Oil shock in the Caspian Basin: Diversification policy and subsidized economies

• Published in: Resources policy 2017-12, Vol.54, p.149-156
• Main Authors: Bayramov, Vugar, Abbas, Gulnara
• Format: Article
• Language: English
• Subjects: Azerbaijan; Caspian Basin; Competition; Constraints; Crude oil; Crude oil prices; Diversification; Economic crisis; Economic slowdowns; Economics; Exports; Government spending; Kazakhstan; Market entry; Oil shock; Petroleum; Prices; Russia; Subsidies; Subsidized economy
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2017.10.006

The recent oil price shocks of 2014 resulted in a substantial economic slowdown in the oil-exporting countries of the Caspian Basin, namely Russia, Kazakhstan and Azerbaijan. These resource-reliant countries have encountered a contraction not only in the commodity sector, but also in the non-oil sector due to poor diversification of the economy, and cuts in budget expenditure amid plunging oil prices. By analyzing the underlying causes of the current crisis, this paper concludes that, the economies of these countries are “subsidized economies”, or based on government spending financed by resource windfalls. The non-resource sectors in these oil-exporting countries were poorly developed prior to the crisis and failed to act as an avenue for diversification, lacking the potential to be export-oriented and sustainable. Russia, Kazakhstan, and Azerbaijan need to implement various reforms to support the diversification of the economy, including liberal measures such as eliminating barriers to market entry and promoting competition. •The underlying cause of recent economic slowdown in the resource-abundant Caspian Basin countries was heavy reliance on resource windfalls to finance government expenditure and to invest in non-resource tradable sectors.•Non-oil growth dependency on the international crude oil price hampered the achievement of a diversified economy in these countries.•The economy was based on public spending in the Caspian Basin during the boom period, the oil price shock deprived the governments of their major source of funding for the already existing “subsidized economy”.•Azerbaijan, Kazakhstan, and Russia formed a “supply-based economy” reliant on government expenditure both in the short term as government consumption expenditure, and in the long term as gross capital formation.•The failure to achieve a diversified economy can also be attributed to poor diversification of infrastructure investment under budget expenditures.