Economy of Russia

Economy of Russia

Moscow International Business Center
Currency	Russian ruble (RUB)
Fiscal year	calendar year
Trade organizations	WTO, CIS, APEC, EURASEC, G-20 and others
Statistics
GDP	$1.2 trillion (2016) (nominal)[1] $3.5 trillion (2016) (PPP)[1]
GDP rank	12th (nominal) / 6th (PPP) (2015)
GDP growth	0.7% (2014), -3.7% (2015e), -1.2% (2016f), 1.4% (2017f)[2]
GDP per capita	$8,000 (2016) (nominal)[3] $24,000 (2016) (PPP)[4]
GDP by sector	Agriculture: 4%, Industry: 36.3%, Services: 59.7% (2014 est.)[5]
Inflation (CPI)	12.9% (2015)[6]
Population below poverty line	13.4% (2015)[7]
Labour force	77 million (June 2016)[8]
Labour force by occupation	Agriculture: 9.7%, Industry: 27.8%, Services: 62.5% (2012 est.)[5]
Unemployment	5.4% (June 2016)[9]
Average gross salary	RUB 433,000/€6,200/$7,000 annual (2016-09)
Average net salary	RUB 377,000/€5,500/$6,000 annual (2016-09)
Main industries	List Oil and gas Chemicals Mining Processed metals Defense equipment Shipbuilding Aerospace Automotive Communications equipment Electric power generating and transmitting equipment Consumer durables Textiles Food and beverages Retailing Real estate Healthcare Utilities
Ease-of-doing-business rank	51st (2016)[10]
External
Exports	$82 billion (Jan-Apr 2016)[11]
Export goods	Petroleum and petroleum products, natural gas, metals, wood and wood products, chemicals, and a wide variety of civilian and military manufactures
Main export partners	Netherlands 11.9%  China 8.3%  Germany 7.4%  Italy 6.5%  Turkey 5.6%  Belarus 4.4%  Japan 4.2% (2015)[12]
Imports	$53 billion (Jan-Apr 2016)[13]
Import goods	Consumer goods, machinery, vehicles, pharmaceutical products, plastic, semi-finished metal products, meat, fruits and nuts, optical and medical instruments, iron, steel
Main import partners	China 19.2%  Germany 11.2%  United States 6.4%  Belarus 4.8%  Italy 4.6% (2015)[14]
FDI stock	$361 billion (2015 est.)[15]
Current account	$29 billion (Jan-Apr 2016)[16]
Gross external debt	$538 billion (December 2015)[17]
Public finances
Public debt	14% of GDP (2016)[18]
Revenues	$182 billion (2014 est.)[19]
Expenses	$213 billion (2014 est.)[19]
Credit rating	Standard & Poor's:[20] BBB- (Domestic) BB+ (Foreign) BB+ (T&C Assessment) Outlook: Negative[21] Moody's:[22] Ba1 Outlook: Negative Fitch:[23] BBB- Outlook: Negative
Foreign reserves	$0.4 trillion(August 2016)[24]
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars.

Russia has an upper-middle income^[25] 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.^[26][27][28] The World Bank estimates the total value of Russia's natural resources at $75 trillion US dollars.^[29][30] 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 the GDP, 52% of federal budget revenues and over 70% of total exports.^[31][32]

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.^[33][34]

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%.^[35] In dollar-denominated terms this amounted to a more than sevenfold increase in disposable incomes since 2000.^[36] In the same period, unemployment and poverty more than halved and Russians' self-assessed life satisfaction also rose significantly.^[37] This growth was a combined result of the 2000s commodities boom, high oil prices, as well as prudent economic and fiscal policies.^[38] 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.^[39][40] 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.^[41] Since 2008 Forbes has repeatedly named Moscow the "billionaire capital of the world".^[42][43]

The Russian economy risked going into recession from early 2014 - mainly as a result of the falling oil prices, the 2014 Russian military intervention in Ukraine and the subsequent capital flight.^[44][45] However, the 2014 GDP growth remained positive at 0.6%.^[46] In 2015, the Russian economy shrunk by 3.7% and is expected to shrink further in 2016.^[47] However, the World Bank and the IMF estimate that Russia's economy will begin to recover by 2017.^[48][49]

In January 2016, the US company Bloomberg rated Russia's economy as the 12th most innovative in the world,^[50] up from 14th in January 2015^[51] and 18th in January 2014.^[52] 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.^[50] Former finance minister Alexei Kudrin has said that Russia needs to reduce geopolitical tensions to improve its economic conditions.^[53]

Economic history

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 since fall of the Soviet Union

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.^[54][55] 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.^[56][57]

The majority of state enterprises were privatized amid great controversy and subsequently came to be owned by insiders^[58] for far less than they were worth.^[54] 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.^[59] Many of them promptly invested their newfound wealth abroad producing an enormous capital flight.^[60]

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".^[61][62]

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.^[63]

Between 2000 and 2008, Russian economy got a major boost from rising commodity prices. GDP grew on average 7% per year.^[56][64] Disposable incomes more than doubled and in dollar-denominated terms increased eightfold.^[36] The volume of consumer credit between 2000–2006 increased 45 times, fuelling a boom in private consumption.^[65][66] The number of people living below poverty line declined from 30% in 2000 to 14% in 2008.^[64][67][68]

Inflation remained a problem however, as the central bank aggressively expanded money supply to combat appreciation of the ruble.^[69] Nevertheless, in 2007 the World Bank declared that the Russian economy achieved "unprecedented macroeconomic stability".^[70] Until October 2007, Russia maintained impressive fiscal discipline with budget surpluses every year from 2000.^[63]

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.^[71][72][73] A sharp, but brief recession in Russia was followed by a strong recovery beginning in late 2009.^[56] The GDP of Russia increased by 10 times in 2009 as compared with the previous values. The value reached up to 1.223 Trillion USD.^[74]

After 16 years of negotiations, Russia's membership to the WTO was accepted in 2011.^[75] In 2013, Russia was labeled a high-income economy by the World Bank.^[76]

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.^[77] In 2012 oil, gas and petroleum products accounted for over 70% of total exports.^[32] This economic model appeared to show its limits, when after years of strong performance, Russian economy expanded by a mere 1.3% in 2013.^[56] 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.^[78] 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.^[79] 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).^[80] Since 2008, Moscow has been by Forbes magazine repeatedly named the "billionaire capital of the world".

2014–present

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 defence sectors.^[81] 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.^[82] The Russian economy grew by a better than expected 0.6% in 2014.^[83] 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.^[84] To balance the state budget in 2015, oil price would need to be around US$74 as opposed to US$104 for 2014.^[85] Russia used to have around US$500 billion 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.^[86]

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%. 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 recapitalisation of banks reached 1.9 trillion roubles.^[87]

• 
  Gross domestic product (PPP) per capita in 2014
• 
  Unemployment rate of Russia since the fall of the Soviet Union
• 
  Map showing countries who have higher or lower GDP per capita than Russia

Growth of Russian GDP

The annual growth of the Russian GDP according to World Bank:^[88][89]

Year	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
% GDP	6.4	10.0	5.1	4.7	7.3	7.2	6.4	8.2	8.5	5.2	-7.8	4.5	4.3	3.4	1.3	0.6	-3.7

Currency and central bank

Official ruble sign

Russian ruble is the unit of currency of the Russian Federation. It is also accepted as legal tender in Abkhazia and South Ossetia.

Russian monetary system is managed by the Bank of Russia. Founded on 13 July 1990 as the State Bank of the RSFSR, Bank of Russia assumed responsibilities of the central bank following the breakup of the Soviet Union in 1991.^[90]

According to the Сonstitution, Bank of Russia is an independent entity, with the primary responsibility of protecting the stability of the national currency, the ruble. It is also chief regulator and a lender of last resort for the banking industry in Russia. Bank of Russia is governed by a board of directors, headed by a governor who is appointed by the President of Russia.^[91]

Large current account surpluses caused rapid real appreciation of the ruble between 2000 and 2008. Bank of Russia attempted to combat this trend by aggressively accumulating foreign currency reserves. This was a major contributing cause to relatively high inflation rates during this period. Central bank policy evolved following the global financial crisis. Instead of targeting a fixed exchange rate vs a basket of dollar and euro, Bank of Russia shifted its focus to inflation targeting.^[69][92] In April 2012 Russian inflation reached record low of 3.6%.^[93]

The Russian Central Bank has been planning to free float the Russian Ruble and has been widening the currency's trading band and expects the ruble to be fully free floating in 2015. However, the ruble has fell significantly since 2013 when the central bank announced the plans. On 3 October 2014 the USD-RUB exchange reached 40.00 Russian Rubles to USD, up from 32.19 Rubles the same time last year, this represents a decline of 24.26%. The Russian Central bank has stated that Russian banks are able to withstand a devaluation of up to 25%-30% in January 2014 when the Ruble has just began its decline, therefore Central Bank intervention may be needed, however plans to free float the currency continued, as of January 2014.^[94][95] The Russian Central Bank spent $88 billion in order to stem the fall of the ruble in 2014. Due to central bank intervention and stronger oil prices the ruble rebounded sharply at the begging of 2015. In April 2015, Ksenia Yudaeva, Bank of Russia's First Deputy Governor, stated that she believed the currency has stabilized at the present rate of around 50 rubles to USD.^[96][97]

Along with a rapid devaluation of the Ruble inflation in Russia has greatly increased. In 2012 Inflation was at one of its lowest points since the fall of the Soviet Union at 3.6%, in October 2014 the rate of inflation was reported to be 8%, although this is well below the 2333.30% inflation rate experienced in 1992.^[98]

Public policy

Fiscal policy

Central and local government expenditures are about equal. Combined they come to about 38% of GDP. Fiscal policy has been very disciplined since the 1998 debt crisis. The overall budget surplus for 2001 was 2.4% of GDP, allowing for the first time in history for the next year's budget to be calculated with a surplus (1.63% of GDP). Much of this growth, which exceeded most expectations for the third consecutive year, was driven by consumption demand. Analysts remain skeptical that high rates of economic growth will continue, particularly since Russia's planned budgets through 2005 assume that oil prices will steadily increase. Low oil prices would mean that the Russian economy would not achieve its projected growth. However, high oil prices also would have negative economic effects, as they would cause the ruble to continue to appreciate and make Russian exports less competitive. The 2007 budget law incorporates a 25% increase in spending, much of it for public-sector salary increases, pension increases and social work. Spending on education is targeted to increase by 60%, based on 2006 legislation, and spending on healthcare is to increase by 30%. Funding for the four "national projects", undertakings in agriculture, education, housing and healthcare, will increase by 85 billion rubles over the 2006 figure to 230 billion rubles.

National wealth fund

On 1 January 2004, the Stabilization fund of the Russian Federation was established by the Government of Russia as a part of the federal budget to balance it if oil price falls. Now the Stabilization fund of the Russian Federation is being modernized. Stabilization Fund of the Russian Federation will be divided into two parts on 1 February 2008. The first part will become a reserve fund equal to 10% of GDP (10% of GDP equals to about $200 billion now), and will be invested in a similar way as Stabilization Fund of the Russian Federation. The second part will be turned into the National Prosperity Fund of Russian Federation. Deputy Finance Minister Sergei Storchak estimates it will reach 600–700 billion rubles by 1 February 2008. The National Prosperity Fund is to be invested into more risky instruments, including the shares of foreign companies.^[99]

Public debt

Russian public debt

Russia has very low debt-to-GDP ratio, it is among the lowest ratios in the world. Most of its external debt is private. Its debt to GDP ratio was in 2016 is at 12%.^[100]

As a chief successor state to the Soviet Union, Russia took up the responsibility for paying USSR's external debts.^[101]

In the June 2002 G8 summit, leaders of the eight nations signed a statement agreeing to explore cancellation of some of Russia's old Soviet debt to use the savings for safeguarding materials in Russia that could be used by terrorists. Under the proposed deal, $10 billion would come from the United States and $10 billion from other G-8 countries over 10 years.

Strategic sectors and enterprises

In the Russian law, there are sectors of the economy which are considered to be crucial for national security and foreign companies are restricted from owning them. Investments in the so-called Strategic Sectors are defined in a law adopted by the Federal Assembly of Russia. Strategic enterprises are a list of state owned corporations which privatization and new share issues of require explicit approval of the President. It began with a Presidential Decree with list of more than 1000 state owned firms dated from 2004, which was amended several times.

Protectionism

Russia has recently come to attention as a leading nation for protectionist policies. According to the independent Global Trade Alert, Russia put more protectionist policies in place than any other country in 2013. Russia's strategic trading block consisting of Russia, Belarus, and Kazakhstan was responsible for 33% of worldwide protectionism during the year.^[102] Of the protectionist policies, 43.4 percent were targeted bailouts and direct subsidies for local companies, while 15.5 percent were tariff measures.^[103]

Sectors

In Russia, services are the biggest sector of the economy and account for 58% of GDP. Within services the most important segments are: wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods (17% of total GDP); public administration, health and education (12%); real estate (9%) and transport storage and communications (7%). Industry contributes 40% to total output. Mining (11% of GDP), manufacturing (13%) and construction (4%) are the most important industry segments. Agriculture accounts for the remaining 2%.

Export structure of Russia

Primary

Energy

Oil and natural gas pipelines in Europe

The mineral-packed Ural Mountains and the vast oil, gas, coal, and timber reserves of Siberia and the Russian Far East make Russia rich in natural resources, which dominate Russian exports. Oil and gas exports, specifically, continue to be the main source of hard currency.

The petroleum industry in Russia is one of the largest in the world. Russia has the largest reserves, and is the largest exporter, of natural gas. It has the second largest coal reserves, the eighth largest oil reserves, and is the largest exporter of oil in the world in absolute numbers. Per capita oil production in Russia, though, is not that high. As of 2007, Russia was producing 69.603 bbl/day per 1,000 people, much less than Canada (102.575 bbl/day), Saudi Arabia (371.363 bbl/day), or Norway (554.244 bbl/day), but more than two times the USA (28.083 bbl/day) or the UK (27.807 bbl/day).^[104]

Mining

Russia is also a leading producer and exporter of minerals and gold. 90% of Russian exports to the United States are minerals or other raw materials. Russia is the largest diamond-producing nation in the world, estimated to produce over 33 million carats in 2013, or 25% of global output valued at over $3.4 billion, with state-owned ALROSA accounting for approximately 95% of all Russian production.^[105]

Expecting the area to become more accessible as climate change melts Arctic ice, and believing the area contains large reserves of untapped oil and natural gas, Russian explorers on 2 August 2007 in submersibles planted the Russian flag on the Arctic seabed, staking a claim to energy sources right up to the North Pole. Reaction to the event was mixed: President Vladimir Putin congratulated the explorers for "the outstanding scientific project", while Canadian officials stated the expedition was just a public show.^[106]

Under the Federal Law "On Continental Shelf Development" upon proposal from the federal agency managing the state fund of mineral resources, or its territorial offices, the Russian government approves the list of some sections of the mineral resources that are passed for development without any contests and auctions, some sections of federal importance of the Russian continental shelf, some sections of the mineral resources of federal importance that are situated in Russia and stretch out on its continental shelf, some gas deposits of federal importance that are handed over for prospecting and developing mineral resources under a joint license. The Russian government is also empowered to decide on the handover of the previously mentioned sections of the mineral resources for development without any contests and auctions.

Fishing and forestry

The Russian fishing industry is the world's fourth-largest, behind Japan, the United States, and China.

Russia has more than a fifth of the world's forests, which makes it the largest forest country in the world.^[107] However, according to a 2012 study by the Food and Agriculture Organization of the United Nations and the government of the Russian Federation,^[108] the considerable potential of Russian forests is underutilized and Russia's share of the global trade in forest products is less than 4%.^[109]

Agriculture

Russia comprises roughly three-quarters of the territory of the former Soviet Union. Following the breakup of the Soviet Union in 1991 and after nearly 10 years of decline, Russian agriculture began to show signs of improvement due to organizational and technological modernization. Northern areas concentrate mainly on livestock, and the southern parts and western Siberia produce grain. The restructuring of former state farms has been an extremely slow process. The new land code passed by the Duma in 2002 should speed restructuring and attract new domestic investment to Russian agriculture. Private farms and garden plots of individuals account for over one-half of all agricultural production.

Industry

Russia's industrial growth per year (%), 1992–2010

Industrial Production in Russia decreased 2.10% in February 2013 over the same month in the previous year. Industrial Production in Russia is reported by the Federal State Statistics Service. Historically, from 2006 until 2013, Russia Industrial Production averaged 2.82% reaching an all-time high of 12.60% in May 2010 and a record low of −16.90% in January 2009. In Russia, industrial production measures the output of businesses integrated in industrial sector of the economy such as manufacturing, mining, and utilities. Russia is one of the most industrialized of the former Soviet republics. In the 2000s, Russia's industry, due to increasing demand and improved state finances, emerged from a deep crisis caused by the dissolution of the Soviet Union. However, years of low investment continue to leave their mark on the industry's capabilities and a lot of its equipment is in need of modernization.

Besides its resource-based industries, Russia has developed large manufacturing capacities, notably in machinery. The defense and aircraft industries are important employers and are able to offer internationally competitive products for export.

Defense industry

Russia's defense industry employs 2.5 – 3 million people, accounting for 20% of all manufacturing jobs.^[110] Russia is the world's second largest conventional arms exporter after the United States.^[111] The most popular types of weaponry bought from Russia are Sukhoi and MiG fighters, air defense systems, helicopters, battle tanks, armored personnel carriers and infantry fighting vehicles.^[111] The research organization Centre for Analysis of Strategies and Technologies ranked the air defense system producer Almaz-Antey as the industry's most successful company in 2007, followed by aircraft-maker Sukhoi. Almaz-Antey's revenue that year was $3.122 billion, and it had a work force of 81,857 people.^[112]

Aerospace

The Sukhoi Superjet 100 is Russia's most recent civilian aviation product of its industry. The regional passenger plane was ordered around 280 times for various airlines and leasing companies.

Aircraft manufacturing is an important industry sector in Russia, employing around 355,300 people. The Russian aircraft industry offers a portfolio of internationally competitive military aircraft such as MiG-29 and Su-30, while new projects such as the Sukhoi Superjet 100 are hoped to revive the fortunes of the civilian aircraft segment. In 2009, companies belonging to the United Aircraft Corporation delivered 95 new fixed-wing aircraft to its customers, including 15 civilian models. In addition, the industry produced over 141 helicopters. It is one of the most science-intensive hi-tech sectors and employs the largest number of skilled personnel. The production and value of the military aircraft branch far outstrips other defense industry sectors, and aircraft products make up more than half of the country's arms exports.^[113]

Space industry of Russia consists of over 100 companies and employs 250,000 people.^[114] The largest company of the industry is RKK Energia, the main manned space flight contractor. Leading launch vehicle producers are Khrunichev and TsSKB Progress. Largest satellite developer is Reshetnev Information Satellite Systems, while NPO Lavochkin is the main developer of interplanetary probes.

Automotive industry

Lada is the brand of AvtoVAZ, the largest Russian car manufacturer in the Russian automotive industry.

Automobile production is a significant industry in Russia, directly employing around 600,000 people or 0.7% of the country's total work force. In addition, the industry supports around 2–3 million people in related industries. Russia was the world's 15th largest car producer in 2010, and accounts for about 7% of the worldwide production. In 2009 the industry produced 595,807 light vehicles, down from 1,469,898 in 2008 due to the global financial crisis. The largest companies are light vehicle producers AvtoVAZ and GAZ, while KAMAZ is the leading heavy vehicle producer. 11 foreign carmakers have production operations or are constructing plants in Russia.

Electronics

Russia is experiencing a regrowth of microelectronics, with the revival of JCS Mikron.^[115][116] An example of a successful Russian consumer electronics company is Telesystems, whose products are sold in over 20 countries.

Services

Retail

As of 2013, Russians spent 60% of their pre-tax income shopping, the highest percentage in Europe. This is possible because many Russians pay no rent or house payments, owning their own home after privatization of state-owned Soviet housing. Shopping malls were popular with international investors and shoppers from the emerging middle class. Eighty-two malls had been built near major cities including a few that were very large. A supermarket selling groceries is a typical anchor store in a Russian mall.^[117]

Retail sales in Russia^[118][119]

Year	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Total retail sales (RUB trillions)	3.77	4.53	5.64	7.04	8.69	10.76	missing year	14.60	16.49	19.08

Banking

A significant drawback for investment is the banking sector, which lacks the resources, the capability, and the trust of the population that it would need to attract substantial savings and direct it toward productive investments. Russia's banks contribute only about 3% of overall investment in Russia. While ruble lending has increased since the August 1998 financial crisis, loans are still only 40% of total bank assets. The Central Bank of Russia reduced its refinancing rate five times in 2000, from 55% to 25%, signaling its interest in lower lending rates. Interest on deposits and loans are often below the inflation rate. The poorly developed banking system makes it difficult for entrepreneurs to raise capital and to diversify risk. Banks still perceive commercial lending as risky, and some banks are inexperienced with assessing credit risk.

Money on deposit with Russian banks represents only 7% of GDP. Sberbank receives preferential treatment from the state and holds 73% of all bank deposits. In March 2002, Sergei Ignatyev replaced Viktor Gerashchenko as Chairman of the Russian Central Bank. Under his leadership, necessary banking reforms, including stricter accounting procedures and federal deposit insurance, were implemented.

Telecommunications

Russia's telecommunications industry is growing in size and maturity. As of 31 December 2007, there were an estimated 4,900,000 broadband lines in Russia.^[120] Over 72% of the broadband lines were via cable modems and the rest via DSL.

In 2006, there were more than 300 BWA operator networks, accounting for 5% of market share, with dial-up accounting for 30%, and Broadband Fixed Access accounting for the remaining 65%.^[121] In December 2006, Tom Phillips, chief government and regulatory affairs officer of the GSM Association stated:

"Russia has already achieved more than 100% mobile penetration thanks to the huge popularity of wireless communications among Russians and the government's good work in fostering a market driven mobile sector based on strong competition."^[122]

The financial crisis, which had already hit the country at the end of 2008, caused a sharp reduction of the investments by the business sectors and a notable reduction of IT budget made by government in 2008–2009. As a consequence, in 2009 the IT market in Russia declined by more than 20% in ruble terms and by one third in euro terms. Among the particular segments, the biggest share of the Russian IT market still belongs to hardware.^[123]

Key data on the telecommunications market in Russia^[121]

Year	2004	2005	2006	2007	2008	2009	2010	2011 (est.)
Telecommunications market value (€ bn)	12.9	16.0	20.9	25.0	27.5	24.4	28.5	30.6
Telecommunications market growth rate (%)	32.0	23.5	30.6	20.2	10.0	−11.4	17.1	7.3

Transportation

Russian Railways accounts for 2.5%^[124] of Russia's GDP. The percentage of freight and passenger traffic that goes by rail is unknown, since no statistics are available for private transportation such as private automobiles or company-owned trucks. In 2007, about 1.3 billion passengers^[125] and 1.3 billion tons of freight^[126] went via Russian Railways. In 2007 the company owned 19,700 goods and passenger locomotives, 24,200 passenger cars (carriages) (2007) and 526,900 freight cars (goods wagons) (2007).^[127] A further 270,000 freight cars in Russia are privately owned. In 2009 Russia had 128,000 kilometres of common-carrier railroad line, of which about half was electrified and carried most of the traffic; over 40% was double track or better.^[128][129]

Construction

In 2009 the Russian construction industry survived its most difficult year in more than a decade. The 0.8% reduction recorded by the industry for the first three quarters of 2010 looked remarkably healthy in comparison with the 18.4% slump recorded the previous year, and construction firms became much more optimistic about the future than in previous months. The most successful construction firms concluded contracts worth billions of dollars an planned to take on employees and purchase new building machinery. The downturn served to emphasise the importance of the government to the construction market.^[130]

Insurance

According to the Central Bank of Russia 422 insurance companies operate on the Russian insurance market by the end of 2013. The concentration of insurance business is significant across all major segments except compulsory motor third party liability market (CMTPL), as the Top 10 companies in 2013 charged 58.1% premiums in total without compulsory health insurance (CHI).^[131] Russian insurance market in 2013 demonstrated quite significant rate of growth in operations. Total amount of premiums charged (without CHI) in 2013 is RUB 904.9 bln (increase on 11.8% compared to 2012), total amount of claims paid is RUB 420.8 bln (increase on 13.9% compared to 2012). Premiums to GDP ratio (total without CHI) in 2013 increased to 1.36% compared to 1.31 a year before. The share of premiums in household spending increased to 1.39%. Level of claims paid on the market total without CHI is 46.5%, insufficient increase compared to 2012. The number of polices in 2013 increased on 0.1% compared to 2012, to 139.6 mln policies.

Although relative indicators of the Russian insurance market returned to pre-crisis levels, the progress is achieved mainly by the increase of life insurance and accident insurance, the input of these two market segments in premium growth in 2013 largely exceeds their share on the market. As before, life insurance and accident insurance are often used by banks as an appendix to a credit contract protecting creditors from the risk of credit default in case of borrower’s death or disability. The rise of these lines is connected, evidently, with the increase in consumer loans, as the total sum of credit obligations of population in 2013 increased on 28% to RUB 9.9 trillion. At the same time premium to GDP ratio net of life and accident insurance remained at the same level of 1.1% as in 2012. Thus, if "banking" lines of business are excluded, Russian insurance market is in stagnation stage for the last four years, as premiums to GDP ratio net of life and accident insurance remains at the same level of 1.1% since 2010.^[132]

Information technology

Russia has more academic graduates than any other country in Europe. (And world leader in percentage of population with associate degree or higher: 54%, compared to 31% in UK^[133])

The IT market is one of the most dynamic sectors of the Russian economy. Russian software exports have risen from just $120 million in 2000 to $3.3 billion in 2010.^[134] Since the year 2000 the IT market has started growth rates of 30–40% a year, growing by 54% in 2006 alone. The biggest sector in terms of revenue is system and network integration, which accounts for 28.3% of the total market revenues.^[135] Meanwhile, the fastest growing segment of the IT market is offshore programming.

Currently Russia controls 3% of the offshore software development market and is the third leading country (after India and China) among software exporters. Such growth of software outsourcing in Russia is caused by a number of factors. One of them is the supporting role of the Russian Government. The government has launched a program promoting construction of IT-oriented technology parks (Technoparks)—special zones that have an established infrastructure and enjoy a favorable tax and customs regime, in seven different places around the country: Moscow, Novosibirsk, Nizhny Novgorod, Kaluga, Tumen, Republic of Tatarstan and St. Peterburg Regions. Another factor stimulating the IT sector growth in Russia is the presence of global technology corporations such as Intel, Google, Motorola, Sun Microsystems, Boeing, Nortel, Hewlett-Packard, SAP AG, and others, which have intensified their software development activities and opened their R&D centers in Russia.^[134]

Under a government decree signed On June 2013, a special "roadmap" is expected to ease business suppliers’ access to the procurement programs of state-owned infrastructure monopolies, including such large ones as Gazprom, Rosneft, Russian Railways, Rosatom, and Transneft. These companies will be expected to increase the proportion of domestic technology solutions they use in their operations. The decree puts special emphasis on purchases of innovation products and technologies. According to the new decree, by 2015, government-connected companies must double their purchases of Russian technology solutions compared to the 2013 level and their purchasing levels must quadruple by 2018.^[136]

Russia is one of the few countries in the world with a home grown internet search engine who owns a relevant marketshare as the Russian-based search engine Yandex is used by 53.8% of internet users in the country.^{[137][138][139][140]}

Known Russian IT companies are ABBYY (FineReader OCR system and Lingvo dictionaries), Kaspersky Lab (Kaspersky Anti-Virus, Kaspersky Internet Security), Mail.Ru (portal, search engine, mail service, Mail.ru Agent messenger, ICQ, Odnoklassniki social network, online media sources).

External trade and investment

Trade

Share of Russia's exports in 2013 according to the ITC. As can be seen the US market for Russia is on Africa Levels significance thanks to failed US Policies and the delay of Russia joining the WTO. Russia is the most independent G20 country when it comes to dealing with US Foreign Policy.

Russian current account due to trade surplus

Russia recorded a trade surplus of 17742 USD million in January 2013. Balance of trade in Russia is reported by the Central Bank of Russia. Historically, from 1997 until 2013, Russia balance of trade averaged 8338.23 USD million reaching an all-time high of 20647 USD million in December 2011 and a record low of −185 USD million in February 1998. Russia runs regular trade surpluses primarily due to exports of commodities. Russia main exports are oil and natural gas (58% of total exports), nickel, palladium, iron and chemical products. Others include: cars, military equipment and timber. Russia imports food, ground transports, pharmaceuticals and textile and footwear. Main trading partners are: China (7% of total exports and 10% of imports), Germany (7% of exports and 8% of imports) and Italy. This page includes a chart with historical data for Russia balance of trade. Exports in Russia decreased to 39038 USD million in January 2013 from 48568 USD million in December 2012. Exports in Russia is reported by the Central Bank of Russia. Historically, from 1994 until 2013, Russia Exports averaged 18668.83 USD million reaching an all-time high of 51338 USD million in December 2011 and a record low of 4087 USD million in January 1994. Russia is the fifth-largest economy in the world and is a leading exporter of oil and natural gas. In Russia, services are the biggest sector of the economy and account for 58% of GDP. Within services the most important segments are: wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods (17% of total GDP); public administration, health and education (12%); real estate (9%) and transport storage and communications (7%). Industry contributes 40% to total output. Mining (11% of GDP), manufacturing (13%) and construction (4%) are the most important industry segments. Agriculture accounts for the remaining 2%. This page includes a chart with historical data for Russia Exports.Imports in Russia decreased to 21296 USD million in January 2013 from 31436 USD million in December 2012. Imports in Russia is reported by the Central Bank of Russia. Historically, from 1994 until 2013, Russia imports averaged 11392.06 USD million reaching an all-time high of 31553 USD million in October 2012 and a record low of 2691 USD million in January 1999. Russia main imports are food (13% of total imports) and ground transports (12%). Others include: pharmaceuticals, textile and footwear, plastics and optical instruments. Main import partners are China (10% of total imports) and Germany (8%). Others include: Italy, France, Japan and United States. This page includes a chart with historical data for Russia Imports.

In 1999, exports were up slightly, while imports slumped by 30.5%. As a consequence, the trade surplus ballooned to $33.2 billion, more than double the previous year's level. In 2001, the trend shifted, as exports declined while imports increased. World prices continue to have a major effect on export performance, since commodities, particularly oil, natural gas, metal, and the timber comprise 80% of Russian exports. Ferrous metals exports suffered the most in 2001, declining by 7.5%. On the import side, steel and grains dropped by 11% and 61%, respectively.

Most analysts predicted that these trade trends would continue to some extent in 2002. In the first quarter of 2002, import expenditures were up 12%, increased by goods and a rapid rise of travel expenditure. The combination of import duties, a 20% value-added tax and excise taxes on imported goods (especially automobiles, alcoholic beverages, and aircraft) and an import licensing regime for alcohol still restrain demand for imports. Frequent and unpredictable changes in customs regulations also have created problems for foreign and domestic traders and investors. In March 2002, Russia placed a ban on poultry from the United States. In the first quarter of 2002, exports were down 10% as falling income from goods exports was partly compensated for by rising services exports, a trend since 2000. The trade surplus decreased to $7 billion from well over $11 billion the same period last year.

Russian exports in 2006

Foreign trade rose 34% to $151.5 billion in the first half of 2005, mainly due to the increase in oil and gas prices which now form 64% of all exports by value. Trade with CIS countries is up 13.2% to $23.3 billion. Trade with the EU forms 52.9%, with the CIS 15.4%, Eurasian Economic Community 7.8% and Asia-Pacific Economic Community 15.9%.^[141]

Russia Export Treemap by Product (2014) from Harvard Atlas of Economic Complexity

Trade volume between China and Russia reached $29.1 billion in 2005, an increase of 37.1% compared with 2004. China's export of machinery and electronic goods to Russia grew 70%, which is 24% of China's total export to Russia in the first 11 months of 2005. During the same time, China's export of high-tech products to Russia increased by 58%, and that is 7% of China's total exports to Russia. Also in this time period border trade between the two countries reached $5.13 billion, growing 35% and accounting for nearly 20% of the total trade. Most of China's exports to Russia remain apparel and footwear.

Russia is China's eighth largest trade partner and China is now Russia's fourth largest trade partner.

China now has over 750 investment projects in Russia, involving $1.05 billion. China's contracted investment in Russia totaled $368 million during January–September 2005, twice that in 2004.

Chinese imports from Russia are mainly those of energy sources, such as crude oil, which is mostly transported by rail, and electricity exports from neighboring Siberian and Far Eastern regions. Exports of both of these commodities are increasing, as Russia opened the Eastern Siberia–Pacific Ocean oil pipeline's branch to China, and Russian power companies are building some of its hydropower stations with a view of future exports to China. Despite all this Russia still exports more to China by amount of 21.23 billion US dollars in comparison to an import of 17.52 Billions in 2009.

Foreign Direct Investment

In 1999, investment increased by 4.5%, the first such growth since 1990. Investment growth has continued at high rates from a very low base, with an almost 30% increase in total foreign investments in 2001 compared to the previous year. Higher retained earnings, increased cash transactions, the positive outlook for sales, and political stability have contributed to these favorable trends. Foreign investment in Russia is very low. Cumulative investment from U.S. sources of about $4 billion are about the same as U.S. investment in Costa Rica. Over the medium-to-long term, Russian companies that do not invest to increase their competitiveness will find it harder either to expand exports or protect their recent domestic market gains from higher quality imports.

Foreign direct investment, which includes contributions to starting capital and credits extended by foreign co-owners of enterprises, rose slightly in 1999 and 2000, but decreased in 2001 by about 10%. Foreign portfolio investment, which includes shares and securities, decreased dramatically in 1999, but has experienced significant growth since then. In 2001, foreign portfolio investment was $451 million, more than twice the amount from the previous year. Inward foreign investment during the 1990s was dwarfed by Russian capital flight, estimated at about $15 billion annually. During the years of recovery following the 1998 debt crisis, capital flight seems to have slowed. Inward investment from Cyprus and Gibraltar, two important channels for capital flight from Russia in recent years, suggest that some Russian money is returning home.

Maps

Regional development

GRP per capita, 2008 (US dollars):

  50 000 and over

  30 000 – 50 000

  20 000 – 30 000

  9 750 (Russian average) – 20 000

  7 500 – 9 750

  5 000 – 7 500

  3 000 – 5 000

  under 3 000

See also

Commonwealth of Independent States History of post-Soviet Russia Monotown, a city or town whose economy is dominated by a single industry or company. The term is especially often used in Russia, Politics of Russia

Russian Railways Taxation in Russia Types of legal entities in Russia Unitary enterprise, a government-owned corporation in Russia and some other post-Soviet states

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•  This article incorporates public domain material from the Library of Congress Country Studies website http://lcweb2.loc.gov/frd/cs/. – Soviet Union

External links

• Russia Economy Data at Quandl
• IT & Telecoms Market in Russia
• Construction Sector in Russia
• Retail & FMCG Sector in Russia
• Inflation in Russia – history, tables, charts, calculators
• World Bank Trade Summary Statistics Russia 2012
• Comprehensive current and historical economic data
• Tariffs applied by Russia as provided by ITC's Market Access Map , an online database of customs tariffs and market requirements
• The Russian Economy: The end of the line, The Economist, 20 November 2014.