April 8, 2010Russia Economyby EW World Economy Team

Russia Economy

Russia’s economy still exists with state ownership in strategic areas, despite the privatization of several major industries. In 2014, the Russian economy was the sixth largest in the world in GDP per capita based on purchasing power parity (PPP) and tenth largest at market exchange rates.

Between 2000 and 2012, the Russian population's disposable income increased by 160% on the back of energy exports. However, these gains were not evenly distributed, with approximately 110 individuals controlling 35% of all financial assets held by Russian households. Since 2008, Forbes has named Moscow the "billionaire capital of the world" on several occasions.

Unfortunately, poor and corrupt governance means that Russia also experiences the second-largest volume of illicit money outflows. It has lost an estimated $880 billion between 2002 and 2011 to such illegal expenditures.

Formerly a communist socialist state, political and economic reforms in the 1990s privatized much of Russia's economy, including industry and agriculture, but with notable exceptions in the energy and defense-related sectors. Russia is unique among major world economies, due to the way that it relies on energy revenues to drive economic growth. Russia is blessed with an abundance of natural resources, including oil, natural gas, and precious metals; these make up the majority of Russia's exports, with oil-and-gas alone accounting for 16% of the gross domestic product (GDP), 52% of budget revenues, and over 70% of total exports. A large and high-tech arms industry underpins the revenues generated by these resources, accounting for $15.7 billion in revenue in 2013—second only to the US for military export revenues.

Economic History

Formerly a feudal state run by a czar, Russia was a largely agrarian society through much of its existence. It also relied on its enormous deposits of natural resources. Trade often took place via river routes, with communities dotting the banks of these water bodies. Much of the Russian plain was very sparsely inhabited, in large part due to the sheer vastness of this region and the cold climates.

While well known to the West, Russia developed in isolation in many ways. This changed with industrialization in the 18th and 19th century. The development of factories and industrial production brought an influx of foreign money into the country. Export of raw materials still dominated much of the economy, but living conditions improved and larger populations began to congregate around urban centers.

Wars with France in the middle of the 19th century devastated portions of the Russian countryside and contributed to widespread famine. Unfortunately, wealth began to concentrate in the hands of an elite minority, leading to civil unrest akin to that experienced in pre-revolutionary France. Thus, in 1917, the political and economic philosophy of communism swept through the country, leading to the overthrow of the Czar Nicholas II and the execution of the royal family.

As a communist state, Russia became known as the Union of Soviet Socialist Republics (USSR) or simply the Soviet Union. The economy during this period was based on a model of government ownership of industry and agricultural production. While every citizen of the Soviet Union was theoretically employed, the communist model provided little incentive for innovation and little means of inter-class mobility.

In the 1970s, as the rest of the world began innovating with computer technology, the USSR remained largely a resource-based economy with less means for domestic development of new technologies. Although a very powerful nation with an enormous economic footprint, its population began, experiencing widespread shortages and rationing due to the nation's inability to adequately compete. These problems were only exacerbated by an inefficient bureaucracy and widespread corruption at all levels of government.

From the mid-1970s, and until the just before its collapse, corruption and data fiddling became common practices and caused major issues with government administration. Bureaucrats, fearful of reprisals for reporting unsatisfactory economic performance, adjusted figures, present inaccurate figures to decision makers and deepening the problems with the economy. Recognizing this problem, Soviet Premiere Mikhail Gorbachev attempted to address these issues with a number of market-oriented policy changes. These policies ultimately led to political, social, and economic disintegration that culminated in the breakup of the Soviet Union in 1991.

Following the collapse of the Soviet Union, Russia underwent an enormous change to its market. A corrupt and somewhat haphazard privatization process attempted to shift major state-owned firms to private ownership. Unfortunately, the only available buyers were often politically connected oligarchs, which led to a concentration of wealth and the means of production in the hands of a select few.

Russia's efforts to rebuild during the 1990s were largely ineffectual and led to even greater drops in the nation's productivity. By 1999, Russia had shed more than 40 percent of its pre-collapse GDP, and it suffered from hyperinflation that wiped out personal savings and created significant motivation and opportunity for criminal activity.

By 1998, Russia was in an economic crisis. Russia earned the dubious distinction of largest borrower during the 1990s according to the International Monetary Fund (IMF). However, this lending allowed Russia to begin a slow recovery that began almost immediately after an August 1998 financial crash. Recovery owed much of its momentum to devaluation of the ruble, making Russian products more price-competitive on the international markets.

From 2000 to 2008, the Russian economy grew an average of seven percent per year. Disposable incomes more than doubled, and the volume of consumer credit increased by 45 times, fueling private consumption. Poverty levels also dropped from 30 percent in 2000 to 14 percent by 2008. While inflation remained problematic during this period, in 2007 the World Bank lauded Russia for achieving "unprecedented macroeconomic stability." Between 2000 and 2007, Russia even experienced annual budget surpluses.

Current Economic Situation

Although affected by the global economic recession, Russia did not experience crippling effects as it might have just a few years previously. A sharp, but brief recession occurred in late 2008 that were followed by a strong recovery beginning in late 2009.

After 16 years of negotiations, Russia finally became a member of the World Trade Organization (WTO) in 2011. In 2013, Russia also received the label of a high-income economy according to the World Bank.

Russia is still heavily dependent on its natural resources for much of its GDP. As a result, in 2013, the economy slowed to a growth rate of just 1.3 percent.

Forbes magazine lists Russia as the 91st best country in the world for business. While the country has made substantial improvement in areas like innovation and trade freedom, it still suffers from widespread corruption, disparate wealth distribution, and a lack of investor and consumer confidence.

The Russian economy grew just 0.6 percent in 2014, according to the Russian Economic Ministry.

Economic Forecast

The Russian economy has struggled, decelerating over a number of quarters to just 0.4 percent in the first quarter of 2015. Industrial production has declined sharply as has the services sector. On the other hand, the ruble has made a strong rebound, prompted by rising oil prices and the relaxing tensions over the Ukraine.

A combination of lower oil prices and international sanctions are expected to drive the Russian economy into a deep recession in 2015. Should oil prices recover, this could bring Russia back from the verge of economic collapse.

Experts predict a contraction of as much as 4.2 percent for 2015. However, the economy is expected to recover slightly in 2016, and grow by 0.4%.

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