Russia Economy Information

Russia Economy

(2015 est.)

GDP: $1.325 trillion (purchasing power parity estimated at $3.718 trillion.
Growth rate (2015): -3.7%
Per capita GDP: $25,400
Natural resources: Petroleum, natural gas, timber, furs, precious and nonferrous metals.
Agriculture: grain, sugar beets, sunflower seeds, vegetables, fruits; beef, milk
Industry: complete range of mining and extractive industries producing coal, oil, gas, chemicals, and metals; all forms of machine building from rolling mills to high-performance aircraft and space vehicles; defense industries (including radar, missile production, advanced electronic components), shipbuilding; road and rail transportation equipment; communications equipment; agricultural machinery, tractors, and construction equipment; electric power generating and transmitting equipment; medical and scientific instruments; consumer durables, textiles, foodstuffs, handicrafts

Trade (2015): Exports (f.o.b.)--$341.5 billion: petroleum and petroleum products, natural gas, metals, wood and wood products, chemicals, and a wide variety of civilian and military manufactures. Major markets--Netherlands, China, Germany, Italy, Turkey, Belarus and Japan. Imports (f.o.b.)--$193 billion: machinery, vehicles, pharmaceutical products, plastic, semi-finished metal products, meat, fruits and nuts, optical and medical instruments, iron, steel. Major partners--China, Germany, United States of America, Belarus, Italy.

Economy of Russia

Russia has undergone significant changes since the collapse of the Soviet Union, moving from a centrally planned economy towards a more market-based system. Both economic growth and reform have stalled in recent years, however, and Russia remains a predominantly statist economy with a high concentration of wealth in officials' hands. Economic reforms in the 1990s privatized most industry, with notable exceptions in the energy, transportation, banking, and defense-related sectors. The protection of property rights is still weak, and the state continues to interfere in the free operation of the private sector.

Russia is one of the world's leading producers of oil and natural gas, and is also a top exporter of metals such as steel and primary aluminum. Russia's reliance on commodity exports makes it vulnerable to boom and bust cycles that follow the volatile swings in global prices.


The economy, which had averaged 7% growth during 1998-2008 as oil prices rose rapidly, has seen diminishing growth rates since then due to the exhaustion of Russia’s commodity-based growth model.

A combination of falling oil prices, international sanctions, and structural limitations pushed Russia into a deep recession in 2015, with the GDP falling by close to 4%. Most economists expect this downturn will continue through 2016. Government support for import substitution has increased recently in an effort to diversify the economy away from extractive industries. Although the Russian Ministry of Economic Development is forecasting a modest growth of 0.7% for 2016 as a whole, the Central Bank of Russia (CBR) is more pessimistic and expects the recovery to begin later in the year and a decline of 0.5% to 1.0% for the full year. Russia is heavily dependent on the movement of world commodity prices and the CBR estimates that if oil prices remain below $40 per barrel beyond 2016, the resulting shock would cause GDP to fall by up to 5%.

Gross Domestic Product
Russia's GDP, estimated at $1.325 trillion at 2015 exchange rates, decreased by -0.57 in 2015 compared to 2014.

In 2015, the unemployment rate rose from 5.2% to 5.6%. Combined unemployment and underemployment may exceed those figures. Industrial production growth rate decreased by -3.6%.

Monetary Policy
The exchange rate substantiially increased from 38.378 rubles/dollar in 2014 to 60.938 rubles/dollar in 2015. The consumer price index (CPI) also rose to 15.5% in 2015, significantly higher than the 7.8% of 2014. 

Population Aging
Russia's population is falling. Lower birth rates and higher death rates reduced Russia's population at a 0.5% annual rate during the 1990s. By comparison, although in many developed countries birth rates have dropped below the long-term population replacement rate, in only a few countries is the population actually declining. Population decline is particularly drastic in Russia, with higher death rates, especially among working-age males due to poverty, abuse of alcohol and other substances, disease, stress, and other afflictions. Russians generally disapprove of permanent or temporary immigration of workers from countries other than the Russian-speaking former Soviet states that might help solve economic problems brought on by its declining population.

HIV/AIDS
Russia and Ukraine are said to have the highest growth rates of HIV infection in the world. In Russia HIV seems to be transmitted mostly by intravenous drug users sharing needles, although data is very uncertain. Data from the Federal AIDS Center shows that the number of registered cases is doubling every 12 months and by November 2002 had reached 220,000 persons. When this number is adjusted to include people who have not been tested for the disease, estimates of the actual number of infected persons vary from 1-2 million. The high growth rate of AIDS cases will have negative economic consequences. Investment will suffer from the diversion of private and government funds to AIDS treatment. The problems of population aging will be magnified, especially since about 60% of infected individuals in Russia are between 20 and 30 years of age.

Law
Lack of legislation and, where there is legislation, lack of effective law enforcement, in many areas of economic activity is a pressing issue. During 2000 and 2001, changes in government administration increased the power of the central government to compel localities to enforce laws. Progress has been made on pension reform and reform of the electricity sector. Nonetheless, taxation and business regulations are not very predictable, and legal enforcement of private business agreements, especially outside of Moscow and St. Petersburg, is weak. Attitudes left over from the Soviet period will take many years to overcome. Local officials in some areas interfere in business. Government decisions affecting business have often been arbitrary and inconsistent, and corruption remains a serious problem. Crime has increased costs for both local and foreign businesses. On the positive side, Russian businesses are increasingly turning to the courts to resolve disputes. The passage of an improved bankruptcy code in January 1998 was one of the first steps. In 2001, the Duma passed legislation for positive changes within the business and investment sector; the most critical legislation was a deregulation package. A new flat tax boosted income tax collections considerably. This trend in legislation continued through 2002 when the new corporate tax code went into effect.

Natural Resources
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. However, most such resources are located in remote and climactically unfavorable areas that are difficult to develop and far from Russian ports. Oil and gas exports continue to be the main source of hard currency, but declining energy prices have hit Russia hard. Russia is a leading producer and exporter of minerals, gold, and all major fuels. The Russian fishing industry is the world's fourth largest, behind Japan, the United States, and China. Russia accounts for one-quarter of the world's production of fresh and frozen fish and about one-third of world output of canned fish. Natural resources, especially energy, dominate Russian exports. Ninety percent of Russian exports to the United States are minerals or other raw materials.

Industry
Russia is one of the most industrialized of the former Soviet republics. However, years of very low investment have left much of Russian industry antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in machinery. Russia inherited most of the defense industrial base of the Soviet Union, so armaments are the single-largest manufactured goods export category for Russia. Efforts have been made with varying success over the past few years to convert defense industries to civilian use.

Agriculture
Russia comprises roughly three-quarters of the territory of the former Soviet Union but has relatively little area suited for agriculture because of its arid climate and inconsistent rainfall. Northern areas concentrate mainly on livestock, and the southern parts and western Siberia produce grain. Restructuring of former state farms has been an extremely slow process. The new land code passed by the Duma in 2002, which makes it easier for Russians to buy and sell farmland, should speed restructuring and attract new domestic investment to Russian agriculture. Foreigners are not allowed to own farmland in Russia. Private farms and garden plots of individuals account for over one-half of all agricultural production.

Investment
During 2002, cumulative foreign investment increased by 20%. This was mostly due to increases in loans and trade credits since the "other" category accounted for $15.3b out of $19.8b in new 2002 foreign investment in Russia. Russia does poorly in the international competition for foreign investment. Russian investment in their own country also is low. Indeed, $15-$20 billion of Russian capital leaves Russia every year for want to attractive investment opportunities at home. Over the medium to long term, Russian companies that do not invest to increase their competitiveness will find it harder either to expand exports or protect their recent domestic market gains from higher quality imports.

Foreign direct investment, which includes contributions to starting capital and credits extended by foreign co-owners of enterprises, rose slightly in 1999 and 2000, but decreased in 2001 by about 10%. FDI rose during 2002 by 20% to a total of $20.4 billion. Foreign portfolio investment, which includes shares and securities, decreased dramatically in 1999, but has experienced significant growth since then. During 2002 , foreign portfolio investment grew by 20% to reach $1.47 billion in January 2003. Capital flight seems to have slowed, although very large trade surpluses owing to high energy prices are pushing it up again. Inward investment from Cyprus and Gibraltar, two important channels for capital flight from Russia in recent years, suggest that some Russian money is returning home.

A significant drawback for investment is the banking sector, which lacks the resources, the capability, and the trust of the population that it would need to attract substantial savings and direct it toward productive investments. Russia's banks contribute only about 3% of overall investment in Russia. While ruble lending has increased since the October 1998 financial crisis, loans are still only 45% of total bank assets. The Central Bank of Russia reduced its refinancing rate five times in 2000, from 55% to 25%, signaling its interest in lower lending rates. Interest on deposits and loans are often below the inflation rate providing little incentive for depositors. Many Russians prefer to keep their money outside the banking sector. The poorly developed banking system makes it difficult for entrepreneurs to raise capital as well as to permit capital transfer from a capital-rich sector such as energy to capital-poor sectors such as agriculture and manufacturing and to diversify risk. Banks still perceive commercial lending as risky, and some banks are inexperienced with assessing credit risk.

Money on deposit with Russian banks represents only 7% of GDP. Sberbank receives preferential treatment from the state and holds 73% of all bank deposits. It also is the only Russian bank that has a federal deposit insurance guarantee. Sergei Ignatiev recently replaced Viktor Gerashchenko as Chairman of the Russian Central Bank. Under his leadership, necessary banking reforms, including stricter accounting procedures and federal deposit insurance, are likely to be implemented although the switch to International Accounting Standards was recently pushed back from 2004 to 2007.

Trade
During 2002, Russian goods exports rose 5% to $107b while imports grew 12% to $60.9b. World prices continue to have a major effect on export performance, since commodities, particularly oil, natural gas, metals, and timber comprise 80% of Russian exports. Russian GDP growth and the surplus/deficit in the Russian Federation state budget are closely linked to world oil prices.

The combination of import duties, a 20% value-added tax and excise taxes on imported goods (especially automobiles, alcoholic beverages, and aircraft) and an import licensing regime for alcohol still restrain demand for imports. Frequent and unpredictable changes in customs regulations and great variations in enforcement practices from one customs terminal to another also have created problems for foreign and domestic traders and investors. Uncertainty over Russian veterinary regulations cut U.S. poultry exports to Russia by 40% during 2002. Quotas to be introduced for poultry, pork, and beef in spring 2003 will likely keep U.S. poultry exports below their 2001 peak.

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