labor camp system in 1929 for the explicit purpose of colonizing and exploiting the natural resources of the nation's most remote regions. By 1934, half a million Soviet citizens—everyone who had received a prison sentence of three years or longer—were in the GULAG (an acronym based on the name of the department within the Soviet police ministry that ran the camp system). Stalin's great purges of the late 1930s brought the total camp population to more than 2 million.

The GULAG and its virtually inexhaustible pool of slave labor became fundamental tools in the industrialization of Siberia. GULAG inmates—some 18 million–20 million of them over slightly more than two decades—facilitated the exploitation of timber and mineral resources in unpeopled remote areas. They also laid railroads, constructed roads and dams, dug canals, developed oil fields, and built factories and farms, all under monstrously inhuman conditions.

World War II gave further impetus to Siberian development when key factories were moved from European Russia eastward into the Ural Mountains and beyond, to put them out of the reach of invading German forces. Siberia received 322 relocated plants. Postwar economic development plans encompassing both these and yet-to-be-built industrial facilities demanded even more forced labor. Continuously, from mid-1949 until Stalin's death in 1953, the forced labor camps contained around 2.5 million inmates, half of whom had committed crimes no more serious than theft. During those peak years in the late 1940s and early 1950s, the GULAG accounted for an estimated 15–18 percent of all Russian industrial output and industrial employment.

Siberia after Stalin

The GULAG was largely dismantled after Stalin's death, but it had already laid the basis for what was to become a massive project of Siberian development under his successors. Many motives converged in the postwar development of Siberia. Communist economic planners sought to extract Siberia's oil, gas, diamonds, gold, and other rich mineral deposits to make the Soviet Union self-sufficient in strategic resources. Military planners, who during the war had already begun to reconceptualize Siberia as a strategic redoubt—a defensible core deep in the interior—wanted to ensure that the entire region would be settled and secured. Soviet politicians tasked with engineering and mobilizing society in the 1960s–80s stressed the ideology of "conquering new lands"—now to be interpreted as campaigns to overcome nature and the wilderness through industrialization—to increase the strength of the Soviet state.

Planned "Cities"

Cities were an important feature of the plans for a Siberian industrial utopia. Cities were developed in Siberia in tandem with industries to provide a fixed reserve of labor for factories, mines, and oil and gas fields. In many respects, however, the cities were not really cities. Rather than being genuine social and economic entities, they were physical collection points, repositories, and supply centers—utilitarian in the extreme. They were built to suit the needs of industry and the state, rather than the needs of people. Indeed, primary responsibility for planning and constructing city infrastructure fell to the Soviet economic ministry in charge of the enterprise the city was designed to serve. Few responsibilities were assigned to the municipal governments.

Still the cities grew, in both number and size. By the 1970s the Soviet Union had urbanized its coldest regions to an extent far beyond that of any other country in the world. (See box on page 25.) At precisely the time when people in North America and western Europe were moving to warmer regions of their countries, the Soviets were moving in the opposite direction.

Boom...and Bust

In the 1970s and early 1980s, Siberia and the Russian Far East dominated Soviet regional development programs. Western Siberia, rich not only in oil but also in natural gas, was on its way to becoming the largest energy-producing region in the USSR, and grand long-term industrial projects were being planned for the whole of Siberia. Western analysts were astounded by the magnitude of the projects and by the scale of investment necessary to carry them out.

But the Soviet economic slowdown of the late 1970s would put an end to such ambitions. By the 1980s the massive investments in Siberia and the Far East were offering extremely low returns. Many huge construction projects were left incomplete or postponed indefinitely. At first, the troubles were blamed on disproportional and incoherent planning, ineffective management, and poor coordination. But by the reformist era of the late 1980s under Mikhail Gorbachev, the problem was seen to be Siberia itself as well as the efforts to develop it. Criticism of the giant outlays in Siberia became commonplace. Regional analysts and planners in Siberia mounted a fierce rearguard action. They tried to justify continued high investment by pointing to the value of the commodities produced in Siberia on world markets and the state's dependence on Siberian natural resources and energy supplies. Still, by 1989 the industrialization of Siberia was beginning to seem a monumental mistake. The Siberian enterprise was, in any case, brought to a screeching halt by the collapse of the Soviet Union in 1991 and the beginning of Russia's macroeconomic reforms in the 1990s.

Shrinking Russia

For more than 50 years, Soviet planners built Siberian towns, industrial enterprises, and power stations—although often not roads—where they should never have been built. Huge cities and industrial enterprises, widely spread and for the most part isolated, now dot the vast region. Not a single Siberian city can be considered economically self-sufficient. And pumping large subsidies into Siberia deprives the rest of Russia of the chance for economic growth.

To become competitive economically and to achieve sustainable growth, Russia must modernize and connect its physically vast but misdeveloped economy. But real change and modernization cannot be pursued within the framework of Russia's current economic geography. Refurbishing and upgrading the existing systems of road, rail, and air transportation, for example, or adding new infrastructure and new means of communications would simply improve the connections between towns, cities, and enterprises that should never have been where they are. It would make places more livable where, from an economic point of view, most people should not live to begin with.

Rather than try to "fix" its misdeveloped economy through further investment in Siberia, what Russia needs to do is the opposite. It needs to focus its attention on redeveloping the regions that are potentially most productive, those in the western part of the country. A large part of Siberia's current population needs to move to those areas, which are both warmer and closer to the markets of Europe. In effect, this is a policy to "shrink" Russia—but one that does so by concentrating its economic geography, rather than by divesting territory.

A New Approach to People

Not only does such a strategy of shrinkage run counter to Russia's imperial and Soviet history of territorial expansion, it also would require abandoning the centuries-old policy of constraining and directing the movement of the Russian people. To shrink Russia's economic geography in a sensible way, the government must set as one of its highest priorities facilitating the free movement of people within the Russian Federation. Even today, although the legal right to move is enshrined in the constitution, Russians are still not free to relocate wherever they would like to live and work. Residence restrictions in cities like Moscow, together with resource constraints, poorly developed job and housing markets, and the absence of social safety nets, obstruct personal mobility. The government needs to remove such overt and hidden barriers so that people can move where they want.

While many Russians will welcome the opportunity to move, for others the downsizing of Siberia will be painful. Many people who would like to move are too poor to do so, and the worse the economic situation becomes in the region, the less they are able to move. The Russian Federation is not rich enough to finance a mass relocation, and today few places in Russia can offer new jobs. To the extent that it can, however, the government should help move people, especially younger and more productive people, out of Siberia to European Russia. It should offer housing relocation packages or lump-sum payments or bonuses to help them move. It could, for instance, finance migration through a special fund generated by revenues from Siberian national resource wealth.

The biggest challenge will be dealing with the many residents of Siberia who are too old or too unskilled to find jobs elsewhere. Their assets in the region are worthless and cannot be sold to finance their relocation. For these people, the Russian central and regional governments will have to continue fuel, food, and other subsidies in the coming decades to make life bearable. But the subsidies must be transparent so that the population elsewhere in Russia, as well as in Siberia, knows who is paying for what and why.

Realistic Strategies for Siberian Development

British geographer Michael Bradshaw has recommended that Russia adopt a "cleaner, leaner approach" to the development of Siberia and the Far East—shifting from labor-intensive methods to labor-saving technologies and industries that can easily shed labor or employ temporary workers. This is exactly the right approach, even if it means renewed emphasis on the region's extractive and energy industries. They are the only sectors that can rely on (and pay the high wages to attract) outside workers on short-term tours of duty.

Canada offers an appropriate model. Canada's North is a resource base, but the bulk of the nation's people are located along the U.S. border, close to markets and in the warmest areas of the country. According to the 2002 Canadian Census, Canada's northern territories have less than 1 percent of the nation's total population. Canada's mining industry—and northern industry in general—relies on seasonal labor, with the labor pool shrinking during the coldest winter months and increasing again in summer.

Were Russia to adopt a similar approach, most of its population would live closer to the markets of Europe, also in the warmer areas of the country. Siberian cities would be much smaller than at present. In very remote areas where key natural resources are located, settlements would be outposts (not towns and cities), with small permanent populations and a heavy dependency on seasonal workers for the bulk of production in the summer months.

New Conceptions of Security

Finally, Russia will have to rethink security issues as it contemplates the prospect of "empty lands" in Siberia and the Russian Far East. Despite popular Russian fears, most serious analysts do not foresee a mass influx of migrants from China across Russia's borders. Still, given that Russia borders countries that may not always remain friendly, its security concerns do need to be addressed. Enhanced technical systems—for instance, the creation of sensors, new rapid reaction forces, and high-tech weapons—could replace the deployment and support of large conventional land and sea forces on Far East borders. More important in the long term would be cooperative solutions such as an international treaty with neighbors like China and the United States to guarantee Russia's territorial integrity and its continued sovereignty over Siberia and the Far East.

Moving Ahead

Market mechanisms alone will not solve the problems that stem from Russia's distorted economic geography. To reconcentrate its population in the west and correct the misallocations in its economy, Russia will need active, even bold, state policies. Even so, those policies will have to be modest in their expectations. The Stalinist process that put people in Siberia in the first place cannot be reversed wholesale. People will not move en masse, and the goal is not, in any case, to "empty out" this resource-rich region, but to help it move closer to the kinds of economic activity, and thus the population, that might have been expected under market conditions.

One big obstacle to effecting change will be the governors, oligarchs, and others based in Siberia who have vested interests in continued regional subsidies and redevelopment programs. President Putin and other national leaders will have to place themselves above such regional interests. They should send out clear signals that the future of Russia (and, consequently, also of Siberia) depends on a strong, integrated, and connected Russia, which will not be achieved if the government continually pumps resources—not least, human resources—out of more productive areas and into Siberia.

Russia needs to achieve, as best it can, a match between its most productive (or potentially most productive) regions and its most productive capital, including people. That involves putting Siberia in its proper context—which means, in at least one respect, reviving the ancient myth of Siberia's promise. The wealth of Siberia is not Siberia's. It is Russia's. It so happens that much of Russia's wealth—and the bulk of its natural resources—are located in Siberia. But Siberia cannot claim these as its own, as much as the oligarchs and local government officials there may want to.

Russian leaders do not face a choice of developing Siberia or rejecting it and casting it off. As they make it possible for most of Siberia's people to move elsewhere, they can develop the region's resources realistically—reducing its dependency on huge fixed pools of labor and shifting to more technologically intensive methods of extraction and temporary work schemes.

Today, Siberia's resources are being developed at far too high a price. Enterprises outside the energy sector cannot generate sufficient revenues to pay high wages to attract new labor or to keep the existing labor force. Instead, administrative, nonmarket mechanisms keep people in place—heavily subsidized to the detriment of Russia as a whole. Siberia's resources can contribute to Russia's future prosperity, and the regional economy can one day be viable, but not if the Russian government persists in trying to maintain the cities and industries that communist planners left for it out in the cold.

Answer 2

Give the guy who wrote this credit:
http://www.e-ir.info/2012/07/08/natural-resources-and-their-implications-for-russias-economic-and-political-development/

Answer 3

The short answer: Siberia's size and its environment have made it a brutal challenge for the Soviets, and now the Russian Federation, to deal with when it comes to developing the resources there. It's a rich region filled with mineral wealth some of which has been tapped into. It's just hard to get to most of it because the climate, low population density (Siberia's not a heavily populated region), and the difficult terrain continue to create huge -- and expensive -- challenges.