Is Natural Resource-Rich Russia Suffering from the Dutch Disease?

Abstract

“Dutch Disease” phenomenon is defined as the increase in the price of natural resources, such as oil and natural gas, which causes the appreciation of the real exchange rate and leads to the decline of manufacturing and ultimately to increases in service prices. Since the 1980s there has been a great body of “Dutch Disease” empirical literature, and as a natural resource-rich country Russia is a good case for the exploration of this phenomenon. The Russian economy experienced some difficulties after the collapse of the Soviet Union in the adaptation to a free market economy model. In the process of moving towards a free market economy, Russia failed to diversify its economic structure despite increases in natural resource revenues. In the last decades, while the share of natural resources in export revenues has significantly increased, the share of manufacturing output has decreased. According to the United Nations Development Program Russia report 2009, increases in energy income have resulted in the decline of other sectors of the Russian economy. Furthermore, the report claims that these indicators may trigger a recession in the Russian economy in the future. In fact, in recent years the Russian economy has exhibited some typical symptoms of “Dutch Disease” along with increases in oil prices accompanied by a reduction in the share of manufacturing output and an increase in service prices. Using Gregory Hansen cointegration method, this paper finds that Russia is in fact might be suffering from the “Dutch Disease” in the post Soviet Union-era.