As its resources go, so goes Russia

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If Satan, for sheer mischievous fun, were to design the perfectly dysfunctional economy from scratch, he'd probably look first at modern Greece as a model. All of the vilest ingredients are there: bloated government bureaucracy, lack of economic diversity, epic corruption and cronyism, obscene wealth concentrated in the hands of the few, runaway debt and violent opposition to any reform. The Prince of Demons would even like Greece's inferno summers. No doubt he'd also find inspiration in Italy (with its bacchanalian "bunga bunga" prime minister) and clapped-out Portugal (effectively bankrupt).

But what about Russia? At first glance, the country looks like a reformed sinner. Less than a generation ago, it was a nasty dictatorship where private enterprise barely existed. Today, it's a powerful market economy that's rich in resources and ambition, and equipped with a solid middle class that's starting to swap Lada for Lexus.

Alas, if Satan peers behind Russia's pious façade, he'll find that it shares more wicked traits with Greece than might be apparent at first. Take bureaucracy. Greece, with a population of about 11 million, has somewhere between 700,000 and one million public servants (estimates vary considerably, in part because the country's data collection systems are so backward). Over the past two decades, various governments have used jobs as political rewards. And Russia? The number of state employees has swelled from 700,000 in 1991 to 1.7 million today, according to a recent report on the country's economy by Troika Dialog, Russia's biggest investment bank.

Corruption? Greece fudged its debt and budget deficit figures to get into the euro currency zone in 2001, and fudged them again to stay there. In Transparency International's most recent Corruption Perceptions Index in 2010, which ranks 178 countries from best (New Zealand) to worst (Somalia), Greece sank to 78th from 47th in 2005. Compared with Russia, however, Greece is still a paragon of virtue. Russia ranks 154th, tied with Papua New Guinea and Tajikistan.

There are other unfortunate parallels. Russia, like Greece, relies heavily on consumption to drive its economy, rather than investment in the future. Each country also has a rapidly aging population and a falling birth rate, with predictably dire consequences for the taxpayer-to-pensioner ratio. Lack of economic diversification is another flaw the two share: Greece is overly reliant on tourism, Russia on oil.

Oil is Russia's nemesis and its saviour. The Russian economic collapse of the 1990s was largely driven by sinking crude oil prices, which dipped below $11 (all currency in U.S. dollars) a barrel in 1998. In August of that year, Russia defaulted on its foreign debt, wiping out most of its banks and devaluing the ruble. Russia's government-debt-to-GDP ratio soared to more than 80% (Greece's is now an estimated 150%, and rising).

When oil prices reversed, Russia rose from the wreckage. Oil climbed to more than $100 a barrel, then to almost $150 before the 2008 financial crisis hit. Those soaring prices, coupled with some genuine structural reforms, pushed Russia's debt-to-GDP ratio below 10%—a dream figure in the now debt-soaked Western world. Russia's foreign exchange reserves ballooned from $10 billion to $500 billion. Fuelled by all that oil money, consumer spending took off. Troika Dialog notes that beer sales have climbed sixfold since the mid-1990s.

Russia is now addicted to high prices for oil and other commodities. Last year, oil accounted for about one-quarter of GDP, and contributed 50% of federal government revenues. Russia now vies with Saudi Arabia as the world's leading oil exporter. Since the post-Communist collapse in 1998, oil exports have soared by about 90%, to 7.3 million barrels a day. Even Russian president Dmitry Medvedev is worried. In 2009, he called his country's dependence on oil "primitive."

Various analysts estimate that the Kremlin's "break-even" oil price—the one at which its budget balances—is about $100 a barrel, and a few put the threshold even higher. Recently, both the benchmark Brent and West Texas Intermediate crude oil prices have been within a few dollars of that figure. But the sagging European and North American economies are pushing down oil price forecasts. Russia's Otkritie Bank says the price will fall to about $80. Citibank estimates that every $10 decline in the price of oil reduces the Kremlin's revenues by an astounding $20 billion.

So, would Satan choose Russia over Greece? Maybe not at the moment, if only because Russia's low debt gives it room for mistakes. But over-reliance on a single volatile product combined with a bloated bureaucracy and endemic corruption can be a recipe for disaster. Look at Venezuela. Its economy is struggling even though oil prices have more than doubled since the 2008 credit crunch. While Russia may still look okay on paper, Satan might shift allegiances soon if Moscow makes the mistake of counting on its oil fortunes forever.