Economy of Russia

Two fundamental and interdependent goals — macroeconomic stabilization and economic restructuring — the transition from central planning to a market-based economy. The former entailed implementing fiscal and monetary policies that promote economic growth in an environment of stable prices and exchange rates. The latter required establishing the commercial, and institutional entities — banks, private property, and commercial legal codes— that permit the economy to operate efficiently. Opening domestic markets to foreign trade and investment, thus linking the economy with the rest of the world, was an important aid in reaching these goals. The Gorbachev regime failed to address these fundamental goals. At the time of the Soviet Union's demise, the Yeltsin government of the Russian Republic had begun to attack the problems of macroeconomic stabilization and economic restructuring. By mid-1996, the results were mixed.

Since collapse of the Soviet Union in 1991, Russia has tried to develop a market economy and achieve consistent economic growth. In October 1991, Yeltsin announced that Russia would proceed with radical, market-oriented reform along the lines of "shock therapy", as recommended by the United States and IMF.[2] However, this policy resulted in economic collapse, with millions being plunged into poverty and corruption and crime spreading rapidly.[3] Hyperinflation resulted from the removal of Soviet price controls and again following the 1998 Russian financial crisis. Assuming the role as the continuing legal personality of the Soviet Union, Russia took up the responsibility for settling the USSR's external debts, even though its population made up just half of the population of the USSR at the time of its dissolution.[4] When once all enterprises belonged to the state and were supposed to be equally owned amongst all citizens, they fell into the hands of a few, who became immensely rich. Stocks of the state-owned enterprises were issued, and these new publicly traded companies were quickly handed to the members of Nomenklatura or known criminal bosses. For example, the director of a factory during the Soviet regime would often become the owner of the same enterprise. During the same period, violent criminal groups often took over state enterprises, clearing the way by assassinations or extortion. Corruption of government officials became an everyday rule of life. Under the government's cover, outrageous financial manipulations were performed that enriched the narrow group of individuals at key positions of the business and government mafia. Many took billions in cash and assets outside of the country in an enormous capital flight.[5]

The largest state enterprises were controversially privatized by President Boris Yeltsin to insiders[6] for far less than they were worth.[2] Many Russians consider these infamous "oligarchs" to be thieves.[7] Through their immense wealth, the oligarchs wielded significant political influence.
[edit] Recovery
Russian public debt

The Russian economy underwent tremendous stress as it moved from a centrally planned economy to a free market system. Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998. Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid decline in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.

Russia, however, appears to have weathered the crisis relatively well. As of 2007 real GDP increased by the highest percentage since the fall of the Soviet Union at 8.1%, the ruble remains stable, inflation has been moderate, and investment began to increase again. In 2007 the World Bank declared that the Russian economy had achieved "unprecedented macroeconomic stability".[8] Russia is making progress in meeting its foreign debts obligations. During 2000-01, Russia not only met its external debt services but also made large advance repayments of principal on IMF loans but also built up Central Bank reserves with government budget, trade, and current account surpluses. The FY 2002 Russian Government budget assumes payment of roughly $14 billion in official debt service payments falling due. Large current account surpluses have brought a rapid appreciation of the ruble over the past several years. This has meant that Russia has given back much of the terms-of-trade advantage that it gained when the ruble fell by 60% during the debt crisis. Oil and gas dominate Russian exports, so Russia remains highly dependent upon the price of energy. Loan and deposit rates at or below the inflation rate inhibit the growth of the banking system and make the allocation of capital and risk much less efficient than it would be otherwise.

In 2003, the debt has risen to $19 billion due to higher Ministry of Finance and Eurobond payments. However, $1 billion of this has been prepaid, and some of the private sector debt may already have been repurchased. Russia continues to explore debt swap/exchange opportunities.

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.

On January 1, 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. The Stabilization Fund will be divided into two parts on February 1, 2008. The first part will become a reserve fund equal to 10 percent of GDP (10% of GDP equals to about $200 billion now), and will be invested in a similar way as the Stabilization Fund. 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 February 1, 2008. The National Prosperity Fund is to be invested into more risky instruments, including the shares of foreign companies. Shyhkin, Maxim. "Stabilization Fund to Be Converted into National Prosperity". http://www.kommersant.com/p791856/new_fund_to_specialize_on_portfolio_investments/. Retrieved 2007-08-02.
[edit] Putin years
Russian economy since fall of the Soviet Union.

Under the Putin administration, Russia's economy saw the nominal Gross Domestic Product (GDP) double, climbing from 22nd to 11th largest in the world. The economy made real gains of an average 7% per year (2000: 10%, 2001: 5.7%, 2002: 4.9%, 2003: 7.3%, 2004: 7.2%, 2005: 6.5%, 2006: 7.7%, 2007: 8.1%, 2008: 5.6%), making it the 6th largest economy in the world in GDP(PPP). In 2007, Russia's GDP exceeded that of 1990, meaning it has overcome the devastating consequences of the Soviet era, 1998 financial crisis, and preceding recession in the 1990s.[9] On a per capita basis, Russian GDP was US$11,339 per individual in 2008, making Russians 57th richest on both a purchasing power and nominal basis.

During Putin's eight years in office, industry grew by 75%, investments increased by 125%,[9] and agricultural production and construction increased as well. Real incomes more than doubled and the average salary increased eightfold from $80 to $640.[10][11][12] The volume of consumer credit between 2000–2006 increased 45 times,[13][14] and during that same time period, the middle class grew from 8 million to 55 million, an increase of 7 times. The number of people living below the poverty line also decreased from 30% in 2000 to 14% in 2008.[9][15][16]

Inflation remained a problem however, as the government failed to contain the growth of prices. Between 1999–2007 inflation was kept at the forecast ceiling only twice, and in 2007 the inflation exceeded that of 2006, continuing an upward trend at the beginning of 2008.[9]

The Russian economy is still commodity-driven despite its growth. Payments from the fuel and energy sector in the form of customs duties and taxes accounted for nearly half of the federal budget's revenues. The large majority of Russia's exports are made up by raw materials and fertilizers,[9] although exports as a whole accounted for only 8.7% of the GDP in 2007, compared to 20% in 2000.[17]

There is also a growing gap between rich and poor in Russia. Between 2000–2007 the incomes of the rich grew from approximately 14 times to 17 times larger than the incomes of the poor. The income differentiation ratio shows that the 10% of Russia's rich live increasingly better than the 10% of the poor, amongst whom are mostly pensioners and unskilled workers in depressive regions. (See: Gini Coefficient)
[edit] Post-Putin years
See also: 2008–2009 Russian financial crisis

Arms sales have increased to the point where Russia is second (with 0.6 the amount of US arms sale) in the world in sale of weapons, the IT industry has recorded a record year of growth concentrating on high end niches like algorithm design and microelectronics, while leaving the lesser end work to India and China; Russia is now the world's third biggest destination for outsourcing software behind India and China. The space launch industry is now the world's second largest behind the European Ariane 5 and nuclear power plant companies are going from strength to strength, selling plants to China and India, and recently signed a joint venture with Toshiba to develop cutting edge power plants.

The civilian aerospace industry has developed the Sukhoi Superjet, as well as the upcoming MS 21 project to compete with Boeing and Airbus.

The recent global economic downturn has resulted in three major shocks to Russia's long-term economic growth, though. Oil prices dropped from $140 per barrel to $40 per barrel, a decrease in access to financing with an increase in sovereign and corporate bond spreads, and the reversal of capital flows from $80 billion in in-flows to $130 billion in out-flows have all served to crush fledging Russian economic growth. In January 2009, industrial production was down almost 16% year to year, fixed capital investment was down 15.5% year to year, and GDP had shrunk 9% year to year.[18] However, in the second quarter the GDP rose by 7.5 percent on a quarterly basis indicating the beginning of economic recovery.