Keeping the silver lining

In 2002, during a visit to a Gulf country, a business magazine caught my attention. It had a cover story titled: "Getting it right this time". There was an almost identical cover from another magazine beside it, but that one was dated more than 10 years earlier. Both articles were urging governments in the region to stick with the reform and spending agenda formulated during the previous period of oil price weakness. A similar article had been published in the 1980s.
Business leaders were fearful that the curse of high oil would strike for a third time; that governments would become complacent as oil revenues rose and that plans to use the oil wealth "wisely" would again be shelved until the price curve dipped and economic panic returned. Since then, there certainly has been more visible spending in the Gulf countries with greater progress in pushing economic and social reforms in many countries.
For some, most notably Saudi Arabia, the oil revenue recovery came just in time to allow the government to increase domestic social and infrastructure spending. Internal tensions were rising as people became frustrated with the very large wealth gap between rich and poor and the lack of progress with promised reforms.
Already we can see a parallel in Russia. During the second term of Vladimir Putin's presidency, there was a great deal of discussion and planning over how the country was going to use its oil wealth to achieve long-term objectives of creating a more diversified economy, less volatile economic growth and greater wealth distribution.
Not a lot actually happened in that period, other than the mushrooming of annual oil and gas revenues from $106 billion in 2004 to $313 billion in 2008 and the spin-off growth it generated in the economy.
But reform progress and investment spending remained very light. For investors, that was still OK. They understood that Putin's presidency was one of preparation and that the priority would shift to the implementation phase from May 2008.
The plan was still in place and a large part of the $1.2 trillion earned from oil and gas during the previous eight years was still available to fund the next phase.
President Dmitry Medvedev's programme set out the priorities for more actively pursuing the long talked-about reform agenda and long overdue spending plans to improve key areas of the country's infrastructure. So far, so good - but the start of his presidency was unfortunately blighted by the fact that soon after his inauguration, the price of oil peaked and reversed very sharply.
His government's priority necessarily shifted to one of fire-fighting and the reform and spending agenda was temporarily shelved. It cannot be denied that the actions taken so far have led to a relatively stable situation today and, while the problems facing the economy this year are immense, the catastrophe scenario widely feared late last year has been avoided. The oil rally back to $60 per barrel has been a critical factor. Rising unemployment, the sharply falling rate of economic activity, corporate debt problems and more non-performing bank loans still pose a considerable threat. Dealing with these issues will continue to be the government's main priority through 2009 and into 2010.
But there was a silver lining emerging from the economic cloud - a consensus within government that because the period of easily-earned oil and gas wealth was over, or no longer assured, there would have to be a much greater focus on reforms and smart spending. The oil price collapse was viewed as almost a welcome reality check that shook the country out of its complacency. In some quarters there was a palpable sense of relief that the collapse came in 2008 rather than, say, in four years time. Gone unchecked, the rate of debt build-up would surely by then have wrought economic and social havoc even greater than that of 1998.
The oil price was below the revised budget assumption and was in real danger of falling even more sharply. Since then oil has rallied strongly and is approaching an average this year of $50. Many in government feel that they can again sleep easily, panic over. Medvedev continues to push the case for urgency to pursue the reform agenda and to improve the country's investment credentials. Finance Minister Alexei Kudrin and others are also urging the avoidance of complacency and greater focus on change. Others take the view that, like Houdini, Russia has pulled off a great escape and all is well again.
That is what the Saudis and other Gulf oil producers thought - three times - until finally a frustrated public and rising social problems forced the message home. Russia has earned over $1.2 trillion from exporting oil and gas since 2000 and that has provided the basis of the economic boom. Let's hope that the lesson of the curse of high oil in the Gulf countries in the 1980s and 1990s is heeded today in Russia.