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. 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. 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.
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.
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".
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.
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