The paradox of plenty, also known as the resource curse, goes against our intuitive understanding of wealth.

The discovery of a massive natural gas reserve in Groningen, Netherlands, in 1959, presented a fascinating economic paradox. While the prospect of exporting this resource promised prosperity, it triggered a phenomenon known as Dutch disease. This term describes the unintended consequences of a resource boom on other sectors of the economy.

Fueled by gas exports, the Dutch currency gained value. This made other Dutch exports, like manufactured goods, more expensive on the global market. As a result, these industries struggled to compete, leading to job losses and decline. The Dutch economy, heavily reliant on gas, became vulnerable to fluctuations in global energy prices. This overdependence, coupled with the weakened manufacturing sector, ultimately contributed to a recession.

In essence, Dutch disease highlights the potential pitfalls of relying too heavily on a single resource, even when it seems like a windfall.

The International Monetary Fund classifies 51 countries as "resource-rich," which are defined as countries that derive at least 20% of exports or 20% of fiscal revenue from nonrenewable natural resources; 29 of those countries are low- and lower-middle-income. Common characteristics of the 29 countries include (i) extreme dependence on resource wealth for fiscal revenues, export sales, or both; (ii) low saving rates; (iii) poor growth performance; and (iv) highly volatile resource revenues. — Wikipedia

Russia is different

Russia does not/did not rely on one resource as did the Netherlands. Russia has a wide spread of plentiful resources.

Russia has the largest land area of any country on earth and its proven oil & gas reserves rank 6th in the world. It is probably richer in natural resources than any other country in the world. It has abundant supplies of oil, natural gas, timber and valuable minerals, such as copper, diamonds, lead, zinc, bauxite, nickel, tin, mercury, gold and silver — most of which are located in Siberia and the Far East. (FactsandDetails).

Why the paradox?

The paradox summarises the phenomenon of how countries with large reserves of natural resources — oil, minerals, precious metals — often struggle with economic stagnation, poverty and even conflict. This seemingly contradiction raises a question: why does abundance sometimes breed hardship?

One reason is the concept of 'crowding out'.

Crowding out

Resource wealth can discourage investment in other sectors like manufacturing or agriculture. Why invest in building factories when oil exports bring in easy money? Why go to all that trouble when there is plenty of money available and you can take the easy road?

This neglect of other industries creates a one-legged economy, vulnerable to fluctuations in resource prices — as in the Netherlands. And it also leads to organised price manipulation at international level. Just think of OPEC and how they adjust oil output levels to influence market prices.

This problem is clear in Russia today. They took the easy way out, selling oil and gas to the West and buying in technology from the West. Then came the Ukraine war and the imposition of a heavy sanctions regime.

Their oil and gas sales tanked.

Now they are scavenging washing machines for microchips which they cannot manufacture themselves and can otherwise only obtain with grey imports through China, Iran, Kazakhstan, the UAE and yes, even Turkey — a NATO member.

Another common factor is corruption at state level.

State level corruption

Resource wealth can attract those seeking to exploit it for personal gain and Russia is no exception. This often creates a vicious cycle where a few elites siphon off profits, leaving little for development or public services, weapons that do not work, factory production that is fictional.

Generally, social unrest and conflict often follow, further hindering economic growth, but we have not yet seen this unrest on a significant scale in Russia. But it happened in the USSR with republics chafing at Moscow's control, growing nationalism, shortages of goods and falling living standards raising levels of public frustration.

Corruption is endemic in Russian institutions. It is a way of life and the recent purges by Putin have highlighted that. Almost a whole level of Russian armed forces general staff has been removed over the last few months.

Beating the paradox

There are examples of resource-rich countries like Norway that have managed their wealth sustainably and developed strong economies. These success stories often involve good governance, transparent resource management, and investment in diversifying the economy. They learned about the Dutch disease.

The Dutch learned too, and in a curious quirk their company, ASML produces the world-leading unique photolithography machinery necessary to build the most advanced microchips.

The workforce

And there is one resource that is not often mentioned in this resource paradox context. It's people, particularly a well-educated and skilled workforce able to capitalise on a country's resource wealth.

A well-educated and skilled workforce can be a powerful tool for a resource-rich nation trying to escape the paradox of plenty. A skilled workforce can develop new technologies and industries that utilise the nation's resources more efficiently and create additional value. That has to be underpinned by an effective education system.

But Russia has lost a large proportion of its skilled workers, engineers, scientists, and even entrepreneurs. They have left in droves since 1991 — I met many in the ྖs who were waiting to leave the country. And since then the brain and skills drain has continued.

Russia has a vast and growing skills gap.

Corruption

Educated citizens are more likely to demand transparency in resource management and hold leaders accountable. This can make it harder for corruption to take root and ensure resource wealth benefits the entire population.

Putin has tolerated corruption as a way of keeping the 'important' people loyal to the state. But it has gone too far, the rot is too deep and changing that would take a generation. He will not do it, he can not do it, he can only try to reduce it.

Transforming the Russian economy

Putin has put the country on a war footing. Defence expenditure will total 6% of GDP this year. Wages will rise, inflation will rise. But demographics are not looking good as so many men of fighting age have been lost to the workforce.

Russia served as a prime example of the paradox of plenty, but where it will go as its wars in Ukraine and Syria grind on is a big unknown. It cannot rely on sales of its resources — it has tried to sell oil and gas to China but Xi Jinping has Putin by the short and curlies — he will only buy gas at the Russian state internal, heavily subsidised prices.

Russia is indeed suffering from a resource curse: plenty of resources, no buyers and a seriously skewed economy. How long will the population tolerate it?

The signs for Putin are ominous — he has now reportedly started wearing a bullet-proof vest in public.