Why Russia is a Venezuela in the making

The problem with an economy which is mostly dependent on its commodity exports is that it depends on commodity booms for its sustained economic growth. Russia is an economy which depends on commodity exports which are mostly gas and oil, and it doesn’t export any important manufactured products, except for rockets, although even those will also be replaced by Western clients.

Russia’s new age of economic growth from the early years of the new millennium, as of 2003 to be more exact, coincided with the rise of the oil price. This is a very similar story to Venezuela. Maybe, oil had much more to do with Russia’s economy booming than with Putin’s leadership.

The EU is currently in its phase of ending Russian energy purchases and combined with sanctions, these moves may have contributed to severe economic problems in Russia. However, it won’t be sanctions which will ruin Russia. Russia can, after all, find new buyers for its energy in a world which is becoming ever more hungry for more energy. Africa and Asia will replace European buyers.

The problem with Russia is in the commodity bust which may very well be underway, and the inevitable future bust in oil and gas prices when the West solves its supply problem. The probability is that eventually, both oil and gas prices will go down as Western governments figure out their energy issues and new supply comes into the market. Sure, there is also the probability that Western governments crash their own societies into oblivion, however, I am more on the optimistic side of things.

There is also another important factor which will drive Russia into ruin and it’s, obviously, its ongoing war against Ukraine. Russia is deploying a relatively, huge amount of capital for its war and it needs high prices of oil and gas to sustain it.

Venezuela’s huge economic problems began in 2014 when the price of oil crashed. Both Russia and Venezuela have an economy which is run by heavy state intervention with very corrupt government and political appointees running unprofitable state-owned companies. Both countries are sanctioned and can’t use the Western financial system making them exclusively reliant on energy exports for US Dollars. And in fact, the Russian Ruble is buoyed by the gas and oil price.

So, with a Russian economy which is increasingly being isolated from the West and lacking access to US Dollars, Russia may very well turn into a Chinese colony when gas and oil prices crash again.

 

 

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