Putin’s Russia and the Dutch Disease Curse

Welcome to Episode 4 of Axe to the Root Podcast, part of the War Room Productions, I am Bo Marinov, and for the next 30 minutes we will be talking about Putin, Russia, and the Dutch Disease Curse. Don’t get lost yet, We will go through a short history of Russia in the last 40 years, then we will see what the Dutch Disease is, and then we will look at the covenantal meaning and lessons for us today as Christians.

The Russian President Vladimir Putin seems to have built for himself a very high reputation among American conservatives and even many Christians. A Russian friend of mine, when I told him about this high reputation Putin has in the US, retorted wryly, “May be that’s where he is planning to flee to, when the time comes.” Putin’s photogenic masculinity is frequently compared in conservative media to Obama’s girliness. He is shown in a military uniform, even though the man never served in the military, his career was from the beginning with the KGB, which made him exempt from military service; one can say that joining the KGB was sort of a draft dodging for privileged children of families loyal to the Soviet regime. (Putin’s father was a member of the murderous “exterminators’ battalions” in WWII, charged with exterminating any opposition to the Soviet authority in the illegally annexed Baltic republics.) He is shown hunting with a rifle, or flying a fighter jet, or in the gym, etc., etc. Putin is also credited by many American conservatives and many church-goers with being a “protector of Christianity” around the world, on account of some of his statements and of his military venture in Syria. In general, as a European newspaper declared recently, the world is a stage, and Putin is an actor on it; we may add, he is playing the role of that powerful conservative Christian leader that conservatives and Christians in America and in Europe have been looking for for decades, with no success.

This desperate quest for a leader, of course, speaks volumes about the lapse into political idolatry by the Western Christians. That we are looking for political leaders and calling them “benefactors,” then we have become like the Gentiles in Jesus’ words in Luke 22:25: “The kings of the Gentiles lord it over them; and those who exercise authority over them call themselves Benefactors.” Reformed Christians – and especially Reformed Christians in America – who for the last three centuries have steadily undermined the aristocratic view of society and government, have now returned to a pagan, idolatrous view of culture: powerful political leaders who use their political power as benefactors for the right side of the population: protecting the family, protecting the church, fighting the bad guys around the world, enforcing laws against liberals and hippies, etc. We seldom stop to think that such a view presupposes losing the political and economic freedoms our Christian forefathers fought for. They considered those freedoms a far more important application of the Gospel than having a powerful leader and benefactor who imposes the right laws with an iron fist. Yes, sometimes protecting the Christian liberty will mean protecting the liberty of pagans and sinners whose sins are not crimes according to the Biblical Law. Yes, sometimes protecting Christian liberty will mean that we are not going to have a homogenous society made up only of people who think and believe like we do. Yes, sometimes protecting Christian liberty will mean accepting refugees of a different culture, and we as Christians will have to make the effort to evangelize them and convert them and teach them the cultural demands of Christendom. Yes, Christian liberty means more responsibility, more inconveniences, and even more dangers; but that’s what liberty is all about. And when we abandon the concept, when we turn to political saviors and benefactors, when we are looking for that powerful leader and benefactor who will save us from that responsibility, inconveniences, and dangers, we have surrendered ourselves and the future of our children to political idolatry. But political idolatry we will leave to future episodes. Now we want to look at Putin’s Russia, and see what covenantal lessons we can learn from it. Because, from the perspective of Christian Reconstruction, there is no neutrality, and there is not a single inch in the universe where God doesn’t act according to His Covenant which He has established in the Creation and has restored and confirmed in the Gospel.

Looking a little bit deeper below the idolatrous surface, at a level that is more essential and important, there have been a few positive developments in Russia under Putin. First, in 2001, Russia introduced a flat tax of 13%. It made the tax system simpler and more flexible, and it made it easier for foreign private investors to invest in the country. (Prior to 2001 most of the foreign investments were in the form of loans from governments and the International Monetary Fund.) Within the period between 2001 and 2015, the Russian government gradually removed the government monopoly on education, allowing more freedom for private educational institutions as well and homeschooling. In consecutive steps after 2008, also, military draft was severely cut, with plans to abolish it completely. You may wonder why this is an important development, but it is. Military conscription has been one of the sacred cows – if not the most sacred cow – of the traditional Russian and Soviet imperialism and militarism, and one of the main components of statist propaganda. These and other developments make some outside observers to believe that the ideology of the Russian government is changing towards more conservative and libertarian views.

But the truth is, most of these are simple pragmatism, forced on the Russian government by the circumstances, not by some change of ideology. The flat tax helped the administration streamline tax collection but it was not followed by removal of the tens of thousands of government regulations that choke entrepreneurship in Russia. So it didn’t really help the business. Besides, as we will see, the Russian government doesn’t rely much on tax revenues from private business. Most of its revenues come from oil and gas (controlled entirely by the government) and from import duties. By the standards of modern economics, Russia is not really an economy; it is a gigantic mining colony town where the mining business is the only real business. And everything else is like a convenience store in the town: formally a private business, de facto controlled by the mining company.

The freedom in education and homeschooling was forced by the fact that the old schools, built in the Soviet era, deteriorated faster than the government could build new ones. It is a bureaucratic decision to build a new school, you know, and a bureaucratic decision takes time; private companies need to have time to bid on those under-the-table benefits, if you get what I mean. So bad is the situation with schools in Russia that as of now, parents have to bribe local education officials to secure a place for their children in the local school. Since this started to become a serious problem, the central government was forced to free the educational market from the government monopoly: one of those examples where the government couldn’t meet its own promises. The situation is still not resolved, of course. There is no history nor tradition of homeschooling in Russia, and unlike the US, or the UK, or some Eastern European countries, there are no significant groups whose ideology drives them to homeschooling (like Protestant Christians, libertarians, or hippies).

The sharp cut of military conscription – and plans for future abolition of the draft – were forced by the lack of funds, and by the realities of modern warfare where small professional armies achieve better results than large conscripted masses. This, and some problems with the personal and sexual ethic always present in a conscript military, forced the government to consider abandoning the draft completely.

There are some rather popular myths about government legislation in protection of the family or against sexual perversions like sodomy, but these are quite limited. They are done for the PR effect, and not really enforced. Abortions are legalized in Russia and have always been since Stalin’s times; Russia has among the highest abortion rates in the world. Sodomy remains rampant. Russia has the same divorce-to-marriage ratio as Europe and the US. In reality, there is nothing in Russia that conservatives could look up to as an example. There is nothing in Putin’s policies that could make him even remotely close to a Christian or a conservative, leaving the propaganda stunts aside.

So let’s now turn our attention to the Russian economy and the covenantal lessons we can learn from it. Let me give you a short historical introduction. Before the fall of Communism in 1991, no one really knew how large the Russian economy was. There was a heavy smoke screen of government propaganda, and everyone on the other side of the Iron Curtain knew that the official numbers were lying. On the Western side of the Curtain, though, many economists believed the propaganda. The Canadian-American socialist economist John Kenneth Galbraith, for example, came to the conclusion, some time in the 1980s, that the economy of the Soviet Union was about 2/3 of the US economy. I remember how much I laughed when I first heard that. I am sure the Soviet leaders must have been in a quandary themselves, “Does Galbraith know something about our economy we don’t know?” When the Soviet Union disintegrated and a more unbiased assessment was made, it was 2/3 alright, but of the economy of Belgium, not of the US. You know, that little 10-million-population country between France and Germany which today is the capital of the EU? It had a larger economy than the Soviet Union. Anyway.

Boris Yeltsin, after the fall of Communism and the disbanding of the Soviet Union, started a process of liberalization of the Russian economy, and the economy grew. For a while, he had real pro-free market advisers and government executives. Between 1992 and 2000, the legislation of the Russian Federation moved really forward towards more market freedom. Not everything was fine in the culture and in the economy, of course, for legislation doesn’t solve problems, people do. And most people were born and lived in a society without private property, without responsibility, without entrepreneurship, etc. But little by little, step by step, as people learned, the economy grew.

When Putin took over from Yeltsin, this process was reversed. Putin had a reason for it. After the year 2000, the prices of oil and gas started going up, and there was no limit in sight about how high they may go. Russia has the largest oil and gas reserves in the world (most still undeveloped, unlike those in the Middle East), and in 2000 her natural gas production was still in the hands of a government monopolist, Gazprom. Oil production was decentralized and privatized, but within a couple of years Putin’s government forged a number of fake accusations against private oil industrialists, and by 2005, most of the oil industry was back in government hands. By 2008, about 60% of the government’s revenues came from oil and gas. Another 20% came from import duties. So, this leaves only about 20% revenues from the rest of the economy. Imagine this, if you could: the government of a huge country, 140 million population, makes 80% of its revenues from oil and gas mining and import duties, and the rest comes from the totality of the domestic economy. As I said earlier, Russia today is nothing more than a gigantic mining colony where everything rotates around the mining operations, and the rest is like a convenience store in the middle of a mining town: formally free, but in reality controlled and dependent on the mining cartel.

Putin’s government – I should say, a gang of close friends in power – saw this as an opportunity for remaining in power forever. The oil and gas business is easily centralized in government’s hands. With money coming in, the government budget will have enough surpluses to both fund an ever increasing military to terrorize the neighbors, and bribe the population to vote the same guys in power forever. Putin started his own party, Edinnaya Rossia (United Russia), which soon became the party of government apparatchiks. Predictably, the party has won all the elections from the very beginning of its existence. And all the money for this political conspiracy came from oil and gas. So important is the sale of oil and gas that the Russian natural gas monopolist, Gazprom, is the unofficial foreign ambassador for the Russian government. Such is the political power of Gazprom that in 2005 it hired as a second-level director Gerhard Schroeder, who up to that year was, for eight years, the Chancellor of Germany, and before that, for another eight years, the Prime Minister of Lower Saxony. The socialist Schroeder had spent his entire 8 years as a Chancellor working hard for the Russian interests in Europe. You know, any corporation can go shopping for prime ministers in places like the Balkans, Africa, or Latin America. Gazprom bought itself a German Chancellor. Putin looked unstoppable. In 2007 and 2008, commentators in Europe were already talking about the possible resurrection of the old, pre-Soviet Russian Empire.

And then came the fall of 2008. Fall it was, for the price of oil collapsed to a little over $40 per barrel. This was deadly news for Putin: The Russian government budget, entirely geared toward bribing the Russian population and expanding the military, was predicated on a price of $70/barrel. (For comparison, the price in June 2008 was $145/barrel, so the fall was $100, or 70%, within 4 months.) After basking in oil and gas money for 8 years, the Russian government was now running a serious deficit. The recession lasted only for several months and the prices were back to $100, but the Russian government saw the writing on the wall. In 2009, Putin declared that his new course is to develop the Russian industry and agriculture. A needed step, given that the next fall of oil and gas prices could be fatal.

The problem is, he couldn’t develop anything. Russia’s economy – outside the oil and gas industry – couldn’t move an inch above its levels of 2008. To this day, there is nothing that Russia produces in its industrial plants, offices, or fields, that the rest of the world wants and is willing to pay money for. In fact, even Gazprom, the Russian natural gas giant, buys its equipment from American companies. Russian industrial companies produce for their domestic market, and even there, even with the high import duties, they are barely competitive against imported goods – whether in price or in quality. And as of now, there is no hope on the horizon that the Russian economy would be able to rise above that level.

And then, 7 years after the slump in 2008, the oil and gas market collapsed again. And it’s different now. The collapse in 2008 was due to oversupply and excess stocks – so it had a short-term solution. This time it is different: new technologies, fracking and liquefied gas. And also, Texas and North Dakota with their large fields and their private ownership of gas wells and oil rigs. This time even the OPEC surrendered, let alone the underdeveloped Russia. The low prices are here to stay for a long term. And the Russian government budget is still calculated on $70/barrel.

Stay with me, we are getting close to our covenantal lessons from this history.

What Russia experienced was a heavy case of the economic phenomenon known as the Dutch disease. This is its most popular name, but another name would be the Resource Curse. The Dutch disease appears when a vast reserve of some natural resource is discovered in a country or a region; and specifically when that resource, (1) can be easily mined or extracted, and (2) enjoys a high demand and therefore high price on the world markets. That is, it has high marginal return on the investment. What does our instinct tell us about the economic development of such a country? Normally, we all think, “Lots of easily mined natural resources, increased export, mucho dinero, economic growth,” right? Wrong. The opposite is true. The influx of lots of easy money in an economy in fact slows down the economic development, and can easily produce even economic recession. Yes, folks, easy money produces economic recession. Keep that in mind.

The phenomenon has been present throughout human history but was first observed and described in the 1960s in relation to the discovery of the Groningen Natural Gas field in northern Netherlands in 1959 – the tenth largest natural gas field in the world. (Hence the name Dutch disease.) It was a blessing that the field was not discovered 20 years earlier. If the Nazis could take advantage of it, they would have had the fuel reserves to continue the war for much longer. And also the Netherlands would have been devastated, for Groningen is within easy striking distance for both the Royal Navy and the Royal Airforce; the Allies wouldn’t have left such strategic supply remain intact in the hands of the Nazis. By 1963 the field was operational. The Netherlands were producing between 3 and 4 trillion cubic feet of gas for a continent which was still recovering from the devastation of the World War. Within the next 10 years Royal Dutch Shell and Exxon Mobile tapped the whole field and maximized production . . . just in time for the fuel crisis in 1974 and the steep rise of energy prices by 300%. The Netherlands were awash in natural gas money.

And contrary to the expectations, this didn’t produce an economic boom. To the opposite, the rest of the Dutch economy struggled, and in fact, during that period it even experienced a recession. Germany, Belgium, and France were pulling ahead in terms of economic productivity and investment; the Netherlands were lagging behind, despite all the money poured in the small republic. What has happened?

What happened was that with the influx of natural gas money, the price levels in the Netherlands went up. When you have an oversupply of one resource, its market price falls. When that resource is money, the prices of everything else rise. Wages went up, resource prices went up, rents went up. Or, put it in economist’s slang, the Dutch currency was “too strong” compared to the other currencies. (It’s the outward expression of high prices in a nation. When the currency is “strong,” it’s domestic prices are higher than everyone else’s prices.) This made the Dutch industry and agriculture unable to compete against the rest of the European countries; so the levels of investment in the Netherlands were low. (Who wants to invest in a place where all the resources are expensive?) When in the mid-1980s energy prices collapsed, the Dutch economy had to go through a severe bout of readjustment. And, as we will see, Russia’s situation is even worse.

Natural gas and oil are not the only factors that can produce Dutch disease. Precious metals like gold and silver are another factor. Spain’s and Portugal’s lagged severely behind England and the Netherlands when the galleons with plundered gold and silver started arriving from the New World. Mexico’s rich deposits of silver in the 18^th and the 19^th centuries can be partially blamed for the failure of that country to develop a strong manufacturing sector, despite the fact that it had a better starting point than the US. Signs of Dutch disease could be detected in California in the second half of the 19 century because of the gold rush, and later because of the discoveries of oil. China had a similar experience with its monopoly and control over the production first of silk and then of tea. (The emergence of alternative production in Europe and India caused severe damages to the Chinese economy.) Keep this in mind also: foreign aid is a major factor for the Dutch disease, for it involves an influx of money that is much easier than money from oil and gas. In every country in the world where there has existed a source of easy money, the economy has suffered. And, on the other end of the spectrum, nations with little to no natural resources at all have been leading in productivity and economic development – see Switzerland, Hong Kong, or Singapore.

But there’s more to it. The devastation from the Dutch disease is even worse when the economy is controlled by the government. When the influx of excess easy money comes into private hands, the market responds to it by raising prices but at least private individuals are generally focused on either saving the money or investing it in economically profitable enterprises. This mitigates at least somewhat against the damage of the Dutch disease. When the money comes into the hands of government bureaucrats, their “investment” is in politically profitable enterprises: bribing voters, rewarding cronies and lobbyists, and huge construction and military projects that produce no economic value but siphon money into the right bank accounts. Government intervention always distorts economic data and misinforms economic decisions. When the government controls a vast stream of easy money, the distortion is devastating to the economy. Venezuela is the ultimate modern example of such an economy; not only is the country unable to produce anything for export anymore (even their oil rigs are shut down, for the most part), it can’t even produce food for domestic consumption! The country with the best climate in South America and with the largest oil and gas reserves in the world!

And similar thing happened to Russia. It would have been bad enough if the over-reliance on oil and gas had happened in the context of a free market and unhampered economy. But Russia basically made itself into a mild version of Venezuela. The huge stream of foreign currency that entered the country in the last 15 years produced no growth in any sector of the national economy. In fact, it didn’t even produce growth in the oil and gas sector; technologically, these two sectors relied on the size of their fields, not on better technologies, which makes them uncompetitive against producers in Texas and North Dakota today. With the world’s oil prices well below $40/barrel, and with no developed economy, Russia is struggling. And the Russian government is in a quandary, seeing its monetary reserves dwindle away in payments for unrealistic promises. And there is no possible solution on the horizon. Yes, I know, from the outside Russia seems like a monolithic unity, and Putin seems to be on top of everything. From the inside, the picture is quite grim, if even Russian commentators are beginning to speak of “what comes after Putin” and the possible breakdown of the Russian Federation.

So, what is the covenantal lesson in all this? I am sure you are wondering.

The covenantal lesson starts in the Old Testament, in Daniel’s interpetation of Nebuchadnezzar’s dream in chapter 2 verse 44:

In the days of those kings the God of heaven will set up a kingdom which will never be destroyed, and that kingdom will not be left for another people; it will crush and put an end to all these kingdoms, but it will itself endure forever.

And then, previously, in verses 34-35, the specifics of the dream were,

You continued looking until a stone was cut out without hands, and it struck the statue on its feet of iron and clay and crushed them. Then the iron, the clay, the bronze, the silver and the gold were crushed all at the same time and became like chaff from the summer threshing floors; and the wind carried them away so that not a trace of them was found. But the stone that struck the statue became a great mountain and filled the whole earth.

The fifth kingdom, of course, the stone cut without hands, is the Kingdom of Christ established in the days of those kings, that is, in the days of the last of the previous empires, Rome. Note well, the stone not only destroyed the previous empires, it also filled the whole earth.  That is, it would prevent other empires from being established against it on the earth. Keep in mind, that vision was given in a time when all that most people knew as political reality was oppressive empires which always tried to expand as far as they could, bringing as many nations and people as they could under their power. The spirit of Nimrod, the “first of the line of might men om the earth” according to Genesis 10:8, was alive and well in the world before the Cross. Large or small nations, they all wanted to be empires and to rule over other nations. Where the small nations couldn’t expand, local kings ruled over their own populations. Nebuchadnezzar’s dream described exactly that: a sequence of empires whose brutality increases with every step (Rome is described there as an empire which “crushes and shatters all things”). And yet, their moral quality decreases: the progression is from gold, through silver and bronze, and finally just iron, and then even iron mixed with clay. This is not just a prophecy for the Middle East before Christ, it is also a symbolic picture of the political reality in a world without the Cross: empires that are worth less and less, but their brutality is crueler and crueler.

When the Kingdom of Christ comes, was the promise of the dream, human empires won’t rise on the earth anymore. This doesn’t mean fallen men won’t try, and may be for a short time even do some damage. But in the world after the stone has hit the statue, the world will be gradually filled with that stone. After the cross, God works constantly to fulfill His promise in Psalm 2: The kings of the earth may rise against the Lord, but He laughs and scoffs at them, and says to His Son:

Ask of Me, and I will surely give the nations as Your inheritance,
And the very ends of the earth as Your possession.

You shall break them with a rod of iron,
You shall shatter them like earthenware.

And indeed, as we see from history after the Cross, earthly empires have greater and greater problems remaining in power. Governments that overstep their boundaries established by the Law of God almost immediately hit a wall in our day, and can not continue expanding their power. Hitler’s Germany, so powerful at the beginning, was reduced to nothing within 12 years of its existence. Communist Russia, with more natural resources and territory than any other nation and empire in history, had to survive on handouts from the hated West, and eventually surrendered in 1991, after a little over 70 years of existence. Communist China abandoned Communism in practice as early as 40 years after its establishment. Any dictator who wants to build his own empire in our days finds out that he is running out of resources faster than he can plunder his victims. Even milder forms of dictatorship – also known as “socialism” – fail quickly and spectacularly in our day; France’s socialist government under Francois Hollande went into a bankruptcy mode just a few months after the first socialist measures were introduced. It’s getting tougher and tougher to be a dictator or an emperor these days. And the Dutch disease is one of God’s methods of dealing with candidates for empires.

You see, folks, a wicked government has the same motives and desires as a wicked individual. The same ethical principles apply to both. A wicked person is a gambler, he wants as much profit as possible for as little effort as possible. He wants to find that magical formula that would make him rich without having to spend anything for it. A wicked imperial government is the same way: it wants that magical resource that will give it all the money it wants. In the middle ages, this made many kings sponsor not science but alchemy, because alchemy promised to create gold out of base metals. And in our days, politically powerful men use valuable mineral resources – especially oil and gas – to finance their thirst for more power.

But God laughs at them. Any time such a powerful state arises based on a monopoly over a resource, the Dutch disease makes sure that that state remains economically crippled in everything else. It’s not felt right away, but eventually, God makes the price of that resource collapse overnight. Then they are left with nothing. And the Son then crushes them like earthenware. Kings and princes will be forced, more and more, to act as God’s servants, that is, ministers of liberty, if they want to remain in power. Power and authority have been re-defined on the Cross, and that re-definition of power, and Christ has been steadily enforcing this new definition of power through His Gospel. No more free lunches for dictators and bureaucrats, is where our world is heading to. And Putin’s government is in the process of discovering it.

But let me tell you this: Not just Putin’s government. Every government in the world is discovering the same thing. Lady Margaret Thatcher said that socialism is a good idea until you run out of other people’s money. But modern socialist and statist policies are running out not just of other people’s money but of God’s patience as well. If in the past such policies could continue for a generation or two without visible failure, these days they collapse almost immediately. We live in a world in which, more and more, it becomes impossible for government to continue the same wicked policies forever, without losing power. And Russia in the last one year is a good example.

We, American Christians, and often paralyzed by fear. We don’t admit it, or don’t even realize it, so habitual it has become to us to fear the future. We look at the developments in our own country and we say things like “this is how the end begins,” or “these are signs of worse things to come.” We are convinced that there’s nothing good on the horizon for America with the political power in the hands of God-haters, both Democrat and Republican. It is for this reason we succumb to the idolatry I talked about earlier: looking for a powerful leader. Behind every idolatry, there is fear, and every fear leads to idolatry. We see the visible things, and we are losing hope for our world.

But the truth is, in the world after the Cross, God has planted a mechanism of self-destruction into every institution of authority, be it family, church or state. And every institution of authority, when it trespasses God’s boundaries for it, triggers that mechanism, and it starts ticking. Whether it is Putin’s Russia, or the Islamic State, or Saudi Arabia, or the Obama administration, any political potentate who wants to get more power has to do it through acts that are ultimately suicidal for himself and for his plans. The greater the thirst for power, the greater the danger. And the more history progresses, the faster this mechanism ticks. Eventually, the wicked will find their plans thwarted even before they are put to action. Far from losing hope, all we as Christians need to do is what the Psalmist says in Psalm 91: “You will only look with your eyes, and you will see the reward of the wicked.”

Putin’s Russia is an example of this reward. And it is also a warning to other would-be dictators. And it is also a head-lifting reminder for us: We live in a time when the opportunities for the Gospel are greater than ever, and the laughter of God against His enemies in high places is louder than ever. There’s no place for despair or pessimism.

The book we will be assigning today is Peter Thomas Bauer, Dissent on Development. Lord Peter Bauer spent his career as an economist studying the so-called developing countries in Africa and Latin America, and specifically the impact of foreign aid on their economies. And what he has discovered concerning the factors affecting economic development goes directlyt against the accepted stereotypes of today. But guess what: it agrees completely with the Biblical covenantal analysis of man and his society.

So go, and conquer the world for Christ, through His Gospel.

And help me do the same in Bulgaria in Eastern Europe. There’s a mission field there. A little over 20 years ago, it was freed from an oppressive empire. And it is a fertile field, bringing forth 100-fold. Visit bulgarianreformation.com and donate. God bless you all.