ECONOMY OF RUSSIA

ECONOMY OF RUSSIA

Russia has 11.2 percent of the world’s territory but only 2.3 of the population and about 1.1 of the world’s gross domestic product. Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy towards a more market-based and globally-integrated economy, but stalling as a partially reformed, statist economy with a high concentration of wealth in officials' hands. Economic reforms in the 1990s privatized most industry, with notable exceptions in the energy and defense-related sectors. The protection of property rights is still weak and the private sector remains subject to heavy state interference. [Source: CIA World Factbook =]

The Russian economy doesn't rank with the major economies of Europe. It is closer to the economies of Brazil and Mexico. The economy of South Korea is larger than the economy of Russia. Russia's overall economic output in 1999 was lower than Belgium, a country with one-fourteenth the population and one-five-hundredth the land. The $346 billion GDP of Russia in 2003 was still considerably less the Netherlands. In 2014, its GDP, according to the IMF, reached $1.17 trillion, 15th in the world, between Spain and Indonesia.

Russia is one of the world's leading producers of oil and natural gas, and is also a top exporter of metals such as steel and primary aluminum. Russia's manufacturing sector is generally uncompetitive on world markets and is geared toward domestic consumption. Russia's reliance on commodity exports makes it vulnerable to boom and bust cycles that follow the volatile swings in global prices. The economy, which had averaged 7 percent growth during 1998-2008 as oil prices rose rapidly, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. In 2014, economic growth declined further when Russia forcibly violated Ukraine’s sovereignty and territorial integrity, and interfered in Ukraine’s internal affairs. =

In the second half of 2014, the Russian ruble lost about half of its value, contributing to increased capital outflows that reached $151.5 billion for the year; the ruble remains volatile. Declining oil prices, lack of economic reforms, and the imposition of foreign sanctions have contributed to the downturn and created wide expectations the economy will continue to slump. In April 2015, the Russian Ministry of Economic Development predicted that the Russia’s economy will contract by 3 percent in 2015, and average only 2.5 percent growth through 2030. =

The ruble is the monetary unit of the Soviet Union and the Russian Federation. It is divided into 100 kopeks. Historically, the ruble has not been considered hard currency. Hard currency is currency that is freely convertible and traded on international currency markets. The ruble became convertible on the international market in June 1996. The ruble zone is the name given to the group of newly independent states that continued to use the Soviet, then Russian, ruble as the primary currency for financial transactions after the collapse of the Soviet Union. The ruble zone existed from December 1991 until July 1993, when the Russian Central Bank withdrew all ruble notes issued before January 1993.

Economic Statistics

GDP (official exchange rate): $1.857 trillion (2014 est.). GDP - real growth rate: 0.6 percent (2014 est.); 1.3 percent (2013 est.); 3.4 percent (2012 est.); country comparison to the world: 196. GDP - per capita (PPP): $24,800 (2014 est.); $24,700 (2013 est.); $24,300 (2012 est.), country comparison to the world: 69. [Source: CIA World Factbook =]

GDP - composition, by sector of origin: agriculture: 4 percent; industry: 36.3 percent; services: 59.7 percent (2014 est.). GDP - composition, by end use: household consumption: 51.4 percent; government consumption: 19.7 percent; investment in fixed capital: 19.6 percent; investment in inventories: 2.2 percent; exports of goods and services: 29.7 percent; imports of goods and services: -22.6 percent (2014 est.). =

Gross national saving: 23 percent of GDP (2014 est.); 23.3 percent of GDP (2013 est.); 27.2 percent of GDP (2012 est.); country comparison to the world: 53. =

Unemployment rate: 5.1 percent (2014 est.); 5.5 percent (2013 est.); country comparison to the world: 46. =

Inflation rate (consumer prices): 11.4 percent (2014 est.); 6.8 percent (2013 est.); country comparison to the world: 213. =

Economic competitiveness bottom ten of 60 countries (1999): 1) Russia; 2) the Ukraine; 3) Zimbabwe; 4) Bulgaria; 5) Bolivia; 6) Columbia; 7) Ecuador; 8) India; 9) Brazil; 10) Venezuela. [Source: World Economic Forum]

Economic statistics are often very unrepresentative and incomplete. So much activity takes place in the underground economy and is not recorded in government statistics. All the goods that are sold at kiosks and open markets are generally not recorded.

Exchange rates: Russian rubles (RUB) per US dollar - 67.7 (19 December 2014 est.); 32.73 (2013 est.); 30.84 (2012 est.); 29.382 (2011 est.); 30.368 (2010 est.)

Fiscal year: calendar year

Russian Economy Since the Break Up of the Soviet Union

Some have divided the Russian economy into three major sectors: 1) the old economy of the Soviet Union that is having a rough time and is slowly dying: 2) the resource economy of oil, natural gas aluminum, nickel , which makes up a large part of gross national product; and 3) the new economy, which didn't exist in the Soviet era and is constantly evolving.The University of Maryland economist Mancur Olson told Newsweek, "The essence of Stalin's system, and of communism now, is that everything is owned by the top guy or the Politburo. Everyone else therefore has no incentive to protect that property but to steal it back."

Since 1991 Russia’s economy has undergone major changes as a 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, 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. Large sectors of the state-owned enterprise system, especially those in energy, transportation, communications, and heavy industry, remained under government control, and by 2005 the state had re-nationalized about one-third of the private oil and gas sector. [Source: Library of Congress, October 2006 **]

In a poll taken late in 2005, 47 percent of respondents favored a state-run economy, and only 16 percent advocated a free-market economy. Plans for extensive privatization in 2007 concentrated on firms in non-production spheres, agro-industry, and the defense industry. In 2005 an estimated 25 to 40 percent of the gross domestic product (GDP) derived from “informal” economic activity, and organized crime continued to play a significant role in many types of enterprise. In 2005 the richest 10 percent of the population accounted for 30 percent of Russia’s income, and the poorest 10 percent accounted for 2 percent of the income. This distribution remained constant between 2004 and 2005. The disparity between average incomes in Russia’s richest and poorest regions widened in 2005–6. **

In the 1990s, the relative importance of the economic sectors changed significantly. Between 1991 and 2005, the share of the GDP derived from retail trade and services increased from 36 percent to nearly 58 percent, as the share of agriculture decreased from 14 percent to 5 percent. In the same period, the GDP contribution of industry dropped from nearly 50 percent to 37 percent. Large enterprises continue to dominate the economy to the detriment of small and medium-sized enterprises, which in 2005 contributed only 10 to 15 percent of GDP. **

The industrial sector is dominated by heavy industry, particularly fuels and energy (20 to 25 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. The ongoing emigration of scientists, 25,000 of whom left between 1990 and 2005, threatens the technical base of the economy. **

Gross Domestic Product (GDP)

GDP (official exchange rate): $1.857 trillion (2014 est.). GDP - real growth rate: 0.6 percent (2014 est.); 1.3 percent (2013 est.); 3.4 percent (2012 est.); country comparison to the world: 196. GDP - per capita (PPP): $24,800 (2014 est.); $24,700 (2013 est.); $24,300 (2012 est.), country comparison to the world: 69. [Source: CIA World Factbook =]

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. In 1999 the GDP began a six-year trend of expansion that continued in 2006. The major factors in this rise were rapidly expanding oil and gas sales, government tax reforms, and improved investor confidence. In 2004 Russia’s GDP was $657 billion ($1.41 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. [Source: Library of Congress, October 2006 **]

In 2005 GDP increased by 6.4 percent to $741 billion. The official government forecast for 2006 was a 6.6 percent increase; long-term forecasts called for increases of 6 percent in 2007, 5.8 percent in 2008, and 5.9 percent in 2009, subject to oil and gas price trends. Per capita GDP increased in 2005 by 6.8 percent, to $5,393, or $11,100 in terms of purchasing power parity. In 2005 the services sector contributed 57.5 percent to GDP, the industrial sector 37.1 percent, and the agricultural sector 5.4 percent. Regional contributions to GDP vary sharply; in 2005 the city of Moscow contributed 20 percent and the oil-rich province of Tyumen’ added 13 percent, while 72 of Russia’s other 87 jurisdictions made a collective contribution of 37 percent.

In 1999 the GNP of both the Czech Republic and Russia was $111 billion even though the population of the Czech Republic was one fifteenth of Russia. It was lower than Belgium, a country with one-fourteenth the population and one-five-hundredth the land. The $346 billion GDP of Russia in 2003 was still considerably less the Netherlands. In 2014, its GDP, according to the IMF, reached $1.17 trillion, 15th in the world, between Spain and Indonesia.

Inflation in Russia

Inflation rate (consumer prices): 11.4 percent (2014 est.); 6.8 percent (2013 est.); country comparison to the world: 213. =

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. 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 rate for 2005 was 11 percent. In the first eight months of 2006, prices increased by 7.1 percent, somewhat less than the increase in the same period of 2005. The official target for 2007 was 7 percent. [Source: Library of Congress, October 2006 **]

Inflation was very high and up and down in the 1990s after the break up of the Soviet Union, for a while reaching four digits. Inflation reached 2,600 percent in 1993. To give you some sense of how bad the inflation was at his time, before the collapse of the Soviet Union one dollar equaled one ruble. In November 1993, one dollar equaled 1168 rubles. After the period of hyperinflation, the United States ambassador rented his residence for $12.61 a month.

In 1997, the inflation rate in Russian was brought down to 12 percent. After the collapse of the ruble it reached 84 percent in 1998 and 50 percent in 1999. In 1999, the inflation adjusted income per capita was about one forth what it was in 1991 and half what it was in 1995. Industrial production was half what it was in 1991.

Unemployment in Russia

Unemployment rate: 5.1 percent (2014 est.); 5.5 percent (2013 est.); country comparison to the world: 46. [Source: CIA World Factbook =]

In the Soviet era, unemployment was virtually non existent. In 1998, after the ruble collapse, unemployment was officially at 12 percent, but in relatively it was closer to 25 percent. In 1995, the official unemployment rate was 1 percent and the true rate was about 5 percent. The unemployment rate around this time was much lower than it should have been because many workers showed up at their jobs even though they didn't get paid.

The growth of unemployment in the 1990s was the bane of many of the Central and East European countries in the transition from centrally planned to market economies. Russia's unemployment rate has been hard to measure accurately because many firms unofficially furlough workers but leave them on company rolls. This practice is a vestige of the paternalistic Soviet era, when the presence of workers in an enterprise often had no relation to that enterprise's actual production. Many of these furloughed workers find gainful employment in the private sector, where wages often go unreported. Such a system results in a haphazard, inefficient allocation of the labor force. [Source: Library of Congress, July 1996 *]

Western and Russian analysts have relied on International Labour Organisation measurements, which indicate that at the end of 1995, Russian unemployment had reached 8.2 percent. The Russian journal Ekonomika i zhizn' estimated the figure at 8.6 percent, or 6.3 million people, for the first quarter of 1996. Although the last figure still is below the unemployment rates of Poland and some other countries in transition, the full extent of unemployment has been masked by extended subsidies that delayed the shutdown of large Russian enterprises. In 1995 nearly half of plant directors surveyed said that they had more workers than they needed.*

Unemployment varies considerably according to region. Moscow's unemployment rate, the lowest in Russia, was 0.6 percent in March 1996. The Republic of Ingushetia, which also has had the highest immigration rate because of its proximity to Chechnya, reported a rate of 23.5 percent in December 1995. In March 1996, Ivanovo, a textile center east of Moscow, had a rate of 13 percent, and the Republic of Udmurtia, a center of the struggling military-industrial complex, reported 9.4 percent. At that time, women constituted 62 percent of Russia's officially unemployed, and 37 percent of the total were people below the age of thirty.*

The Federal Employment Service (Federal'naya sluzhba zanyatosti--FSZ), the agency in charge of issuing unemployment benefits and placing unemployed workers, had only 3.7 percent of the working population registered for benefits in March 1996; many jobless workers do not register because benefits are so small (averaging $22 per month in 1995) and because, after the guaranteed employment of the Soviet era, joblessness entails a significant stigma for many Russians. However, as the average term of unemployment grew from six to eight months between 1994 and 1995, more workers participated in FSZ programs. In 1995 the service placed an estimated 1.7 million workers in new jobs. That year, 9.8 million workers left positions and 8.7 million were hired, and the majority of those who left did so voluntarily--many because wages were not paid--rather than because of dismissal. Shortages exist in some types of skilled labor, and some companies actively recruit workers.*

Rubles Versus Dollars

As of 1998, the Russian government had changed the Russia currency three times. In 1991, Gorbachev decided to change all 50- and 100-ruble notes to reduce the money supply. People were given only three days to change their money. Panic ensured as people rushed to get their money out of the bank. In January 1998, new banknotes were issued with three zeros loped off the end. This meant that a new banknote of 5 rubles was worth an old one of 5,000 rubles. Before the new 100,000 ruble notes were issued that were worth $20.

In the 1990s the ruble lost so much value that by the mid 2000s the American ambassador was paying rent of only $3 a year for his official residence. The 20-year lease for the property, which has a 25-meter-long hallway with a domed ceiling, was negotiated in 1985 when one ruble was exchanged for $1.66. In 2004 one ruble was worth only 3.5 cents. In the meantime property values had soared in Moscow. A hundred square meter apartment in the neighborhood where the ambassador’s residence was located was going for $3,000 a month.

The United States dollar is the unofficial second currency in Russian. In the 1990s and early 2000s, Russians used dollars more than any other country except for the United States itself. Although it was technically illegal to use dollars for retail trade at that time, people used American currency to buy everything from VCRs to houses. And, everybody from bankers to babysitters preferred to be paid in dollars.

Russians became obsessed with $100 bills. Because they worried about the ruble suddenly losing its value many people kept their life saving in C notes hidden under their mattress or somewhere else in their house or apartment. In Kamchatka In the Far East, many everyday exchanges of goods was carried out with crumpled five and ten dollar bills instead of rubles. There, dollars were considered to valuable to waste on domestically-produced good. They were used mainly to buy foreign goods and things of value.

In November 1998, by one estimate, there were $10.7 billion of rubles in circulation and $40 billion worth f U.S. dollars in circulation, most of it in $100 bills. Crisp, clean $100 notes were best. Russians often rejected bills that were torn, dirty or blemished in the slightest way. Despite assurances from Russian and American banks, Russians got worried when the new $100 bills were introduced.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated May 2016

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