## 1.     Oil Production and Export of Crude Oil, 1995–2005

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---

### I. INTRODUCTION — context and key facts
- Russia’s resource position and 2005 standing:
  - estimated to hold the world’s largest natural gas reserves, second-largest coal reserves, and seventh-largest oil reserves.
  - In 2005, Russia was the world’s largest producer and exporter of natural gas and the second-largest producer and exporter of crude oil.
- Macroeconomic importance of oil and gas:
  - together account for almost 60 percent of Russia’s total export revenues.
  - constitute an estimated 20–25 percent of Russia’s gross domestic product (GDP).
- Recent developments and dynamics:
  - Recent high oil prices have generated significant windfall revenues, put the real exchange rate on an appreciation path, and stimulated the economy to the point of overheating (Oomes and Dynnikova, 2006).
  - Oil output growth: in 2005 and 2006, oil output grew by only about 2½ percent year-on-year; oil output growth was around 10 percent year-on-year in both 2003 and 2004.
- Factors cited for slowdown in crude oil output and export growth:
  - recent increase in state ownership creating significant uncertainty in the sector;
  - increases in oil sector taxation and bottlenecks in the distribution network raising production and transportation costs;
  - diminishing returns to existing oil extraction implying further growth requires significant new investment in exploration, development of new fields, and necessary export infrastructure.
- Dutch Disease debate (selected assessments):
  - Westin (2004) and Roland (2005): concluded Russia had not contracted full-blown Dutch Disease by end-2003 or that it was premature to conclude Dutch Disease was present.
  - Standard and Poor’s (2005, 2006): warned Russia is “fast becoming a classical victim” and must avoid the “hydrocarbons habit”.
  - World Bank (2005b): found ruble appreciation had led to a slowdown in many manufacturing industries consistent with Dutch Disease symptoms.
  - Latsis (2005): argued Russia has “all the classical symptoms of Dutch Disease.”
- This paper’s diagnostic aim:
  - Precisely define the symptoms of Dutch Disease and test whether the Russian economy exhibits each symptom.
  - Main symptoms tested: (1) real appreciation, (2) slowdown in manufacturing growth, (3) acceleration in service sector growth (if spending effect dominates resource movement effect), and (4) increase in overall wage level.
- Main conclusion summary:
  - Russia appears to have symptoms of Dutch Disease, but the authors cannot conclude with certainty that it has contracted Dutch Disease.
  - Findings include:
    - Evidence that higher oil prices have led to faster real appreciation but no evidence of an overvalued real exchange rate.
    - Manufacturing sector has declined relative to the service sector, but this could be due to a “transition effect.”
    - Real wages have increased rapidly in all sectors, but this might be explained by de-shadowization, rapid productivity growth, and rebound from the 1998 crisis.
  - Further research is needed to better control for alternative explanations.

### II. EXPLAINING THE NATURAL RESOURCE CURSE — mechanisms summarized
- Empirical regularity:
  - Resource-rich economies, on average, experience lower growth rates than resource-poor economies (Sachs and Warner, 1995, 2001).
  - Sachs and Warner (1995) report a robust negative relationship between real GDP growth per capita and the ratio of resource exports to GDP in a sample of 97 developing countries during 1970–1989; replicated and updated for 1970–2000 in this paper.
- Proposed explanations (summarized):
  1. Institutional decline and rent-seeking (e.g., Hausmann and Rigobon, 2003; Sala-i-Martin and Subramanian, 2003).
  2. Volatility of resource rents and adverse effects on growth and investment (e.g., Ramey and Ramey, 1995; Aizenman and Marion, 1999).
  3. Dutch Disease mechanics (focus of this paper): resource movement effect and spending effect (Corden and Neary, 1984).
- Dutch Disease predictions (four combined):
  1. Real exchange rate appreciation.
  2. Unambiguous decline in manufacturing output and employment.
  3. Ambiguous effects on oil and services output and employment; if oil employs few workers and labor mobility is low, services output and employment may increase.
  4. If labor is mobile, overall wage level increases.
- Longer-run growth channels:
  - De-industrialization may increase volatility and lower growth when financial markets are imperfect.
  - Loss of manufacturing can reduce technological spillovers and “learning by doing” with persistent negative effects (Krugman, 1997; Torvik, 2001).

### III. EVIDENCE OF DUTCH DISEASE IN RUSSIA — empirical approach and headline findings
- Empirical strategy:
  - Test the four Dutch Disease symptoms while controlling for alternative explanations (government consumption, net international reserves, productivity differential, corruption).
  - Use a Behavioral Equilibrium Exchange Rate (BEER) model and cointegration techniques to estimate long-run relationships.
  - Dataset covers January 1995−December 2005; robust cointegration results obtained when excluding 1995–1996 due to instability.
- Headline diagnostic findings:
  - Real exchange rate:
    - Evidence that oil prices have strengthened the real ruble exchange rate (elasticity around 0.50 in the baseline).
    - No evidence that the real exchange rate has been above the estimated equilibrium level since 2002 (brief overvaluation episodes mid-1997–Aug 1998 and end-2000–early 2002).
  - Manufacturing and services:
    - No evidence of absolute de-industrialization (manufacturing output negative only in 1998); evidence of relative de-industrialization: manufacturing has grown more slowly than other sectors since 2001 and its share in total output has fallen.
    - Services growth outpaced manufacturing and, since 2002, even the fuel sector; employment growth in services positive since 2000 and exceeded other sectors in 2002 and 2004.
  - Wages:
    - Real wage growth has been rapid in all sectors since 2000; initial sharpest increases in the fuel sector, then manufacturing and services caught up.
    - Productivity-adjusted wage growth (unit labor cost growth) was close to zero in all sectors between 2002 and 2004 (based on the authors’ calculations and assumptions).
- Cautionary interpretation:
  - The authors cannot unequivocally attribute observed symptoms to Dutch Disease because alternative explanations (transition effects, de-shadowization, productivity rebounds, recovery from the 1998 crisis) can produce similar patterns.
  - Further research required to better control for these factors before a definitive diagnosis.

### IV. COINTEGRATION, ESTIMATES, AND ELASTICITIES — Appendix I and Table 2 summary
- Unit roots and cointegration:
  - ADF tests (Table A3): most variables nonstationary in levels; differences stationary.
  - Johansen cointegration tests (Table A4): evidence of a unique cointegrating vector between the real exchange rate and determinants.
  - Sample for cointegration estimates (Table 2): First observation 1997:04; Last observation 2005:12; Number of observations 104.
- Estimated long-run cointegrating vectors (dependent variable: log of the real effective exchange rate; regressions include four lags, a constant, and two dummies for September and October 1998):
  - Ln (oil price): 0.58 (0.12), 0.49 (0.13), 0.50 (0.15)
  - Ln (government consumption): 1.32 (0.20), 1.50 (0.19), 1.62 (0.18)
  - Ln (NIR): -0.11 (0.03), -0.18 (0.04), -0.14 (0.03)
  - Ln (productivity differential): 1.08 (0.36), 0.90 (0.42)  (reported where included)
  - Ln (corruption): -0.53 (0.36)  (reported in equation (3))
- Diagnostic statistics by equation (1), (2), (3):
  - LM test for serial correlation: 0.69, 0.73, 0.52
  - Jarque-Bera normality test: 0.12, 0.82, 0.81
  - Heteroskedasticity test: 0.08, 0.53, 0.92
  - Akaike Information Criterion: -5.49, -5.52, -5.46
  - Log likelihood: 305, 311, 311
- Interpretation of elasticities and economic magnitudes:
  - Oil price: baseline elasticity ~0.50 → a one percent increase in the oil price leads to an approximate 0.50 percent real appreciation.
    - Example from text: the increase in the Urals oil price by 75 percent in 2005 would, all else equal, have led to 0.5*75 or 37.5 percent real appreciation; officially published real effective ruble appreciation in 2005 was 8.5 percent (IFS measure).
  - Government consumption: a one percent increase in the ratio of general government consumption to GDP leads to an approximate 1.5 percent real appreciation.
  - Net international reserves (NIR): baseline elasticity -0.18 → a one percent increase in NIR associated with a reduction in the real exchange rate by 0.18 percent.
  - Productivity differential: coefficients not significantly different from one → a one percent increase leads to approximately one percent real appreciation (Balassa-Samuelson effect).
  - Corruption: estimated long-run elasticity -0.53 (standard error 0.36) — negative sign intuitive but not statistically significant.

### V. SECTORAL ESTIMATES AND MANUFACTURING IMPACTS (Table 3 highlights)
- Sectoral cointegration results (selected Ln (oil price) coefficients for sub-sectors):
  - Machinery: 2.23
  - Chemicals: 0.16
  - Forestry: 0.31
  - Light industry: -0.32
  - Food: 0.31
  - Manufacturing index (overall): -0.36
  - After controlling for a transition trend, equation (6) suggests the overall impact of oil prices on total manufacturing output up to end-2005 was negative, albeit not significantly so.
- Relative de-industrialization evidence:
  - Manufacturing has grown more slowly than other sectors since 2001 and its share in total output has fallen, consistent with relative de-industrialization even in absence of absolute contraction (manufacturing output negative only in 1998).

### VI. ROBUSTNESS, DIAGNOSTICS, AND LIMITATIONS
- Residual behavior and stability:
  - Residuals generally well-behaved: no evidence of serial correlation or non-normality in most specifications.
  - Chow breakpoint test: no significant structural break at the 5-percent significance level — evidence for model stability.
- Causality and exogeneity tests:
  - No evidence of short-run causality from causality tests; test for weak exogeneity on alpha parameters suggests none of the included variables is weakly exogenous.
- Key caveat:
  - Difficulty of estimating a long-run relationship for a sample period of less than ten years for an economy in transition.

### VII. POLICY IMPLICATIONS AND RECOMMENDATIONS
- To limit real appreciation pressures and mitigate Dutch Disease risks:
  - Reduce government consumption as a share of GDP (saving windfall revenues rather than increasing consumption).
  - Raise tax revenues (policy agenda references better collection of value added and corporate profit taxes).
  - Foreign exchange interventions (reserve accumulation) can help to a limited extent but are not a panacea for long-run real appreciation.
- Policy actions noted:
  - The Russian policy of saving a large part of windfall oil and gas tax revenues in a Stabilization Fund and using part to repay external debt likely helped reduce real appreciation.

### VIII. SUGGESTED FURTHER RESEARCH
- Correct for “initial undervaluation”, e.g., by estimation of the core-CPI based REER.
- Test for asymmetric effects of oil prices on the real exchange rate (negative oil price shocks may have stronger effects than positive shocks).
- Include additional determinants of real appreciation, for example growth of oil export volumes.
- Better control for transition effects, de-shadowization, productivity rebounds, and post-1998 recovery to isolate Dutch Disease effects.

*Content drawn from the provided PDF content unit _wp07102.*

### 1.     Oil Production and Export of Crude Oil, 1995–2005 .................................................... 4

### 1.     Oil Production and Export of Crude Oil, 1995–2005 .................................................... 4

### Major sections (chapter contents)
- 1.     Oil Production and Export of Crude Oil, 1995–2005 .................................................... 4
- 2.     Primary Exports and GDP Growth per Capita............................................................... 6
- 3.     Real Effective Exchange Rate and Its Determinants, 1995–2005 ............................... 15
- 4.     Estimated Real Exchange Rate Misalignment, 1997–2005 ......................................... 16
- 5.     Sectoral Economic Indicators, 1997–2004 .................................................................. 18
- 6.     Industrial Growth Rates by Sector ............................................................................... 19

### Tables listed
- 1.     Summary of Dutch Disease Symptoms ......................................................................... 9
- 2.     Real Exchange Rate Determinants: Estimated Cointegrating Vectors ........................ 12
- 3.     Real Effective Exchange Rate and Its Determinants: Estimated Cointegrating  
        Vectors ......................................................................................................................... 20

### Appendix
- Descriptive Statistics............................................................................................................ 24

- Key numeric references preserved from the content unit:
  - Years covered in sections: 1995–2005; 1997–2005; 1997–2004.
  - Page or location markers: 4, 6, 15, 16, 18, 19.
  - Table location markers: 9, 12, 20.
  - Appendix location marker: 24.

*Source: _wp07102 - 1.     Oil Production and Export of Crude Oil, 1995–2005 .................................................... 4*

### References..............................................................................................................

### _wp07102 - References..............................................................................................................

### I. INTRODUCTION
- Russia is one of the major producers of natural resources and is estimated to hold the world’s largest natural gas reserves, second-largest coal reserves, and seventh-largest oil reserves.
- In 2005, Russia was the world’s largest producer and exporter of natural gas and the second-largest producer and exporter of crude oil.
- Oil and gas exports:
  - together account for almost 60 percent of Russia’s total export revenues.
  - constitute an estimated 20–25 percent of Russia’s gross domestic product (GDP).
- Recent high oil prices have:
  - generated significant windfall revenues,
  - put the real exchange rate on an appreciation path,
  - stimulated the economy to the point of overheating (Oomes and Dynnikova, 2006).
- Oil output and export growth dynamics:
  - In 2005 and 2006, oil output grew by only about 2½ percent year-on-year.
  - Oil output growth was around 10 percent year-on-year in both 2003 and 2004.
- Factors cited for the slowdown in crude oil output and export growth:
  - recent increase in state ownership creating significant uncertainty in the sector;
  - increases in oil sector taxation and bottlenecks in the distribution network raising production and transportation costs;
  - diminishing returns to existing oil extraction implying further growth requires significant new investment in exploration, development of new fields, and necessary export infrastructure.
- Debate on Dutch Disease in Russia:
  - Some analyses (Westin, 2004; Roland, 2005) concluded Russia had not contracted full-blown Dutch Disease by end-2003 or that it was premature to conclude Dutch Disease was present.
  - Standard and Poor’s (2005, 2006) warned Russia is “fast becoming a classical victim” and must avoid the “hydrocarbons habit”.
  - World Bank (2005b) found ruble appreciation had led to a slowdown in many manufacturing industries consistent with Dutch Disease symptoms.
  - Latsis (2005) argued Russia has “all the classical symptoms of Dutch Disease.”
- This paper’s contribution:
  - Precisely define the symptoms of Dutch Disease and test whether the Russian economy exhibits each symptom.
  - Main symptoms tested: (1) real appreciation, (2) slowdown in manufacturing growth, (3) acceleration in service sector growth (if spending effect dominates resource movement effect), and (4) increase in overall wage level.
- Main conclusion summary:
  - Russia appears to have symptoms of Dutch Disease, but the authors cannot conclude with certainty that it has contracted Dutch Disease.
  - Findings:
    - Evidence that higher oil prices have led to faster real appreciation but no evidence of an overvalued real exchange rate.
    - Manufacturing sector has declined relative to the service sector, but this could be due to a “transition effect.”
    - Real wages have increased rapidly in all sectors, but this might be explained by de-shadowization, rapid productivity growth, and rebound from the 1998 crisis.
  - Further research is needed to better control for alternative explanations.

### II. EXPLAINING THE NATURAL RESOURCE CURSE
- Empirical regularity:
  - Resource-rich economies, on average, experience lower growth rates than resource-poor economies (Sachs and Warner, 1995, 2001).
  - Sachs and Warner (1995) report a robust negative relationship between real GDP growth per capita and the ratio of resource exports to GDP in a sample of 97 developing countries during 1970–1989; replicated and updated for 1970–2000 in this paper.
- Proposed explanations for the natural resource curse:
  1. Institutional decline and rent-seeking:
     - Large windfall revenues create incentives for rent-seeking, “voracity,” corruption, or civil conflict, crowding out productive activity.
     - Hausmann and Rigobon (2003) emphasize common-pool problems and uncertainty over property rights leading to inefficient fights over resource income.
     - Sala-i-Martin and Subramanian (2003) attribute much of Nigeria’s poor performance to waste and poor institutional quality from oil.
  2. Volatility of resource rents:
     - Natural resource rents tend to be volatile (low price elasticities of supply).
     - Volatility correlates negatively with growth (Ramey and Ramey, 1995) and investment (Aizenman and Marion, 1999), including investment in education (Flug, Spilimbergo, and Wachtenheim, 1998).
     - Hausmann and Rigobon (2003) link volatility to higher cost of capital through financial market imperfections.
  3. Dutch Disease (focus of this paper):
     - Increase in resource prices or output leads to real exchange rate appreciation and decline in manufacturing.
     - Model structure: three categories—natural resources (“oil”), non-resource tradable goods (“manufacturing”), and nontradable goods (“services”).
     - Tradables (oil, manufacturing) have world-determined prices; services are domestically priced.
- Dutch Disease mechanics (Corden and Neary, 1984):
  - Two main effects: resource movement effect and spending effect.
  - Resource movement effect:
    - Higher oil price raises demand for labor and capital in oil sector; mobile factors move from manufacturing and services to oil; direct de-industrialization in manufacturing and services decline; services price rises; real exchange rate appreciates.
  - Spending effect:
    - Higher oil prices raise incomes in oil sector and aggregate demand; increased demand for domestically produced services raises services prices relative to tradables; real exchange rate appreciates.
    - Spending effect operates even if oil sector employs few workers; will lead to higher services prices and, if labor is mobile from manufacturing to services, to indirect de-industrialization via wage pressures.
- Table 1 (summary of Dutch Disease symptoms) described qualitative effects on Output, Employment, Wage, Price across oil, manufacturing, and services under resource movement effect, spending effect, and combined effect.
- Four combined predictions of Dutch Disease:
  1. Real exchange rate appreciation.
  2. Unambiguous decline in manufacturing output and employment.
  3. Ambiguous effects on oil and services output and employment, but if oil employs few workers and labor mobility is low, spending effect may dominate and services output and employment increase.
  4. If labor is mobile, overall wage level increases.
- Discussion on why Dutch Disease may reduce long-run growth:
  - De-industrialization increases volatility (smaller manufacturing sector reduces shock absorption via labor mobility), which lowers growth when financial markets are imperfect.
  - Manufacturing sectors often generate greater competition, innovation, and technological spillovers (“learning by doing”) than resource extraction or many services; loss of manufacturing can have persistent negative effects on growth (Krugman, 1997; Torvik, 2001).

### III. EVIDENCE OF DUTCH DISEASE IN RUSSIA
- Approach:
  - Test the four Dutch Disease symptoms while controlling for alternative explanations that could generate similar observations.
  - Example: real effective exchange rate appreciation alone is not sufficient evidence; must test whether oil prices significantly affect the real exchange rate after controlling for other determinants (government consumption, net international reserves, productivity differential, corruption).
- Findings overview:
  - After controlling for other factors, the authors cannot unequivocally attribute observed symptoms to Dutch Disease.
  - Specifics on real appreciation:
    - A Behavioral Equilibrium Exchange Rate (BEER) model is used to estimate the long-run relationship between the real exchange rate and its determinants.
    - The error correction term is interpreted as deviation from long-run equilibrium (exchange rate misalignment).
    - Appendix I reports evidence of stable cointegration relationships between the real exchange rate, the oil price, the productivity differential, government consumption, net international reserves (NIR), and the corruption index.
    - Dataset covers January 1995−December 2005, but robust results are obtained only when excluding the period 1995–1996 due to instability.
- Interpretation cautions:
  - Manufacturing decline relative to services and rapid wage growth are observed, but can be confounded by:
    - Transition effects (structural shifts unrelated to oil windfalls).
    - De-shadowization (formalization of previously informal economic activity).
    - Rapid productivity growth.
    - Rebound from the 1998 crisis.
- Concluding diagnostic assessment:
  - Evidence that higher oil prices are associated with faster real appreciation.
  - No evidence of an overvalued real exchange rate in the model estimates reported.
  - Manufacturing sector decline relative to services is documented, but causality with Dutch Disease is not unambiguous.
  - Rapid increases in real wages across sectors are observed, but alternative explanations cannot be ruled out.
  - Further research is required to control more tightly for non–Dutch Disease explanations before a definitive diagnosis can be made.

*Italic: Content drawn from the provided PDF content unit _wp07102 - References..............................................................................................................*

### Appendix I, Tables A1 and A2. Table A3 shows that all variables are nonstationary,

### Appendix I, Tables A1 and A2. Table A3 shows that all variables are nonstationary,

### Unit roots and cointegration
- ADF tests (Table A3): the null hypothesis of a unit root in levels cannot be rejected in most cases (with sufficient lags), while the null hypothesis of a unit root in differences can be rejected.  
- Johansen cointegration tests (Table A4) provide evidence that a unique cointegrating vector exists between various combinations of the variables.
- Sample and data timing for cointegration estimates (Table 2):
  - First observation 1997:04
  - Last observation 2005:12
  - Number of observations 104

### Estimated long-run cointegrating vectors (Table 2) — baseline and alternative specifications
- Dependent variable: log of the real effective exchange rate. All regressions include four lags, a constant, and two dummies for September and October 1998.
- Cointegrating coefficients (levels reported for equations (1), (2), (3); standard errors in parentheses):
  - Ln (oil price): 0.58 (0.12), 0.49 (0.13), 0.50 (0.15)
  - Ln (government consumption): 1.32 (0.20), 1.50 (0.19), 1.62 (0.18)
  - Ln (NIR): -0.11 (0.03), -0.18 (0.04), -0.14 (0.03)
  - Ln (productivity differential): 1.08 (0.36), 0.90 (0.42)  (reported where included)
  - Ln (corruption): -0.53 (0.36)  (reported in equation (3))
- Diagnostic statistics (by equation (1), (2), (3)):
  - LM test for serial correlation: 0.69, 0.73, 0.52
  - Jarque-Bera normality test: 0.12, 0.82, 0.81
  - Heteroskedasticity test: 0.08, 0.53, 0.92
  - Akaike Information Criterion: -5.49, -5.52, -5.46
  - Log likelihood: 305, 311, 311
- Statistical significance: All coefficient estimates in the baseline equation (center column, equation (2)) are statistically significant and have the expected signs. Only in equation (1) is there some evidence of heteroskedasticity (hypothesis of no heteroskedasticity rejected at the 8-percent significance level).

### Economic magnitudes and interpretation (from estimated elasticities)
- Oil price:
  - Because all variables are in logs, coefficients are long-run elasticities.
  - Baseline: a one percent increase in the oil price leads to an approximate 0.50 percent real appreciation.
  - Example calculation in text: the increase in the Urals oil price by 75 percent in 2005 would, all else equal, have led to 0.5*75 or 37.5 percent real appreciation; the officially published real effective ruble appreciation in 2005 was 8.5 percent (IFS measure).
- Government consumption:
  - A one percent increase in the ratio of general government consumption to GDP leads to an approximate 1.5 percent real appreciation (about three times stronger than the oil price effect).
  - Policy implication in text: a reduction in government consumption can help offset real appreciation pressures from higher oil prices.
- Net international reserves (NIR):
  - Baseline: a one percent increase in NIR is associated with a reduction in the real exchange rate by 0.18 percent.
  - Interpretation: reserve accumulation (foreign exchange intervention) appears to limit real appreciation pressures to a limited extent; theoretically long-run effect could be zero if interventions are unsterilized and fully pass through to inflation, but sample may be too short to detect money neutrality.
- Productivity differential:
  - Coefficient estimates not significantly different from one: a one percent increase in the productivity differential leads to approximately one percent real appreciation (consistent with Balassa-Samuelson).
- Corruption:
  - Estimated long-run elasticity -0.53 in equation (3), standard error 0.36 (not statistically significant).
  - Interpretation: negative coefficient is intuitive (corruption → capital outflows → depreciation), but measurement issues with the Transparency International CPI limit inference.

### Sectoral findings related to Dutch Disease symptoms
- Real exchange rate: evidence that oil prices have strengthened the real ruble exchange rate (elasticity around 0.50 in baseline), but no evidence that the real exchange rate has been above the estimated equilibrium level since 2002 (brief overvaluation episodes mid-1997–Aug 1998 and end-2000–early 2002).
- Manufacturing and services:
  - No evidence of absolute de-industrialization (manufacturing output negative only in 1998); but evidence of relative de-industrialization: manufacturing has grown more slowly than other sectors since 2001 and its share in total output has fallen.
  - Services growth outpaced manufacturing and, since 2002, even the fuel sector; employment growth in services positive since 2000 and exceeded other sectors in 2002 and 2004.
  - Sectoral cointegration estimates (Table 3) show mixed effects of oil price on non-oil manufacturing subsectors:
    - Ln (oil price) coefficients (Eq (1)–(6)): 2.23 (machinery), 0.16 (chemicals), 0.31 (forestry), -0.32 (light industry), 0.31 (food), -0.36 (manufacturing index); standard errors and t-statistics reported in Table 3.
    - After controlling for a transition trend, equation (6) suggests the overall impact of oil prices on total manufacturing output up to end-2005 was negative, albeit not significantly so.
- Wages and unit labor costs:
  - Real wage growth has been rapid in all sectors since 2000; initial sharpest increases in the fuel sector, then manufacturing and services caught up.
  - Productivity-adjusted wage growth (unit labor cost growth) was close to zero in all sectors between 2002 and 2004 (based on the authors’ calculations and assumptions).

### Robustness and additional tests
- Residuals generally well-behaved: no evidence of serial correlation or non-normality in most specifications.
- Chow breakpoint test (search over data points): no significant structural break at the 5-percent significance level — evidence for model stability.
- Causality and exogeneity: causality test indicates no evidence of short-run causality; test for weak exogeneity on the alpha parameters suggests none of the included variables is weakly exogenous.
- A caveat repeatedly noted: difficulty of estimating a long-run relationship for a sample period of less than ten years for an economy in transition.

### Policy implications and recommendations (from text)
- To limit real appreciation pressures and mitigate Dutch Disease risks:
  - Reduce government consumption as a share of GDP (saving windfall revenues rather than increasing consumption).
  - Raise tax revenues (policy agenda references better collection of value added and corporate profit taxes).
  - Foreign exchange interventions (reserve accumulation) can help to a limited extent but are not a panacea for long-run real appreciation.
- The Russian policy of saving a large part of windfall oil and gas tax revenues in a Stabilization Fund and using part to repay external debt likely helped reduce real appreciation.

### Suggested further research (from text)
- Correct for “initial undervaluation”, e.g., by estimation of the core-CPI based REER.
- Test for asymmetric effects of oil prices on the real exchange rate (negative oil price shocks may have stronger effects than positive shocks).
- Include additional determinants of real appreciation, for example growth of oil export volumes.

*Source: Appendix I, Tables A1 and A2; Tables A3–A4 and accompanying text (as provided).*

### REFERENCES

### _wp07102 - REFERENCES

### Major themes in the reference list
- Dutch Disease, resource abundance, and natural-resource-induced macroeconomic effects
- Real exchange rates, equilibrium exchange rates, and currency appreciation
- Oil, energy markets, and the macroeconomic role of the oil-gas sector
- Aid, volatility, investment, and fiscal management
- Corruption, rentier states, and political economy effects of natural resources
- Russian economic growth, restructuring, competitiveness, and overheating risks
- Empirical and theoretical contributions on volatility, investment, and growth

### Representative references by theme

- Dutch Disease / resource curse / natural resources and growth
  - Adam, Christopher S. and David L. Bevan, 2003, “Aid, Public Expenditure and Dutch Disease,” Centre for the Study of African Economies Working Paper 2003–02 (Oxford: University of Oxford).
  - Buiter, Willem and Douglas D. Purvis, 1983, “Oil, Disinflation and Export Competitiveness: A Model of the ‘Dutch Disease’,” National Bureau of Economic Research Working Paper 592 (Cambridge, Mass: NBER).
  - Corden, W. Max, 1984, “Booming Sector and Dutch Disease Economics: Survey and Consolidation,” Oxford Economic Papers, Vol. 36 (November), pp. 359–80.
  - Corden, W. Wax, and J. Peter Neary, 1982, “Booming Sector and De-Industrialisation in a Small Open Economy,” The Economic Journal, Vol. 92 (December), pp. 825–48.
  - Krugman, Paul, 1997, “The Narrow Moving Band, the Dutch Disease and the Competitive Consequences of Mrs. Thatcher,” Journal of Development Economics, Vol. 27, pp. 41–55.
  - Torvik, Ragnar, 2001, “Learning by Doing and the Dutch Disease,” European Economic Review, Vol. 45, No. 2, pp. 285–306.
  - Nkusu, Mwanza, 2004, “Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses,” IMF Working Paper 04/49, March (Washington: International Monetary Fund).
  - Younger, Stephen D., 1992, “Aid and the Dutch Disease: Macroeconomic Management When Everybody Loves You,” World Development, Vol. 20, No. 11, pp. 1587–97.
  - Égert, Balázs, 2006, “The Dutch Disease in Kazakhstan: An Empirical Investigation,” Focus on European Economic Integration, No. 2/06, pp. 85–108.
  - Kutan, Ali M. and Michael Louis Wyzan, 2005, “Explaining the Real Exchange Rate in Kazakhstan, 1996–2003: Is Kazakhstan Vulnerable to the Dutch Disease?” Economic Systems, Vol. 29, No. 2, pp. 242–255.

- Real exchange rates, equilibrium exchange rates, and appreciation
  - De Gregorio, Jose and Holger Wolf, 1994, “Terms of Trade, Productivity, and the Real Exchange Rate,” National Bureau of Economic Research Working Paper 4807 (Cambridge, Mass: NBER).
  - Edwards, Sebastian, 1989, Real Exchange Rates, Devaluation, and Adjustment (Cambridge, Massachusetts: MIT Press).
  - Égert, Balazs, László Halpern, and Ronald MacDonald, 2004, “Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues,” Centre for Economic Policy Research Discussion Paper No. 4809 (London: Centre for Economic Policy Research Discussion Paper).
  - Spatafora, Nicola and Emil Stavrev, 2003, “The Equilibrium Exchange Rate in a Commodity Exporting Country: The Case of Russia,” IMF Working Paper 03/93 (Washington: International Monetary Fund).
  - Rautava, Jouko, 2004, “The Role of the Oil Prices and the Real Exchange Rate in Russia's Economy—A Cointegration Approach,” Journal of Comparative Economics, Vol. 32, No. 2, pp. 315–27.
  - Sosunov, Kirill and Oleg Zamulin (2006a), “Can Oil Prices Explain the Real Appreciation of the Russian Ruble in 1998–2005?”, CEFIR/NES Working Paper No. 83 (Moscow: Center for Economic and Financial Research at New Economic School).

- Oil, energy markets, and macroeconomic role of oil-gas sector
  - International Energy Agency, 2004, World Energy Outlook 2004 (Paris: International Energy Agency).
  - International Energy Agency, 2005, World Energy Outlook 2005 (Paris: International Energy Agency).
  - International Energy Agency, 2006, “Monthly Oil Market Report” (Paris: International Energy Agency).
  - Gylfason, Thorvaldur, 2004, “Natural resources and Economic growth: from dependence to diversification,” CEPR Discussion paper 4804.
  - Gurvich, E. T., 2004, “A Macroeconomic Estimate of the Role of the Russian Oil-Gas Sector” (in Russian) [Макроэкономическая оценка роли российского нефтегазового сектора], Voprosy Ekonomiki, No. 10.
  - OPEC, 2005, Organization of the Petroleum Exporting Countries, OPEC Bulletin, Vol. 11–12 (Vienna: OPEC).

- Aid, volatility, investment, fiscal management
  - Aizenman, Joshua and Nancy Marion, 1999, “Volatility and Investment: Interpreting Evidence from Developing Countries,” Economica, Vol. 66, pp. 157–79.
  - Bulir, Ales and Timothy D. Lane, 2002, “Aid and Fiscal Management,” IMF Working Paper 02/112 (Washington: International Monetary Fund).
  - Flug, Karnit, Antonio Spilimbergo, and Erik Wachtenheim, 1998, “Investment in Education: Do Economic Volatility and Credit Constraints Matter?” Journal of Development Economics, Vol. 55, No. 2, pp. 465–4.
  - Nkusu, Mwanza, 2004, “Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses,” IMF Working Paper 04/49, March (Washington: International Monetary Fund).
  - Rajan, Raghuram G. and Arvind Subramanian, 2005, “What Undermines Aid’s Impact on Growth?” IMF Working Paper 05/126(Washington: International Monetary Fund).

- Corruption, rentier experience, and political economy
  - Leite, Carlos and Jens Weidmann, 1999, “Does Mother Nature Corrupt? Natural Resources, Corruption, and Economic Growth,” IMF Working Paper 99/85 (Washington: International Monetary Fund).
  - Mauro, Paolo, 1995, “Corruption and Growth,” Quarterly Journal of Economics, Vol. 90, pp. 681–712.
  - Isham, Jonathan, Lant Pritchett, Michael Woolcock, and Gwen Busby, 2005, “The Varieties of Rentier Experience: How Natural Resource Endowments Affect the Political Economy of Economic Growth,” The World Bank Economic Review, Vol. 19, No. 2, pp.141–174.
  - Wei, Shang-Jin and Yi Wu, 2001, “Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises,” National Bureau of Economic Research Working Paper 8187 (Cambridge, Mass: NBER).

- Russian economy: growth, competitiveness, restructuring, overheating
  - Ahrend, Rudiger, 2004, “Russian Industrial Restructuring: Trends in Productivity, Competitiveness and Comparative Advantage,” ECO/WKP No. 31 (Paris: OECD).
  - Ahrend, Rudiger, 2006, “Russia's Post-Crisis Growth: Its Sources and Prospects for Continuation,” Europa-Asia Studies, Vol. 58, No.1, pp. 1–24.
  - Desai, Padma, 2006, “Why is Russian GDP Growth Slowing?” American Economic Review Papers and Proceedings, Vol. 96, No. 2, pp. 342–7.
  - Merlevede, Bruno, Bas van Aarle, and Koen Schoors, 2004, “Russia from Bust to Boom: Oil, Politics or the Ruble?” William Davidson Institute Working Paper No. 722.
  - Oomes, Nienke and Oksanna Dynnikova, 2006, “The Utilization-Adjusted Output Gap: Is the Russian Economy Overheating?” IMF Working Paper No. 06/68 (Washington: International Monetary Fund).
  - World Bank, 2004, Russian Economic Report, No. 7 (Washington: The World Bank).
  - World Bank, 2005a, “From Transition to Development. A Country Economic Memorandum for the Russian Federation” (Washington: The World Bank).
  - Standard and Poor’s, 2005, “Russia: Facing ‘Dutch Disease’ Reform,” June 6.
  - Standard and Poor’s, 2006, “Avoiding the hydrocarbons habit is vital for sovereign ratings on Russia,” CreditWeek, July.
  - Latsis, O., 2005, “Dutch Disease Hits Russia,” Moscow News, June 8-14.
  - Westin, Peter, 2004, “Dutch Disease: Diagnosing Russia” (Moscow: ATON Capital).

- Volatility, investment, and growth literature (cross-country and theoretical)
  - Caballero, Ricardo J., 1991, “On the Sign of the Investment—Uncertainty Relationship,” American Economic Review, Vol. 81, No. 1, pp. 279–88.
  - Ramey, Garey and Valerie A. Ramey, 1995, “Cross-Country Evidence on the Link Between Volatility and Growth,” American Economic Review, Vol. 85, pp. 1138–51.
  - Lane, Philip and Aaron Tornell, 1996, “Power, Growth, and the Voracity Effect,” Journal of Economic Growth, Vol. 1, No. 2, pp. 213–41.
  - Tornell, Aaron and Philip Lane, 1999, “Voracity and Growth,” American Economic Review, Vol. 89, pp. 22–46.
  - Collier, Paul and Anke Hoeffler, 2004, “Greed and Grievance in Civil War,” Oxford Economic Papers, Vol. 56, No. 4, pp. 563–95.

### Key empirical and working-paper sources cited (select examples with exact identifiers)
- IMF Working Paper 02/112 — Bulir, Ales and Timothy D. Lane, 2002, “Aid and Fiscal Management.”
- IMF Working Paper 03/93 — Spatafora, Nicola and Emil Stavrev, 2003, “The Equilibrium Exchange Rate in a Commodity Exporting Country: The Case of Russia.”
- IMF Working Paper 05/126 — Rajan, Raghuram G. and Arvind Subramanian, 2005, “What Undermines Aid’s Impact on Growth?”
- IMF Working Paper 06/68 — Oomes, Nienke and Oksanna Dynnikova, 2006, “The Utilization-Adjusted Output Gap: Is the Russian Economy Overheating?”
- NBER Working Paper 5398 — Sachs, Jeffrey D. and Andrew M. Warner, 1995 (revised 1997 and 1999), “Natural resource abundance and economic growth.”
- CEPR Discussion Paper No. 4809 — Égert, Balázs, László Halpern, and Ronald MacDonald, 2004, “Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues.”

*Reference list from _wp07102 - REFERENCES*

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