The price of oil dependency: Dutch disease in Russian regions

This paper investigates the extent to which the Russian economy suffers from Dutch Disease, and to what extent oil-dependent Russian regions are more prone to the symptoms. We first summarize the main Dutch Disease model and its key predictions. We subsequently test these predictions and find evidence of the key 3 symptoms: real exchange rate appreciation, de-industrialization, and a services sector boom. We find that Russia’s oil dependency has carried a price. First, based on cointegration estimates, we find that changes in the oil price have had a strong and robust effect on the Russian real exchange rate, and have thereby reduced the competitiveness of non-oil exports during times of high oil prices. Second, based on cross-section regressions for 77 Russian regions, we find that, the more dependent a Russian region is on oil, the more prone to Dutch Disease it is. We end with some policy recommendations to reduce the impact of Dutch Disease.