Fading Superpowers

Much of Russia's commodities production has been renationalized or heavily taxed. But little of the huge earnings the commodities sector provides goes to alleviate poverty, develop the economy or rebuild Russia's terrible social and industrial infrastructure. Most tend to find their way into numbered accounts offshore and choice properties in resort areas around the world.

But don't rush to criticize Russia. The U.S. is moving toward a similar economic model, except its commodity exports are not oil but Treasuries. Printing Treasury bills is even easier than pumping oil out of the ground. As in other commodity-producing nations, the money is distributed through politicians and government officials. This explains why the District of Columbia has grown so much over the past quarter of a century. Its expansion closely parallels the structural widening of the Federal budget deficit and the expansion of our national debt. American public servants are less likely to steal than their colleagues in Russia, and their enrichment involves legally acceptable, if somewhat convoluted, schemes, such as becoming lobbyists. But the end result is similar.

After the 2008 financial debacle, which hit Russia especially hard, Russian leaders declared that they would rid the economy of its dependence on oil and diversify the industrial base. But diversification was entrusted to Russian bureaucrats. Not surprisingly, Russia is entering what may become the second dip in a double-dip global economic crisis while being even more dependent on oil exports than before.

In a very similar fashion, political Washington spent weeks over the summer debating the budget deficit, national debt and the size of the government only to come up with a putative $2 trillion deficit cut over the next decade, or about the same as the projected federal deficit in fiscal 2011. After Standard & Poor's downgraded its sovereign debt rating on the U.S., prompting severe criticism from the White House, Russia's Prime Minister Vladimir Putin also lashed out against the credit agency. He too believes that his country's credit rating is too low. 

Poisoning the Well

It is an old truth that you've got to use your faculties in order not to lose them. Since making money for Russian and American bureaucrats has been such a no-brainer, they seem to be losing their ability to use their brains. They are starting to undermine demand for their countries' respective commodities.

Several times in recent years Russia has tried to use its oil and gas exports as a political weapon. It has attempted to blackmail leaders in neighboring ex-Soviet republics Ukraine and Belarus and has even brandished this economic weapon before its customers in Western Europe. The result has been predictable. While falling into line in the short term and placating the angry Russian bear, Western Europeans began exploring alternative sources of natural gas, including the North Sea, North Africa and Israel.

Russia is building several pipelines to supply Western Europe, but it may find itself with a lot of spare capacity when those multibillion dollar projects are completed.

Americans, too, are playing with fire as far as their own commodity exports are concerned. The world seems to have an insatiable appetite for Treasuries, as evidenced by historically low yields on U.S. government paper going into mid-August. This means that the U.S. remains the global safe haven. However, unlike Russia's oil — which people still need to power their cars and to produce chemical products — Treasuries have value only as long as investors don't doubt the full faith and credit of the U.S. government that backs them. Trust is something that you can lose only once.

The spectacle in Washington over the summer has chipped into the trust for the U.S. over the long term. Treasuries may one day become an unexportable commodity — but, paradoxically, it may do the country a world of good to stop being a commodity-exporting nation.