Overview: Since 1991 Russia’s economy has undergone major changes as the result of the rejection of the Soviet state planning system and the adoption of various elements of free-market commerce. The highly structured Soviet system, nominally following the standards of five-year plans, was succeeded by ambitious restructuring aimed at encouraging private enterprise. However, large sectors of the state-owned enterprise system, especially those in energy, transportation, communications, and heavy industry, remained under government control. In the mid-1990s, government privatization plans were undermined by corruption, which concentrated significant economic resources in the hands of a well-connected elite rather than effecting true redistribution. In 2002 an estimated 25 to 40 percent of the gross domestic product (GDP) derived from “informal” economic activity, and organized crime plays a significant role in many types of enterprise. In 2004 businesses paid an estimated US$316 billion in bribes that are untaxed revenue for government officials and criminal organizations.
In the 1990s, the relative importance of the economic sectors changed significantly. Between 1991 and 2004, the share of the GDP derived from retail trade and services increased from 36 percent to about 61 percent, as the share of agriculture decreased from 14 percent to slightly less than 5 percent. In the same period, the GDP contribution of industry dropped from nearly 50 percent to slightly less than 34 percent. Large enterprises continue to dominate the economy to the detriment of small and medium-sized enterprises, which in 2002 contributed only 10 to 15 percent of GDP. The industrial sector is dominated by heavy industry, particularly fuels and energy (20 percent of output) and metallurgy (17 percent of output). High-technology and consumer goods production are minor constituents, and light industry contributes only 2 percent of total output. Throughout the early 2000s, raw materials exports have contributed a disproportionately high percentage to Russia’s economic growth, and the reduction of this dependency has been a high priority for economic planners.
Gross Domestic Product (GDP): In the first five post-Soviet years (1992–96), Russia’s GDP fell by an aggregate 37 percent. The indicator rose in 1997, then fell steeply as Russia suffered a major economic crisis. Then, boosted mainly by vigorous sales of oil and gas followed by government tax reforms and improved investor confidence, Russia’s GDP began a six-year trend of expansion that continued in 2004. In 2004 Russia’s GDP was US$398 billion (US$1.29 trillion in terms of purchasing power parity), an increase of 7.1 percent over the 2003 figure. At that point, GDP had increased by at least 4 percent every year since the economic crisis of 1998. The official government forecast for 2005 was a 5.8 percent increase; in the first half of that year, growth was 5.4 percent. Per capita GDP increased in 2004 by 7.4 percent, to US$2,768, or US$9,800 in terms of purchasing power parity. In 2004 the services sector contributed 61.2 percent to GDP, the industrial sector 33.9 percent, and the agricultural sector 4.9 percent.
Federal Budget: From 2000 to 2005, Russia’s federal budget showed surpluses each year. Tax revenues tripled between 1999 and 2002. Following the tax reform of 2001, which established a flat 13 percent income tax rate, income tax revenues increased annually through the early 2000s. The 2001 reform also reduced the corporate tax rate from 35 percent to 24 percent, and in 2004 the value-added tax was reduced from 20 percent to 18 percent. Total tax revenues for 2004 rose by 16 percent over 2003. In 2003 the budget showed a surplus of US$6.8 billion, amounting to 1.6 percent of gross domestic product (GDP). The surplus was based on revenues of US$83.1 billion and expenditures of US$76.3 billion. In 2004 the government had revenues of US$81.2 billion and expenditures of US$64.5 billion, yielding a surplus of US$16.7 billion. The approved budget for 2005 called for revenues of US$111 billion and expenditures of US$102 billion.
Inflation: In the first half of the 1990s, hyperinflation was a major economic problem, as the annual rate reached 2,500 percent in 1992. After price stabilization brought the inflation rate down to 11 percent in 1997, the financial collapse of 1998 and subsequent currency devaluation raised inflation that year to 84.5 percent. Since that time, inflationary pressure has remained a sensitive policy issue, although rates have receded significantly. In 2003 estimates of the inflation rate varied from 12 to 15 percent. Stimulated by high costs for fuel and manufacturing inputs, the official rate for 2004 was 11.7 percent, exceeding the government target of 10 percent. The 2005 yearly inflation target was 8.5 percent, but early in the year monthly rates exceeded that level.
Agriculture: Russia’s agricultural potential, limited by climatic and soil factors to 32 percent of the country’s land area, has been further depleted by policies such as overly intensive farming, over-use of chemicals, and inappropriate crop choice. In the post-Soviet era, failure to effectively convert collective farms to private ownership has further limited production. Limited sale of agricultural land was approved only in 2002, and because of the political sensitivity of the issue, in 2005 comprehensive land reform legislation still had not been passed. In the 1990s, Russia’s agricultural production fell sharply. The output of every major crop—sugar beets, potatoes, grains, vegetables, and sunflower seed—dropped by 50 percent or more, and livestock herds also shrank significantly. Output increased somewhat beginning in 1999, but Russia has remained a net importer of food. Farm infrastructure has declined sharply, and farmers lack funds to purchase key inputs. Federal and subnational jurisdictions still subsidize agriculture heavily instead of developing incentives for independent entrepreneurship. In 2005 grain remained the largest crop, occupying more than 50 percent of cultivated land. Other key crops were sugar beets, sunflower seed, and vegetables.
Forestry: About 45 percent of Russia’s land is covered by forests, and Russia is a major exporter of timber. However, wasteful Soviet timber policies have caused the industry to move steadily eastward into Siberia and the per-hectare output of Russia’s forests to fall far behind outputs elsewhere. In the post-Soviet era, exploitation by foreign and domestic companies and criminal organizations in Siberia has expanded rapidly without adequate licensing and control. A new forestry code was under discussion in 2005. In 2002 Russia’s exports of sawn logs totaled US$1.5 billion, and exports of other timber products totaled US$3 billion.
Fishing: In 1991 the Soviet Union was the world’s fourth largest producer of fish. Production has declined steadily since that time because of inefficient privatization of the industry and pollution in certain fishing areas. However, fish exports increased through that period, driving the export share of the total catch to 80 percent in 2001. Extensive poaching in Russia’s Far East has restricted the economy’s yield from Pacific fisheries, a primary source.
Mining and Minerals: Russia’s diverse mineral resources have given many of its products a strong position in world markets. Of particular economic importance are diamonds, of which in 2004 Russia accounted for one-quarter of world production; nickel (20 percent); cobalt (20 percent); platinum (40 percent); and aluminum (12 percent). The economic slump of the early 1990s caused overall production to decrease and the proportion of exports to increase. The coal industry, forced by depleted resources to more northerly and less economical sites, remains a key industry in some regions but requires large-scale restructuring. Russia still is second only to the United States in coal reserves, however. The oil and gas industries, among the largest in the world, provide key export commodities, although transport within the country and conflicts over the energy sector’s structure have provided obstacles. The oil industry underwent a major restructuring in 2003–4. The government has delayed restructuring of the heavily subsidized coal sector.
Industry and Manufacturing: After 1991 Russia’s industrial sector continued to rely heavily on defense industries and heavy manufacturing, despite an evident need for diversification. At the end of the Soviet era, Russia’s manufacturing infrastructure was decaying and energy- intensive, although it produced (and continues to produce) a wide range of chemical, metallurgical, and machine-building products, communications and transportation equipment, and ships. Lacking the subsidies and captive markets of the Soviet era, the industrial sector in the 1990s was not competitive with those of other countries. Shortages of investment and human capital were other disadvantages leading to a drastic decrease in production, which by 1998 was only 45 percent of the 1990 level. Especially hard-hit in this period were the consumer goods and metallurgy industries. Light industry, of which textiles is the main component, remained in decline because of its outdated infrastructure and inability to compete on the world market. After a sharp decline in the 1990s, production in the defense sector increased significantly beginning in 1999; restructuring of that chronically obsolete sector has concentrated on high-technology items. Increased foreign sales and some increases in domestic military spending have spurred growth. In 2004 military exports were estimated at US$5.7 billion. The estimated industrial growth rate was 6.1 percent in 2004; the predicted growth rate for 2005 was 5.1 percent. Major industrial nodes are located in the Ural Mountains, the Kola Peninsula, the Moscow and St. Petersburg areas, and in cities along the Volga River.
Energy: Russia possesses abundant resources on which to base its energy industries, making it a net exporter of electric power and the largest producer of energy in the world. Increasingly, Russia has used this position as a geopolitical lever to enhance its influence in the states of the former Soviet Union and to influence world energy prices. Estimates vary, but in 2003 the oil and gas industry contributed as much as 25 percent of gross domestic product (GDP). Power stations utilize a variety of fuels and energy sources: petroleum, coal, and natural gas (together providing 66.3 percent of the total); hydroelectric power stations (17.2 percent); and 10 nuclear power stations with 31 reactors (16.4 percent). Plans call for substantial increases in hydroelectric production in the Far East and for five new nuclear reactors at existing plants. In 2004 the system’s total generating capacity was 205.6 gigawatts. The national electric power grid is divided into seven regional systems, all but one of which are fed from a state-controlled monopoly, the Unified Energy System. Energy supply problems include wasteful practices in all phases of production and supply; long distances between sites of fuel supply and power generation and between sites of power generation and consumption; a nuclear power infrastructure that is dangerously outmoded; and ownership uncertainty and tax pressure on key oil and gas enterprises. A 2003 law aimed to restructure the energy sector substantially, including extensive privatization of energy provision and elimination of the Unified Energy System, the state-run agency that dominates the industry. The favored status of that monopoly has slowed reform, however. A major player in the energy sector is the state-controlled Gazprom company, which controls natural gas production and has diversified into the transport and processing of gas as well as telecommunications. Gazprom controls an estimated 25 percent of the world’s natural gas reserves. Yukos, until 2004 Russia’s largest oil company, lost most of its assets after its president, Mikhail Khodorkovskiy, was tried for tax evasion.
Services: Russia’s services sector has expanded rapidly in the post-Soviet era, contributing 61.2 percent of gross domestic product (GDP) in 2004. Financial services have expanded especially fast during that period. Banking remains highly concentrated and dominated by the state-run Sberbank. Bank reform has not yet expanded the basic services offered or attacked Sberbank’s dominant position. Protectionist laws have discouraged the activity of foreign banks in Russia. Although stock trading grew rapidly in the mid-1990s, stock sales have not been an important source of investment funds for Russian enterprises since the setback of the 1998 financial crisis. The insurance industry also grew rapidly in the 1990s, but in the early 2000s it occupied a substantially less significant position than in Western economies. Restrictive laws have limited foreign participation.
In the post-Soviet era, retail services have grown rapidly, expanding annually in value by 9.5 percent between 2000 and 2002. However, retail outlets are concentrated in the major cities. Most of Russia lacks adequate retail outlets, and even Moscow has much less retail activity than comparable world capitals. Outside Moscow and St. Petersburg, outdoor markets are the predominant type of retail outlet.
The tourist industry has grown significantly since the mid-1990s, although activity is concentrated in large cities where Western-owned hotels predominate. Less expensive accommodations have developed slowly. In 2002 a government tourism development plan aimed at easing tourist access and increasing promotion and investment in the industry. In 2004 about 23 million tourists visited Russia, and tourism contributed an estimated 9 percent of GDP. An estimated 5 million people work in the tourism industry.
Labor: Russia’s labor force generally is considered well educated and skilled, although its strengths increasingly are mismatched to the needs of the national economy. In 2004 Russia’s active labor force was estimated at 71.8 million individuals. The government estimated in 2004 that the number of individuals of working age, estimated at 89 million in 2002, would decrease by some 10 million by 2016, partly because fewer migrant workers were entering Russia. In 2004 some 65 percent of workers were employed in services, 22.7 percent in industry, and 12.3 percent in agriculture. The official unemployment rate was 8.3 percent, although because of incomplete registration and substantial underemployment, the actual figure is believed to be considerably higher. Unemployment, which is highest among women and young people, is distributed unevenly throughout the country: in 2003, 1.3 percent of the work force in Moscow was unemployed, while the republics of Kalmykia and Tyva, heavily dependent on failing industries, reported unemployment rates of more than 21 percent. In 2004 average wages rose by 24 percent, less than the average increase in the early 2000s. The minimum wage, which had been officially estimated to cover only 22 percent of basic living costs, was raised in 2004 from about US$20 to about US$24 per month and raised again, in 2005, to about US$29 per month.
Foreign Economic Relations: The improvement of Russia’s foreign trade and foreign investment positions has been a central policy of the Putin administration. In 2005 Russia took major steps toward its most important goal in foreign trade, membership in the World Trade Organization (WTO). In May 2005, a new agreement extended cooperation with the European Union (EU) in a wide variety of economic and security areas and committed the EU to supporting Russia’s WTO membership in 2006. For the European side, a vital motivation for supporting Russia’s membership was minimizing the price of Russian gas and oil on which EU nations depend. In 2004 and 2005, Russia negotiated bilateral trade agreements with many WTO member nations, but in mid-2005 some prerequisites for Russia’s membership remained unfulfilled. In the post-Soviet era, Russia has maintained strong trade relationships with several states of the Commonwealth of Independent States (CIS), especially Belarus, Ukraine, and Kazakhstan. By 2004, however, trade with CIS nations had declined steadily to 17 percent of the total as trade with the countries of the EU increased to 50 percent of the total, based on increasingly favorable conditions. During the entire post-Soviet era, Germany has been Russia’s highest-volume partner in both imports and exports, accounting for 14.3 percent of imports and 7.5 percent of exports. China, the United States, and Italy also each account for at least 5 percent of both imports and exports. China and India are the chief customers of the defense industry.
Trade Balance: Devaluation of the ruble in 1998 improved Russia’s export situation and began an annual trend of trade surpluses. In 2004 exports were valued at US$162.5 billion, led by petroleum products and natural gas, which accounted for more than half the total. Imports were valued at US$92.9 billion, led by machinery and equipment, consumer goods, and medicines.
Balance of Payments: In 2003 all items in Russia’s current account except merchandise trade were in deficit, but the overall current account balance was US$39.1 billion. In 2004 the same conditions yielded a balance of US$60.1 billion. Large-scale capital flight, a major problem in the post-Soviet era, continued to affect the balance of payments in 2004, totaling a negative US$9.5 billion compared with the 2003 figure of US$2.7 billion. In 2004 the balance of net investment income was negative US$12.2 billion, while foreign direct investment showed a balance of US$11.7 billion.
External Debt: In 1991 Russia assumed the Soviet Union’s outstanding debt of US$67.5 billion, but by 1997 additional borrowing had doubled that figure, and international creditors rescheduled the debt several times between 1995 and 2001. Since 2001, creditors have increased pressure for repayment because of Russia’s favorable trade balance and increasing foreign-exchange reserves. At the end of 2004, the external debt totaled US$197.4 billion.
Foreign Investment: Compared with the size of Russia’s economy, foreign investment levels have remained very low throughout the post-Soviet era. The reasons for this have been an unfavorable tax system, corruption, the lack of production-sharing agreements in the fuel sector, and overall economic uncertainty. The United States has been the largest foreign investor in Russia, accounting for about one-third of the investment total between 1991 and 2000. A significant development in 2003 was British Petroleum’s decision to invest US$6.7 billion in Russia’s petroleum industry. In 2004 foreign direct investment increased by about 40 percent compared with 2003. Total foreign investment for 2004 was US$40.5 billion, with consumer goods and services and construction receiving the largest shares among the economic sectors. Government policy generally has prevented foreign interests from gaining significant shares of Russia’s energy industries.
Currency and Exchange Rate: Russia’s currency is the ruble. Between 2000 and 2004, the value of the ruble remained steady at around 31 rubles per US$1. In August 2005, the rate was 28.5 rubles per US$1.