The "Russian Disease": a look inside the dangerous, chaotic, unlawful, and unpredictable world of Russian oil.

• Author: Goldman, Marshall I.

With his purchase of the Chelsea Soccer team in London and along with it, the world's largest private yacht, the Russian oligarch Roman Abramovich highlighted the fact that his oil-derived wealth was now the match of anything claimed by the oil princes of Saudi Arabia. That assumes of course that unlike Mikhail Khodorkovsky and some of the other oligarchs, Abramovich is not forced to flee the country nor imprisoned.

But in prison or not, Abramovich's and Khodorkovsky's individual pranks and run-ins with President Vladimir Putin have also awakened us to the realization that as a country, Russia ranks a close second to Saudi Arabia as the world's largest producer of petroleum. And like Saudi Arabia, if those oil and gas reserves are used effectively, Russia and its leaders have at their disposal a powerful economic and political lever. Unfortunately for Russia, that lever has not always been used wisely or productively by any of Putin's predecessors, the oligarchs, or Putin himself.

Like so many other major oil-producing countries, the enormous wealth created by that oil in Russia has triggered a stormy and unsettling struggle for control between state officials and oil field operators. The battle has been particularly fierce--not only between the state and the private owners--but among Russian government officials. This battle has become so epic in its proportions that we can say that just as the "Dutch Disease" has become emblematic of the damage oil and gas wealth can do to the rest of a country's economy, so for countries characterized by over-abundant raw material wealth but inadequate rule of law and social mores, the "Russian Disease" symbolizes the corrupting influence that too much oil can have on a country's laws and social behavior and the no-holds-barred political and personal fight for control that the oil wealth almost always ignites. The battle that ensues is usually wasteful and divisive, on occasion even bloody and typically destructive of efforts to institute democracy and rule of law.

Oil has a long history in Russia. Not many realize that in 1905, before the Bolshevik revolution, Russia was the world's largest producer of petroleum. With the nationalization of property after the revolution, production suffered and it was not until the mid-1960s that production began to increase rapidly. Between 1970 and 1980 for example, output rose 90 percent. By 1976, the USSR had surpassed the United States to become the world's largest producer of crude oil. This in turn made it possible to export 25 percent of its output, making it the world's second largest exporter after Saudi Arabia.

Some saw this increase in output as proof of the superiority of the Soviet system of central planning. The U.S. Central Intelligence Agency, however, came to just the opposite conclusion. The emphasis on increasing output in the short run, it warned, came at the expense of extracting the maximum output over the long run. (1) As the CIA saw it, to obtain the increase in output demanded by the central planners, oil field producers injected excessive amounts of water into the wells. In the short run, this increased the pressure within the well, which made it easier to extract the oil, but after a time, the operators found they were pumping out more water than petroleum. This led the CIA analysts to predict that by 1985 the Soviet...