Economy of Russia

Soviet economy

By the 1970s the Soviet Union entered the Era of Stagnation. The complex demands of the modern economy and inflexible administration overwhelmed and constrained the central planners. The volume of decisions facing planners in Moscow became overwhelming. The cumbersome procedures for bureaucratic administration foreclosed the free communication and flexible response required at the enterprise level for dealing with worker alienation, innovation, customers, and suppliers. From 1975 to 1985, corruption and data fiddling became common practice among bureaucracy to report satisfied targets and quotas thus entrenching the crisis. Since 1986 Mikhail Gorbachev attempted to address economic problems by moving towards a market-oriented socialist economy. Gorbachev's policies had failed to rejuvenate the Soviet economy, though. Instead, Perestroika set off a process of political and economic disintegration, culminating in the breakup of the Soviet Union in 1991.

Transition to market economy (1991–98)

Following the collapse of the Soviet Union, Russia had undergone a radical transformation, moving from a centrally planned economy to a globally integrated market economy. Corrupt and haphazard privatization processes turned over major state-owned firms to politically connected "oligarchs", which has left equity ownership highly concentrated.

Yeltsin's program of radical, market-oriented reform came to be known as a "shock therapy". It was based on the recommendations of the IMF and a group of top American economists, including Larry Summers. The result was disastrous, with real GDP falling by more than 40% by 1999, hyperinflation which wiped out personal savings, crime and destitution spreading rapidly.

The majority of state enterprises were privatized amid great controversy and subsequently came to be owned by insiders for far less than they were worth. For example, the director of a factory during the Soviet regime would often become the owner of the same enterprise. Under the government's cover, outrageous financial manipulations were performed that enriched a narrow group of individuals at key positions of business and government. Many of them promptly invested their newfound wealth abroad producing an enormous capital flight.

Difficulties in collecting government revenues amid the collapsing economy and a dependence on short-term borrowing to finance budget deficits led to the 1998 Russian financial crisis.

In the 1990s Russia was "the largest borrower" from the International Monetary Fund with loans totaling $20 billion. The IMF was the subject of criticism for lending so much as Russia introduced little of the reforms promised for the money and a large part of these funds could have been "diverted from their intended purpose and included in the flows of capital that left the country illegally".

Recovery and growth (1999–2008)

Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery was devaluation of the ruble, which made domestic producers more competitive nationally and internationally.

Between 2000 and 2002, there was a significant amount of pro-growth economic reforms including a comprehensive tax reform, which introduced a flat income tax of 13%; and a broad effort at deregulation which improved the situation for small and medium-sized enterprises.

Between 2000 and 2008, Russian economy got a major boost from rising commodity prices. GDP grew on average 7% per year. Disposable incomes more than doubled and in dollar-denominated terms increased eightfold. The volume of consumer credit between 2000–2006 increased 45 times, fuelling a boom in private consumption. The number of people living below poverty line declined from 30% in 2000 to 14% in 2008.

Inflation remained a problem however, as the central bank aggressively expanded money supply to combat appreciation of the ruble. Nevertheless, in 2007 the World Bank declared that the Russian economy achieved "unprecedented macroeconomic stability". Until October 2007, Russia maintained impressive fiscal discipline with budget surpluses every year from 2000.

2009–14

Russian banks were hit by the global credit crunch in 2008, though no long term damage was done thanks to proactive and timely response by the government and central bank, which shielded the banking system from effects of the global financial crisis. A sharp, but brief recession in Russia was followed by a strong recovery beginning in late 2009.

After 16 years of negotiations, Russia's membership to the WTO was accepted in 2011. In 2013, Russia was labeled a high-income economy by the World Bank.

Russian leaders repeatedly spoke of the need to diversify the economy away from its dependence on oil and gas and foster a high-technology sector. In 2012 oil, gas and petroleum products accounted for over 70% of total exports. This economic model appeared to show its limits, when after years of strong performance, Russian economy expanded by a mere 1.3% in 2013. Several reasons have been proposed to explain the slowdown, including prolonged recession in the EU, which is Russia's largest trading partner, stagnant oil prices, lack of spare industrial capacity and demographic problems. Political turmoil in neighboring Ukraine added to the uncertainty and suppressed investment.

According to survey provided by Financial Times in 2012, Russia was second by economic performance among G20, following Saudi Arabia. Economic performance estimate on seven measures: gross domestic product growth, budget deficit and government debt for 2012; economic recovery – output compared with the pre-crisis peak; change in debt since 2009; change in unemployment from 2009 to 2013; and, finally, the deviation of the current account from balance. Forbes magazine lists Russia as #91 in the best countries for business. The country has made substantial improvement recently in areas like innovation and trade freedom. (Forbes ranks each country in a number of categories and draws from multiple sources such as the World Economic Forum, World Bank, and Central Intelligence Agency). Since 2008, Moscow has been by Forbes magazine repeatedly named the "billionaire capital of the world".

2014–present

Following the annexation of Crimea in March 2014 and Russia's reported involvement in the ongoing conflict in Ukraine (denied by Russia), the United States, the EU (and some other European countries), Canada and Japan imposed sanctions on Russia's financial, energy and defence sectors. Some EU member countries were split on further sanctions, but have nominated to go down the sanctions route. This led to the decline of the Russian ruble and sparked fears of a Russian financial crisis. Russia responded with sanctions against a number of countries, including a one-year period of total ban on food imports from the European Union and the United States.

According to the Russian economic ministry in July 2014, GDP growth in the first half of 2014 was 1%. The ministry projected growth of 0.5% for 2014. The Russian economy grew by a better than expected 0.6% in 2014. As of the 2nd quarter of 2015 inflation, compared to the second quarter of 2014, was 8%; the economy had contracted by 4.6% as the economy entered recession. To balance the state budget in 2015, oil price would need to be around US$74 as opposed to US$104 for 2014. Russia used to have around US$500 billion in forex reserves, but holds US$360 billion in summer 2015 and plans to keep accumulating forex reserves for years to come, until they reach again $500 billion.

According to Herman Gref from Sberbank, the contraction of Russian economy is "not a crisis but rather a new reality" to which it has to adapt, primarily due to the low oil prices. He also presented a number of metrics demonstrating the change - the GDP has fallen by 3.7%, income - by 4.3%, salaries - by 9.3% and inflation reached 12.9%. However, during December 2015 it was reported by the Moscow Times that the number of people living at or below the poverty line, "those with monthly incomes of less than 9,662 rubles ($140)" increased by more than 2.3 million people. During 2014-2015 a quarter of banks in Russia left the market, the expenses of Russian bank guarantee fund reached 1 trillion roubles plus additional government funds for recapitalisation of banks reached 1.9 trillion roubles.

At the end of 2016, the United States imposed further sanctions on the Russian Federation in response to Russian interference in the 2016 United States elections.

Growth of Russian GDP

The annual growth of the Russian GDP according to World Bank:

Currency and central bank

Russian ruble is the unit of currency of the Russian Federation. It is also accepted as legal tender in Abkhazia and South Ossetia.

Russian monetary system is managed by the Bank of Russia. Founded on 13 July 1990 as the State Bank of the RSFSR, Bank of Russia assumed responsibilities of the central bank following the breakup of the Soviet Union in 1991.

According to the Сonstitution, Bank of Russia is an independent entity, with the primary responsibility of protecting the stability of the national currency, the ruble. It is also chief regulator and a lender of last resort for the banking industry in Russia. Bank of Russia is governed by a board of directors, headed by a governor who is appointed by the President of Russia.

Large current account surpluses caused rapid real appreciation of the ruble between 2000 and 2008. Bank of Russia attempted to combat this trend by aggressively accumulating foreign currency reserves. This was a major contributing cause to relatively high inflation rates during this period. Central bank policy evolved following the global financial crisis. Instead of targeting a fixed exchange rate vs a basket of dollar and euro, Bank of Russia shifted its focus to inflation targeting. In April 2012 Russian inflation reached record low of 3.6%.

The Russian Central Bank has been planning to free float the Russian Ruble and has been widening the currency's trading band and expects the ruble to be fully free floating in 2015. However, the ruble has fell significantly since 2013 when the central bank announced the plans. On 3 October 2014 the USD-RUB exchange reached 40.00 Russian Rubles to USD, up from 32.19 Rubles the same time last year, this represents a decline of 24.26%. The Russian Central bank has stated that Russian banks are able to withstand a devaluation of up to 25%-30% in January 2014 when the Ruble has just began its decline, therefore Central Bank intervention may be needed, however plans to free float the currency continued, as of January 2014. The Russian Central Bank spent $88 billion in order to stem the fall of the ruble in 2014. Due to central bank intervention and stronger oil prices the ruble rebounded sharply at the begging of 2015. In April 2015, Ksenia Yudaeva, Bank of Russia's First Deputy Governor, stated that she believed the currency has stabilized at the present rate of around 50 rubles to USD.

Along with a rapid devaluation of the Ruble inflation in Russia has greatly increased. In 2012 Inflation was at one of its lowest points since the fall of the Soviet Union at 3.6%, in October 2014 the rate of inflation was reported to be 8%, although this is well below the 2333.30% inflation rate experienced in 1992.

Fiscal policy

Russia was expected to have a budget deficit of $21 billion in 2016.

National wealth fund

On 1 January 2004, the Stabilization fund of the Russian Federation was established by the Government of Russia as a part of the federal budget to balance it if oil price falls. Now the Stabilization fund of the Russian Federation is being modernized. Stabilization Fund of the Russian Federation will be divided into two parts on 1 February 2008. The first part will become a reserve fund equal to 10% of GDP (10% of GDP equals to about $200 billion now), and will be invested in a similar way as Stabilization Fund of the Russian Federation. The second part will be turned into the National Prosperity Fund of Russian Federation. Deputy Finance Minister Sergei Storchak estimates it will reach 600–700 billion rubles by 1 February 2008. The National Prosperity Fund is to be invested into more risky instruments, including the shares of foreign companies.

Public debt

Russia has very low debt-to-GDP ratio, it is among the lowest ratios in the world. Most of its external debt is private. Its debt to GDP ratio was in 2016 is at 12%.

As a chief successor state to the Soviet Union, Russia took up the responsibility for paying USSR's external debts.

Protectionism

Russia has recently come to attention as a leading nation for protectionist policies. According to the independent Global Trade Alert, Russia put more protectionist policies in place than any other country in 2013. Russia's strategic trading block consisting of Russia, Belarus, and Kazakhstan was responsible for 33% of worldwide protectionism during the year. Of the protectionist policies, 43.4 percent were targeted bailouts and direct subsidies for local companies, while 15.5 percent were tariff measures.

Sectors

In Russia, services are the biggest sector of the economy and account for 58% of GDP. Within services the most important segments are: wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods (17% of total GDP); public administration, health and education (12%); real estate (9%) and transport storage and communications (7%). Industry contributes 40% to total output. Mining (11% of GDP), manufacturing (13%) and construction (4%) are the most important industry segments. Agriculture accounts for the remaining 2%.

Energy

The mineral-packed Ural Mountains and the vast oil, gas, coal, and timber reserves of Siberia and the Russian Far East make Russia rich in natural resources, which dominate Russian exports. Oil and gas exports, specifically, continue to be the main source of hard currency.

The petroleum industry in Russia is one of the largest in the world. Russia has the largest reserves, and is the largest exporter, of natural gas. It has the second largest coal reserves, the eighth largest oil reserves, and is the largest exporter of oil in the world in absolute numbers. Per capita oil production in Russia, though, is not that high. As of 2007, Russia was producing 69.603 bbl/day per 1,000 people, much less than Canada (102.575 bbl/day), Saudi Arabia (371.363 bbl/day), or Norway (554.244 bbl/day), but more than two times the USA (28.083 bbl/day) or the UK (27.807 bbl/day).

Mining

Russia is also a leading producer and exporter of minerals and gold. Russia is the largest diamond-producing nation in the world, estimated to produce over 33 million carats in 2013, or 25% of global output valued at over $3.4 billion, with state-owned ALROSA accounting for approximately 95% of all Russian production.

Expecting the area to become more accessible as climate change melts Arctic ice, and believing the area contains large reserves of untapped oil and natural gas, Russian explorers on 2 August 2007 in submersibles planted the Russian flag on the Arctic seabed, staking a claim to energy sources right up to the North Pole. Reaction to the event was mixed: President Vladimir Putin congratulated the explorers for "the outstanding scientific project", while Canadian officials stated the expedition was just a public show.

Under the Federal Law "On Continental Shelf Development" upon proposal from the federal agency managing the state fund of mineral resources, or its territorial offices, the Russian government approves the list of some sections of the mineral resources that are passed for development without any contests and auctions, some sections of federal importance of the Russian continental shelf, some sections of the mineral resources of federal importance that are situated in Russia and stretch out on its continental shelf, some gas deposits of federal importance that are handed over for prospecting and developing mineral resources under a joint license. The Russian government is also empowered to decide on the handover of the previously mentioned sections of the mineral resources for development without any contests and auctions.

Forestry

Russia has more than a fifth of the world's forests, which makes it the largest forest country in the world. However, according to a 2012 study by the Food and Agriculture Organization of the United Nations and the government of the Russian Federation, the considerable potential of Russian forests is underutilized and Russia's share of the global trade in forest products is less than 4%.

Agriculture

Russia comprises roughly three-quarters of the territory of the former Soviet Union. Following the breakup of the Soviet Union in 1991 and after nearly 10 years of decline, Russian agriculture began to show signs of improvement due to organizational and technological modernization. Northern areas concentrate mainly on livestock, and the southern parts and western Siberia produce grain. The restructuring of former state farms has been an extremely slow process. The new land code passed by the Duma in 2002 should speed restructuring and attract new domestic investment to Russian agriculture. Private farms and garden plots of individuals account for over one-half of all agricultural production.

Defense industry

Russia's defense industry employs 2.5 – 3 million people, accounting for 20% of all manufacturing jobs. Russia is the world's second largest conventional arms exporter after the United States. The most popular types of weaponry bought from Russia are Sukhoi and MiG fighters, air defense systems, helicopters, battle tanks, armored personnel carriers and infantry fighting vehicles. The research organization Centre for Analysis of Strategies and Technologies ranked the air defense system producer Almaz-Antey as the industry's most successful company in 2007, followed by aircraft-maker Sukhoi. Almaz-Antey's revenue that year was $3.122 billion, and it had a work force of 81,857 people.

Aerospace

Aircraft manufacturing is an important industry sector in Russia, employing around 355,300 people. The Russian aircraft industry offers a portfolio of internationally competitive military aircraft such as MiG-29 and Su-30, while new projects such as the Sukhoi Superjet 100 are hoped to revive the fortunes of the civilian aircraft segment. In 2009, companies belonging to the United Aircraft Corporation delivered 95 new fixed-wing aircraft to its customers, including 15 civilian models. In addition, the industry produced over 141 helicopters. It is one of the most science-intensive hi-tech sectors and employs the largest number of skilled personnel. The production and value of the military aircraft branch far outstrips other defense industry sectors, and aircraft products make up more than half of the country's arms exports.

Space industry of Russia consists of over 100 companies and employs 250,000 people. The largest company of the industry is RKK Energia, the main manned space flight contractor. Leading launch vehicle producers are Khrunichev and TsSKB Progress. Largest satellite developer is Reshetnev Information Satellite Systems, while NPO Lavochkin is the main developer of interplanetary probes.

Automotive industry

Automobile production is a significant industry in Russia, directly employing around 600,000 people or 0.7% of the country's total work force. In addition, the industry supports around 2–3 million people in related industries. Russia was the world's 15th largest car producer in 2010, and accounts for about 7% of the worldwide production. In 2009 the industry produced 595,807 light vehicles, down from 1,469,898 in 2008 due to the global financial crisis. The largest companies are light vehicle producers AvtoVAZ and GAZ, while KAMAZ is the leading heavy vehicle producer.

Electronics

Russia is experiencing a regrowth of microelectronics, with the revival of JCS Mikron.

Retail

As of 2013, Russians spent 60% of their pre-tax income shopping, the highest percentage in Europe. This is possible because many Russians pay no rent or house payments, owning their own home after privatization of state-owned Soviet housing. Shopping malls were popular with international investors and shoppers from the emerging middle class. Eighty-two malls had been built near major cities including a few that were very large. A supermarket selling groceries is a typical anchor store in a Russian mall.

Retail sales in Russia

Telecommunications

Russia's telecommunications industry is growing in size and maturity. As of December 2007, there were an estimated 4,900,000 broadband lines in Russia.

In 2006, there were more than 300 BWA operator networks, accounting for 5% of market share, with dial-up accounting for 30%, and Broadband Fixed Access accounting for the remaining 65%. In December 2006, Tom Phillips, chief government and regulatory affairs officer of the GSM Association stated:

The financial crisis, which had already hit the country at the end of 2008, caused a sharp reduction of the investments by the business sectors and a notable reduction of IT budget made by government in 2008–2009. As a consequence, in 2009 the IT market in Russia declined by more than 20% in ruble terms and by one-third in euro terms. Among the particular segments, the biggest share of the Russian IT market still belongs to hardware.

Key data on the telecommunications market in Russia

Transportation

Russian Railways accounts for 2.5% of Russia's GDP. The percentage of freight and passenger traffic that goes by rail is unknown, since no statistics are available for private transportation such as private automobiles or company-owned trucks. In 2007, about 1.3 billion passengers and 1.3 billion tons of freight went via Russian Railways. In 2007 the company owned 19,700 goods and passenger locomotives, 24,200 passenger cars (carriages) (2007) and 526,900 freight cars (goods wagons) (2007). A further 270,000 freight cars in Russia are privately owned. In 2009 Russia had 128,000 kilometres of common-carrier railroad line, of which about half was electrified and carried most of the traffic; over 40% was double track or better.

Construction

In 2009 the Russian construction industry survived its most difficult year in more than a decade. The 0.8% reduction recorded by the industry for the first three quarters of 2010 looked remarkably healthy in comparison with the 18.4% slump recorded the previous year, and construction firms became much more optimistic about the future than in previous months. The most successful construction firms concluded contracts worth billions of dollars an planned to take on employees and purchase new building machinery. The downturn served to emphasise the importance of the government to the construction market.

Insurance

According to the Central Bank of Russia 422 insurance companies operate on the Russian insurance market by the end of 2013. The concentration of insurance business is significant across all major segments except compulsory motor third party liability market (CMTPL), as the Top 10 companies in 2013 charged 58.1% premiums in total without compulsory health insurance (CHI). Russian insurance market in 2013 demonstrated quite significant rate of growth in operations. Total amount of premiums charged (without CHI) in 2013 is RUB 904.9 bln (increase on 11.8% compared to 2012), total amount of claims paid is RUB 420.8 bln (increase on 13.9% compared to 2012). Premiums to GDP ratio (total without CHI) in 2013 increased to 1.36% compared to 1.31 a year before. The share of premiums in household spending increased to 1.39%. Level of claims paid on the market total without CHI is 46.5%, insufficient increase compared to 2012. The number of polices in 2013 increased on 0.1% compared to 2012, to 139.6 mln policies.

Although relative indicators of the Russian insurance market returned to pre-crisis levels, the progress is achieved mainly by the increase of life insurance and accident insurance, the input of these two market segments in premium growth in 2013 largely exceeds their share on the market. As before, life insurance and accident insurance are often used by banks as an appendix to a credit contract protecting creditors from the risk of credit default in case of borrower’s death or disability. The rise of these lines is connected, evidently, with the increase in consumer loans, as the total sum of credit obligations of population in 2013 increased on 28% to RUB 9.9 trillion. At the same time premium to GDP ratio net of life and accident insurance remained at the same level of 1.1% as in 2012. Thus, if "banking" lines of business are excluded, Russian insurance market is in stagnation stage for the last four years, as premiums to GDP ratio net of life and accident insurance remains at the same level of 1.1% since 2010.

Information technology

The IT market is one of the most dynamic sectors of the Russian economy. Russian software exports have risen from just $120 million in 2000 to $3.3 billion in 2010. Since the year 2000 the IT market has started growth rates of 30–40% a year, growing by 54% in 2006 alone. The biggest sector in terms of revenue is system and network integration, which accounts for 28.3% of the total market revenues. Meanwhile, the fastest growing segment of the IT market is offshore programming.

Currently Russia controls 3% of the offshore software development market and is the third leading country (after India and China) among software exporters. Such growth of software outsourcing in Russia is caused by a number of factors. One of them is the supporting role of the Russian Government. The government has launched a program promoting construction of IT-oriented technology parks (Technoparks)—special zones that have an established infrastructure and enjoy a favorable tax and customs regime, in seven different places around the country: Moscow, Novosibirsk, Nizhny Novgorod, Kaluga, Tumen, Republic of Tatarstan and St. Peterburg Regions. Another factor stimulating the IT sector growth in Russia is the presence of global technology corporations such as Intel, Google, Motorola, Sun Microsystems, Boeing, Nortel, Hewlett-Packard, SAP AG, and others, which have intensified their software development activities and opened their R&D centers in Russia.

Under a government decree signed On June 2013, a special "roadmap" is expected to ease business suppliers’ access to the procurement programs of state-owned infrastructure monopolies, including such large ones as Gazprom, Rosneft, Russian Railways, Rosatom, and Transneft. These companies will be expected to increase the proportion of domestic technology solutions they use in their operations. The decree puts special emphasis on purchases of innovation products and technologies. According to the new decree, by 2015, government-connected companies must double their purchases of Russian technology solutions compared to the 2013 level and their purchasing levels must quadruple by 2018.

Russia is one of the few countries in the world with a home grown internet search engine who owns a relevant marketshare as the Russian-based search engine Yandex is used by 53.8% of internet users in the country.

Known Russian IT companies are ABBYY (FineReader OCR system and Lingvo dictionaries), Kaspersky Lab (Kaspersky Anti-Virus, Kaspersky Internet Security), Mail.Ru (portal, search engine, mail service, Mail.ru Agent messenger, ICQ, Odnoklassniki social network, online media sources).