Russian Economy
The Russian economy underwent tremendous stress in the 1990s as it moved from a centrally planned economy to a free market system. Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998. Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid and steep decline (60%) in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.
Still, Russia has weathered the crisis well. In the nine years following the financial crisis, GDP growth averaged 7% due to a devalued ruble, implementation of key economic reforms (tax, banking, labor and land codes), tight fiscal policy, and favorable commodities prices. Household consumption and fixed capital investments have both grown by about 10 percent per year since 1999 and have replaced net exports as the main drivers of demand growth. Inflation and exchange rates have stabilized due to a prudent fiscal policy (Russia has run a budget surplus since 2003). The government created a stabilization/rainy day fund ($156 billion at the end of 2007), and has the third-largest foreign exchange reserves in the world (close to $476 billion at the end of 2007) which should shelter it from commodity price shocks.
Russia's balance of payments continues to show dynamic growth. The current account balance fell slightly, from $95.3 billion in 2006 to $78.3 billion in 2007, as imports increased rapidly. Large amounts of capital moved into Russia in 2007. The capital account balance was $84.3 billion, compared to $6.1 billion in 2006. In addition, net private capital flows continued to increase in 2007 to $81.2 billion from $40.9 billion in 2006. Foreign direct investment (FDI) flows continued to improve in 2007 to $52.5 billion compared to $32.4 billion in 2006. As of July 1, 2006, the ruble was convertible for both current and capital transactions. Russia prepaid its entire Soviet-era Paris Club debt of $22 billion in late 2006. Russia maintained relatively small amounts of sovereign debt. In 2007, total sovereign foreign debt was $36 billion, or about 3% of GDP, down from $45 billion at the end of 2006. Russia's total public and private foreign debt at the end of 2007 was $460 billion, or 34% of GDP. Russia currently has a sovereign investment-grade rating from Standard and Poor's of BBB+.
Although the economy has begun to diversify, the government budget remains dependent on oil and gas revenues; consumption and investment are, however, contributing to an increasing share to GDP growth. While currently sheltered from external price shocks, the government realizes the need to intensify reforms that will promote new investment in aging infrastructure and continued productivity gains. The government believes it can do this by creating state-sponsored investment funds, special economic zones, and by exercising control of strategic enterprises (a law defining strategic sectors was passed by the Duma in March 2008). Although investors are returning to Russia, excessive bureaucracy, corruption, insufficient and insufficiently enforced legislation, selective interpretation of laws (particularly tax laws), unclear limits and conditions on foreign investment, obsolete infrastructure, and stalled economic reforms still remain a problem. In 2005, the government announced reform programs in four priority areas (health, education, housing, and agriculture), but further work is needed on them as well as in financial regulation, civil service reform, and reform of government monopolies, such as railroads, gas, and electricity.
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 metals, food products, and transport equipment. Russia is now the world's third-largest exporter of steel and primary aluminum. Russia inherited most of the defense industrial base of the Soviet Union, so armaments remain an important export category for Russia. Efforts have been made with varying success over the past few years to convert defense industries to civilian use, and the Russian Government is engaged in an ongoing process to privatize many of the state-owned enterprises.
Gross Domestic Product [GDP] in 2007 was estimated at $1.34 trillion. A strong expansion in domestic demand continues to drive GDP growth, despite a slowdown in manufacturing. GDP growth and industrial production for 2007 were 8.1% and 6.3%, respectively, relative to 6.7% and 4.8% in 2006. GDP growth is currently derived from non-tradable sectors, but investment remains concentrated in tradables (oil and gas). Construction continued to be the fastest-growing sector of the economy, expanding by 22% in 2007. The main private sector services -- wholesale and retail trade, banking and insurance, and transportation and communications -- showed strong growth of about 10%. In contrast, public sector services lagged behind in 2007 with only 1.6%-2.4% growth in education and health care, although public administration increased to 7.5%. Recent productivity growth had still been strong in some parts of domestic manufacturing. Real disposable incomes grew by 10.4% in 2007 spurring considerable growth in private consumption.
The Russian labor force is undergoing tremendous changes. Although well educated and skilled, it is largely mismatched to the rapidly changing needs of the Russian economy. Official unemployment has dropped in recent years to 6.9%, and labor shortages have started to appear in some high-skilled job markets. Nonetheless, pockets of high unemployment remain and many Russian workers are underemployed. Unemployment is highest among women and young people. Following the 1991 collapse of the Soviet Union and the economic dislocation it engendered, the standard of living fell dramatically. However, real disposable incomes have doubled since 1999, and experts estimate that the middle class ranges from one-fifth to one-third of the population. By the end of the third quarter in 2007, 14.8% of the population lived below the subsistence level, in contrast to 38.1% in 1998.
Russia's overall trade surplus in 2007 was $132 billion, roughly equal to the $139 billion surplus in 2006. World prices continue to have a major effect on export performance, since commodities--particularly oil, natural gas, metals, and timber--comprise most of Russian exports. Russian GDP growth and the surplus/deficit in the Russian Federation state budget are closely linked to world oil prices. The U.S. exported $7.4 billion in goods to Russia in 2007, a 57% increase from the previous year. Corresponding U.S. imports from Russia were $19.4 billion, down a slight 2%. Russia was the 20th-largest export market for U.S. goods. Russian exports to the U.S. were fuel oil, inorganic chemicals, aluminum, and precious stones. US exports to Russia were machinery, vehicles, meat (mostly poultry), aircraft, electrical equipment, and high-tech products.
Vladislav Inozemtsev, at the Higher School of Economics and director of the Center for Post-Industrial Studies, has studied the deindustrialization that has enfeebled Russia. Russia's industrial production declined from 1994 to 2008, while that of China grew more than fourfold and India's more than doubled. Russian industrial exports totaled $32 billion in 2008, compared to the $1.4 trillion total of the other "BRIC" states, Brazil, India and China. Russia's industrial work force is seven times less productive than that of the United States. Olga Kryshtanovskaya, director of the Institute of Applied Politics, estimates that raw material and energy costs are three to four times greater in Russia than in China, while a kilometer of paved road costs Russia three times more than in Western Europe.
