change rates, making other exports less attractive on world markets (Gylfason, 2001). Thus, while the economy undergoes a temporary oil boom, the long-term effect is to retard growth below the level it would otherwise have achieved.
While Dutch disease was identified due to its impact on the advanced economy of the Netherlands, it has also been observed at work in developing economies (Benjamin, Devarajan, and Weiner, 1989). Indeed, it underlies one of the notable worldwide economic phenomena since the 1970s. At the time of the 1970s oil shocks, a massive transfer of wealth from the industrial world to the oil-producing nations seemed at hand. A generation later, however, the oil-exporting countries continue to lag. Oil wealth has passed through and out of their economies as quickly as silver passed through and out of the economy of 16th century Spain.
The remainder of this essay will consider the implications of Dutch disease for the economy of Russia. Russia today may be characterized as a semi-developed economy, but one which produces about as much oil as Saudi Arabia, and accounts for a tenth of the world oil market. The temptation for Russia to use oil exports as a source of capital is a natural one, but the record of Dutch disease offers an important precautionary note.
II. The Modern Russian Petroleum Sector
The Soviet Union was a major world oil producing country, though due both to the international politics of the Cold War era and its own internal command economy, it did not participate in normal fashion in the international oil market of the time. Following the collapse of the Soviet Union, the Russian oil industry also went into something of a collapse, with a 40 percent drop in production from 1980s levels to the low point around the middle 1990s (Whalen, Herrick, and Bahree, 2001).
While world oil prices were low in the 1990s, the falloff in Russian production was due primarily to a near-c...