Russia has an upper-middle income mixed economy with state ownership in strategic areas of the economy.
Market reforms in the 1990s privatized much of Russian industry and agriculture, with notable exceptions
to this privatization occurring in the energy and defense-related sectors.
Russia's vast geography is
an important determinant of its economic activity, with some sources estimating
that Russia contains over 30 percent of the world's natural resources.
The World Bank estimates the total value of Russia's natural resources at
$75 trillion US dollars. Russia relies on energy revenues to
drive most of its growth. Russia has an abundance of oil, natural gas and precious metals, which make up a major share of Russia's exports. As of
2012 the oil-and-gas sector accounted for 16% of GDP, 52% of federal budget
revenues and over 70% of total exports.
Russia has a large and
sophisticated arms industry, capable of designing and
manufacturing high-tech military equipment, including a fifth-generation fighter jet, nuclear powered submarines, firearms, short range/long range ballistic missiles. The value of Russian
arms exports totalled $15.7 billion in 2013—second only to the US. Top military
exports from Russia include combat aircraft, air defence systems, ships and
submarines.
In 2015, the Russian
economy was the sixth largest in the world
by PPP and twelfth largest
at market exchange rates. Between 2000 and 2012 Russia's energy exports fueled
a rapid growth in living standards, with real disposable income rising by 160%.
In dollar-denominated terms this amounted to a more than sevenfold
increase in disposable incomes since 2000. In the same period,
unemployment and poverty more than halved and Russians' self-assessed life
satisfaction also rose significantly. This growth was a combined result of
the 2000s commodities boom, high oil prices, as well as prudent
economic and fiscal policies.
However, these gains have
been distributed unevenly, as the 110 wealthiest individuals were found in a
report by Credit Suisse to own 35% of all financial assets held by Russian households.
Poor governance means that
Russia also has the second-largest volume of illicit money outflows, having
lost over $880 billion between 2002 and 2011 in this way.[43] Since 2008 Forbes has repeatedly named Moscow the "billionaire capital of the world".
The Russian economy risked
going into recession from early 2014, mainly due to falling oil prices, the 2014
Russian military intervention in Ukraine, and the subsequent capital flight. While in 2014 GDP growth remained positive at 0.6%,
in 2015 the Russian economy shrunk by 3.7% and was expected to shrink
further in 2016. However, the World Bank and the IMF estimated that
Russia's economy will begin to recover by 2017. By 2016, the
Russian economy rebounded with 0.3% GDP growth and is officially out of the
recession.
In January 2016, the US
company Bloomberg rated Russia's
economy as the 12th most innovative in the world, up from 14th in January
2015 and 18th in January 2014.
Russia has the world's
15th highest patent application rate, the 8th highest concentration of
high-tech public companies, such as internet and aerospace and the third
highest graduation rate of scientists and engineers.[52] Former finance minister Alexei Kudrin has said that Russia
needs to reduce geopolitical tensions to improve its economic conditions.
In May 2016 the average
nominal monthly wages fell below $450 per month, and tax on the income of
individuals is payable at the rate of 13% on most incomes. Approximately
19.2 million of Russians lived below the national
poverty line in
2016, significantly up from 16.1 million in 2015.
The economic development
of the country has been uneven geographically with the Moscow region
contributing a very large share of the country's
GDP. Inequality of household income and wealth has also been noted, with
Credit Suisse finding Russian wealth distribution so much more extreme than
other countries studied it "deserves to be placed in a separate
category."
Another problem is
modernization of infrastructure, ageing and inadequate after years of being
neglected in the 1990s. The Norwegian-Russian Chamber of Commerce also states
that "corruption is one of the biggest problems both Russian and
international companies have to deal with".
Corruption in Russia is perceived as a
significant problem impacting all aspects of life, including public administration, law enforcement, healthcare and education.
The phenomenon of
corruption is strongly established in the historical model of public governance
in Russia and attributed to general weakness of rule of law in Russia According to 2016 results of Corruption Perception
Index of Transparency International, Russia ranked 131th
place out of 176 countries with score 29.
There are many different
estimates of the actual cost of corruption. According to official
government statistics from Rosstat, the "shadow economy" occupied
only 15% of Russia's GDP in 2011, and this included unreported salaries (to
avoid taxes and social payments) and other types of tax evasion. According
to Rosstat's estimates, corruption in 2011 amounted to only 3.5 to 7% of GDP.
In comparison, some independent experts maintain that corruption consumes as
much of 25% of Russia's GDP. A World Bank report puts this figure at 48%.
There is also an
interesting shift in the main focus of bribery: whereas previously officials
took bribes to shut their eyes to legal infractions, they now take them simply
to perform their duties. Many experts admit that in recent
years corruption in Russia has become a business. In the 1990s, businessmen had
to pay different criminal groups to provide a "krysha"
(literally, a "roof", i.e., protection). Nowadays, this
"protective" function is performed by officials. Corrupt hierarchies
characterize different sectors of the economy, including education.
In the end, the Russian
population pays for this corruption. For example, some experts believe
that the rapid increases in tariffs for housing, water, gas and electricity,
which significantly outpace the rate of inflation, are a direct result of high
volumes of corruption at the highest levels. In the recent years the
reaction to corruption has changed: starting from Putin's second term, very few
corruption cases have been the subject of outrage. Putin's system is remarkable
for its ubiquitous and open merging of the civil service and business, as well
as its use of relatives, friends, and acquaintances to benefit from budgetary
expenditures and take over state property. Corporate, property, and land
raiding is commonplace.
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)
Russian economy
1989–2016
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)
Oil prices in the
2000s
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, fueling 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
Changes in the credit
rating (foreign) of Russia, Standard & Poor’s - 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
Average per capita
income in Russia in Dollars, 1995-2015 rose and then dropped.
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 defense 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$500billion 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. Russia is rated
one of the most unequal of the world’s major economies.
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
recapitalization 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 what the US government said was Russian
interference in the 2016 United States elections.
Comments
Russian
debt to GDP is extremely low at 17%. Russia is the largest country on the
planet at 6.6 million square miles and is rich in raw material and has 143
million citizens. Russia has great potential, but needs to clean up local
government corruption and expand its private property ownership, rule of law
and private sector economy to boost its GDP to expand opportunities for its
citizens.
Norb
Leahy, Dunwoody GA Tea Party Leader
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