Reliance on Petroleum for State Revenues in Nigeria, Iran and Russia - Case Study Example

Name: Course: Tutor: Date: Problems Created by Reliance on Petroleum for State Revenues in Nigeria, Iran and Russia Introduction Nigeria, Iran and Russia have a lot in common in addition to being major producers of petroleum in the world. The three economies rely on oil as a major source of their state revenues. While this reliance on oil has been good in terms of the development opportunities created for the three countries, it has also created problems, some of which are similar among all the three states. Nevertheless, a more critical evaluation shows that some of the problems are unique to each country depending on the countries’ location on the globe, as well as the perception of other countries of the world regarding the possession of petroleum. Some of the similarities within Nigeria, Iran and Russia in the context of reliance on petroleum as a source of state revenues include misuse of the funds obtained from petroleum in corrupt deals; creation of governments whose functionality is depended on the state of oil in the world market, and so forth. Of particular interest is the fact that the three countries have had tumultuous political affairs since time immemorial, most of which have been and are still rooted to the states’ reliance on oil. According to Sandalow1, the abundance of oil in Nigeria has been the root cause of widespread corruption the country. In addition, Nigeria is characterized by many militia groups opposed to the cooperation with foreign firms, which many people accuse of implementing unfair policies to have competitive advantage over local petroleum firms (5). The foreign firms control a large stake of Nigeria’s wealth. The problem of armed militia opposed to the foreign companies has been pervasive and has not found an amicable solution, notwithstanding the many attempts to bring peace in the Niger Delta region (Sandalow 5). In addition, Nigeria been faced with many civil wars and dictator-led leaderships, most of which have had roots linked to the state’s reliance on petroleum (Frynas 1)2. Although corruption has not been reported to be as widespread as it is in Nigeria due to dealings in petroleum, Iran is characterized by many militia groups that have stemmed from the wealth obtained from the resource. Thus Iran is considered a foe by many countries of the world, mostly the west, who accuse her of using petroleum wealth to proliferate terrorism and create nuclear weapons to facilitate major wars. In fact, the presence of petroleum in Iran has almost made the west to attack the country in a bid to “suppress terrorism.” Such a move has always been noted with caution for fear that Iran might retaliate by withholding its oil supply and paralyze the world oil market. Russia has been corrupted to large extent by its reliance on oil. It is with this in mind that Sandalow noted that petroleum wealth has a strong relationship with authoritarian rule and corruption (7). This has particularly been true in recent years when oil prices skyrocketed- Russian president Vladimir Putin suddenly shifted authority from a democratic leader to more of an authoritarian leader to contain the simmering unrest. Oil problems have made Russia to constantly severe her relations with countries such as Belarus, Ukraine and many others in Europe (Lynch 24)3. This paper will evaluate the problems associated with reliance on petroleum, which will also be referred to as oil, in each of the three countries highlighted above, and their similarities and differences. It begins by assessing status of reliance on oil and the problems in each of the three countries. 1. Nigeria Nigeria’s economy is largely depended on oil, which contributes over 60 percent of the government’s revenue. In fact, 96 percent of the country’s dollar receipts are derived from oil (Frynas 1). Most of the oil resources are controlled by foreign companies. Thus the relationship between oil companies and the Nigerian state can be said to be a relationship of mutuality. The foreign petroleum companies provide tax revenues for the state, and the state ensures that these companies have access to the country’s strategic oil reserves so that they can source even more revenue (Frynas 8). If the interdependence between the state and oil company were anything to go by, the populace in Nigeria would be a happy lot. But the problems associated with oil have created divisions among Nigerian citizens, with much evidence that corrupt state officials are using the oil revenues for their own benefit. The opposition to the state’s misuse of resources has caused major uprisings mainly in the Niger Delta, which pose a major threat to the development of the oil industry in Nigeria. Therefore resolving the “Niger Delta question” remains a key issue for the Nigerian government. The problems associated with Nigeria’s reliance on oil are compounded by the fact that most of the foreign oil companies use their affluence to manipulate the state (Mohan and Williams 73)4. They use their resources to influence the state in order to be granted tenders to supply oil, get access to strategic areas and so forth. These companies use all possible means to reach state officials, a factor that has compounded the rampant corruption in Nigeria. The companies ensure that bank accounts of cooperating officials are constantly replenished and that the officials get whatever they need including being transported to “international oil conferences” expense-free. Thus, as noted by Mohan and Williams, “corruption is not the failure to play the game according to the rule of official ethic”. Rather, it is a normal means of survival whereby foreign companies are able to “compensate politicians and bureaucrats for their agency services” (73). As state officials in Nigeria savor the pleasures offered by multinational oil corporations, the hoi polloi have largely been neglected. The result has been the persistent civil wars and development of formidable groups among communities such as Ogoni in the Niger Delta region (Mohan and Williams 76). These groups would like to tell the state to ensure that the benefits of oil resources are enjoyed by the populace, not just a handful of state officials and foreign companies. A picture that is created in the Nigerian oil setting is that the state is under so much influence of the foreign petroleum companies that it cannot make decisions independently, hence the neglect of many of Nigerian citizens. 2. Iran When the president of Iran Mahmoud Ahmadinejad presented a draft budget for the fiscal year commencing on 21 March 2009 to parliament, he projected a sharp decline in his government’s reliance on petroleum by 2.5 percent from $305.5 billion to $ 297.6 billion. Although a 2.5 percent decline is generally a small margin, it is regarded as “sharp” because the previous years have seen a growing trend in Iran’s reliance on oil. For instance, a 20 percent increase in dependence on oil in the budget was realized in the financial year 2007-2008 while 2008-2009 witnessed a 19 percent increase (MEES)5. The reduction in Iranian dependence on oil was instigated by the fact that the country’s fiscal planners forecasted sharp declines in world petroleum prices which would ultimately affect Iran’s budget in case the country continued to focus more on earning oil revenues. This presents a point that Iran’s national budget is vulnerable due to reliance on factors that are controlled from outside the country. In addition the economic problems, Iran’s reliance on oil has often put her in compromising situations with countries such as Russia and the United States. Since 1945 Iran has invested in protection of her territory from invasion by countries such Russia (Taylor & Francis Group and Dean 43)6. The United States has branded Iran terrorist country because of its oil wealth and even contemplates attacking the country to stop nuclear projects that have been initiated because of the oil wealth. Two things, and which are major problems are evident. By attacking Iran, the United States would be jeopardizing her own development plans since she is a large consumer of petroleum, which Iran has significant control over. Two, Iran would like to do anything that protects her oil reserves since oil is the country’s economic mainstay. Thus the state dependence on oil has put Iran in a situation where she is ready for war with any intruder to protect oil interests. Iran also commonly finds herself in comprising situations in which the government gives subsidies to oil firms in order to ensure that more revenue is fetched from them (Amuzegar 191)7. This has created a situation whereby oil firms have much influence on the economy of the country. 3. Russia Petroleum exports have been of crucial importance to Russia for a long time, accounting for a large share of the country’s GDP. The country’s finished petroleum industry accounted for 38 percent of the government’s budgetary expenditure in 2002 and a large proportion of revenues is also sourced from exports of raw materials in terms of crude oil. Misuse of oil wealth in corrupt means has also been reported in the country, making Russia one of the states leading in corruption in the world in past years. But the economic problems associated with oil have made analysts to consider Russia a state that will remain a large country but not a world power (Lynch 245). Russia has been involved in many military conflicts with countries such as Chechnya, Belarus and Ukraine, all linked to oil. The conflicts have been instigated by Russia’s bid to control the oil market in the former Soviet Union region, a tactic described by Lynch as “military Keynesianism” (245). Thus in a bid to protect her oil reserves as resources of national importance, Russia has perpetuated armed military conflict in the former Soviet region. Lynch also describes Russia as an enclave economy in that both its macroeconomic and fiscal planning policies are disproportionately and precariously dependent on fluctuating world oil prices (245). Similarities and differences among the countries’ problems of reliance on petroleum The points discussed about each country above can be considered in different aspects to be similar among all the countries, but are also different, that is, unique to each country, in other perspectives. The similarities and differences of the problems are discussed in the following sections. Similarities 1. Creation of a “rentier state” The concept of rentier state implies that a given country has no autonomy vis-à-vis multinational investors (Frynas 29). A rentier also implies an economy that relies primarily on external rent; hence the domestic production or manufacturing industry has peripheral significance. With such an economy, production is centered on a few firms, the rest of the population providing services in distribution and consumption. (Yates 232).8 The Nigerian petroleum industry has historically been controlled by British-oriented companies such as Shell and BP. These companies have been so in influential that they even determine who their potential competitors are and seek appropriate means to block them. For instance, the entry of United States oil companies into Nigeria was only possible after long consultations between the Nigerian government and British oil firms (Frynas 15). This influence can be attributed to the rampant corruption in Nigeria, where most deals involving oil are struck in controversial procedures. The companies’ influence has also rendered the Nigeria government’s decision-making tools defunct since they cannot effectively strike a balance between serving Nigerian citizens and increasing trade in oil (Yates 232). Thus the companies have a created a division in that there are a few extremely affluent individuals and a majority of the populace wallowing in a miasma of poverty. The populace has not been content with the turn of events and has turned against the government in uprisings such as those witnessed in the Niger Delta region that poses the unresolved Niger Delta question. In a way, the citizens are right- the government needs to be more proactive in striking a balance between serving its electorate and attracting foreign investors. On the other hand, the government and foreign investors should rid corruption from their operations, which has been difficult in view of the highly influential oil companies’ need to expand their market. Iran too has been under significant influence from foreign oil companies. This has happened since 1901 when W. K. D’Arcy, a British national, was allowed to explore oil across Iran. The formation of the Anglo-Persian Oil Company in Iran marked the beginning of foreign influence, with oil companies controlling most decisions made by the Iranian government (Amuzegar 194). Russia too has to protect its oil reserves since a significant portion of government rent comes from petroleum. Hence, even though Russia may not appear as a rentier state, the country’s economy has some features of the phenomenon. Rentierism has several implications. The most significant ones include an increase in dependence on foreign rent and making of governments less transparent due to the high degree of irresponsibility and less accountability as is evident in Nigeria, Iran and Russia. 2. The Dutch disease The Dutch disease is related to various problems that arise from reliance on oil rent, which are worsened by the volatility of oil prices. In particular, the Dutch disease implies that it becomes impossible to set up non oil industries in areas dominated by oil reserves (Lewis 106). Perhaps this is the reason why the people in Niger Delta are dissatisfied with oil companies in the region. As explained by Omeje9, petroleum presents an awful absurdity in Nigeria. Whereas there are many multinational companies benefiting from Nigeria’s oil reserves, common people have been left in misery and anxiety because they cannot venture into any meaningful activity (1). Iran and Russia too have focused too much on the benefits from their oil industries, which has caused other sectors of their economies to stagger (Lane 165)10. Both rely too much on importation of other commodities such as foodstuffs and other necessities, a situation that does not augur well with regard to the unpredictable changes in the world market due to globalization and climate change. Too much reliance on importation of consumption goods also discourages local production and adversely affects balance of payments (Lewis 106)11. 3. Creation of a “comprador” state A comprador state implies a state where state officials and state institutions operate as agents and (Mohan and Williams 73). In such systems, the ruling class rather than the local businessmen and bureaucrats become the bourgeoisie of the metropolitan countries. The ruling class is allowed by foreign paymasters to play the role. As has been noted previously in the discussion, Nigeria and Russia are characterized massive corruption due to the influence of oil resources and foreign oil companies. In Iran, the ruling class uses the available wealth to influence their political survival, hence Iran is not anywhere near the process of democratization. In the same breadth, Nigeria became democratic only recently, having been led by people who were influenced by the cash from oil resources to loot the country and perpetuate dictatorship among particular individuals. On other hand, Russia is still reeling from the effects of the collapse of the Soviet Union that was characterized by a totalitarian political system. In general Nigeria, Iran and Russia have shared problems such as corroded democratic institutions, too much reliance on foreign investors’ rent, sensitivity to foreign exploitation of natural resources and little economic diversification due to too much reliance on oil. However, there are differences based on the countries’ different interests as well as what other countries perceive of them. Differences in the problems The magnitude of corruption among the three countries has been illuminated differently. Nigeria’s case is of particular interest since giant multinational oil companies were involved in bribing of states officials. Iran’s much interest in oil has made it to be dubbed a terrorist nation because of her lack of democracy and perceived iron-handedness. Finally, Russia’s economy has never stabilized because of fluctuation in oil prices and constant war-like behavior with her neighbors to protect oil interests (Arbatov et al 113)12. Conclusion The reliance on oil for state revenues by Nigeria, Iran and Russia has presented a number of common problems such as poor leadership, too much reliance on foreign investors and an increase in sensitivity to foreign exploitation of natural resources. Nevertheless, some problems are unique to each country such as the growth of formidable militia groups and too much corruption in Nigeria (as compared to other African countries), Iran being targeted for terrorism, and the instability of the Russian economy due to fluctuating oil prices. References Amuzegar, Jahangir. Managing the oil wealth: OPEC's windfalls and pitfalls. New Jersey: I.B.Tauris, 2001. Arbatov, Alekseĭ Georgievich; Kaiser, Karl; Legvold, Robert and East-West Institute. Russia and the West: the 21st century security environment. New York: M.E. Sharpe, 1999. Frynas, Jedrzej Georg. Oil in Nigeria: Community Rights and Corporate Dominance in Conflict. Berlin: LIT Verlag Berlin-Hamburg-Münster, 2000. Lane, David Stuart. The Political Economy of Russian oil. New York: Rowman & Littlefield, 1999. Lewis, Peter. Growing apart: Oil, Politics, and economic change in Indonesia and Nigeria. Michigan: University of Michigan Press, 2007. Lynch, Allen. 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