Russia is the largest country in the world and a major political player, being a member of the United Nations (UN) Security Council, the Group of Eight (G8) industrialized nations, and the Council of Europe. Main industries of the Russian economy include mining and extractive industries producing coal, oil, gas, chemicals, and metals; defense industries and information technology (IT), among others. From 1922 to 1991, Russia, among 14 other countries, was part of the Union of Soviet Socialist Republics (USSR). The USSR or the Soviet Union had the modern world’s first centrally planned economy, which developed into the second-largest in the world. During and after the disintegration of the Soviet Union, when wide-ranging reforms including privatization and market and trade liberalization were being undertaken, the Russian economy went through a major crisis as it moved from a centrally planned economy to a free market system. Despite the country’s strong economic performance since 1999 and the significant improvement of its international financial position, political, legislation, and management problems still remain. Nevertheless, Russia has a huge long-term potential and is on its way to being a developed country within the 2020–25 time frame.
Russia, officially known as the Russian Federation, is a federation with 89 provincial authorities including a number of semiautonomous republics. It has a land mass of 17,075 sq. km (6,592,800 sq. mi.), covering 11 time zones, and a population of 147 million. It has a rich cultural identity that has been shaped by its distinguished history and vast geography. The official currency in Russia is the ruble. However, it is very common for businesses to make their calculations in U.S. dollars or, more recently, in euros.
Main industries of the Russian economy include a complete range of mining and extractive industries producing coal, oil, gas, chemicals, and metals. It is the world’s leading natural gas exporter and the second leading oil exporter. Thus, Russia remains highly dependent upon the price of energy. However, most such resources are located in remote and climatically unfavorable areas, thus making the exploitation of natural resources more difficult.
Other industries that play a key role in the Russian economy are defense industries including radar, missile production, and advanced electronic components. For instance, Russia has the largest stockpile of nuclear weapons in the world. Russia is the world’s top supplier of weapons, a spot it has held since 2001, accounting for around 30 percent of worldwide weapons sales and exporting weapons to about 80 countries.
Moreover, the IT market is one of the most dynamic sectors of the Russian economy. Russian software exports have increased from just US$120 million in 2000 to US$1.5 billion in 2006. Meanwhile, the fastest growing segment of the IT market is offshore programming. Russia is the world’s third-biggest destination for outsourcing software behind India and China. It is also worth mentioning Russia’s attempt over the last few years to diversify its research and development in emerging technologies. For example, there has been a massive US$7 billion investment program in nanotechnology.
Other significant sectors of the Russian economy include all forms of machine building from rolling mills to high-performance aircraft and space vehicles; shipbuilding; road and rail transportation equipment; and communications equipment. Moreover, other industries comprise agricultural machinery such as tractors; construction equipment; electric power generating and transmitting equipment; as well as medical and scientific instruments.
The Soviet Union’s planned economy constituted the largest and most powerful economy in the world after that of the United States. The nation became among the world’s three top manufacturers of a large number of basic and heavy industrial products such as steel, oil, and gas. During and after the disintegration of the Soviet Union, when wide-ranging reforms including privatization, market and trade liberalization were being undertaken, the Russian economy went through a major crisis. This period was characterized by deep contraction of output, with gross domestic product (GDP) declining by roughly 50 percent between 1990 and the end of 1995 and industrial output declining by over 50 percent.
Russia is one of the most industrialized of the former Soviet republics. However, years of very low investment have left much of Russian industry highly inefficient. Russia inherited most of the defense industrial base of the Soviet Union, so armaments are the single-largest manufactured goods export category. Efforts have been made with varying success over the past few years to convert defense industries to civilian use.
The economic reform in Russia comprised the abolition of all Communist planning ministries and bureaucracies, an end to price fixing, establishment of the stock exchange, and encouragement of foreign direct investment (FDI) and joint ventures. There has been a two-stage mass privatization program put in place: “voucher privatization” shares given away to workers, followed by public auctions of key state enterprises. The Soviet economy, moreover, was the most monopolized in the world. Up to a third of all industrial enterprises were absolute monopolies, producing goods that no other company in the Soviet Union produced. Not only in production, but also in the sphere of management, in trade and supply, in research and development, the system was characterized by the supermonopolism of state power. Denationalization would have to be accompanied by demonopolization to stop privatization simply transforming state monopolies into private ones.
The problem in Russia is a lack of a significant quantity of small firms—in capitalist countries the source of technical innovation, competition, and job creation. The main purpose of privatization was to break the dependence of enterprises on the state budget. The destruction of the old monopolies and their corporate dependence on the state not only began to create a capitalist market but also entailed the destruction of the associated bureaucracy in the Russian Federation.
Privatization has transferred over 70 percent of large enterprises into private hands, and most small businesses have been privatized as well. The state is still a large shareholder in tens of thousands of enterprises, but it plays virtually no role in their management. The great majority of new businesses and joint enterprises are to be found in Moscow, St. Petersburg, and Nizhniy Novgorod, whereas traditional industrial areas found it difficult to adjust to competitive market conditions. In Russia, a significant share of private ownership of industrial enterprises has emerged out of privatization efforts. Privatization proved to be one of the most successful policies. By September 1994, some 100,000 enterprises had been privatized and over 80 percent of the industrial workforce was in privatized enterprises. The privatization of large enterprises was subject to voucher privatization. The majority of privatized enterprises were not sold to the public but in elections by the workforce, who, encouraged by their managers, voted for the option that allowed staff to buy 51 percent of the stock at a fixed price. Rather than outside owners coming in and shaking out factories and sacking staff and managers, control remained within the factory gates. However, the privatization process was also heavily criticized for “insider” deals, because many strategic enterprises were practically given away for free to powerful individuals.
In contrast to developed market economies and leading transition economies in central Europe, private owners in the former state-owned enterprises (FSEs) are predominantly insiders. Private owners consist of “insiders” (workers and managers of the given enterprise) and “outsiders” (individuals and enterprises unrelated to the given firm, such as banks, investment funds, and foreign investors). Also, firms in the Russian Federation that have majority outside ownership stakes also have on average very significant insider ownership stakes. Enterprise insiders in Russia are a less promising source of radical new ideas and have less capability to provide investment funds.
Russia has significantly improved its international financial position since the August 1998 financial crisis. A principal factor in Russia’s growth has been the combination of strong growth in productivity, real wages, and consumption. The devaluation of the ruble in 1998 made Russian exports far more competitive and at the same time made imports too expensive, thus influencing people to shift back to Russian alternatives. Because of the increased investment in the energy sector as well as sustained demand and high prices for oil and export raw materials (gas, steel), the entire economy was propped up and a large state budget surplus was created.
Despite the country’s strong economic performance since 1999, the World Bank lists several challenges facing the Russian economy including diversifying the economy, encouraging the growth of small and medium enterprises, building human capital, and improving corporate governance. Much of the economy is still struggling without cash or reforms. Overall, however, Russia appears to have overcome the crisis relatively well. As of 2007, real GDP increased by the highest percentage since the fall of the Soviet Union at 8.1 percent, the ruble remains stable, inflation has been moderate (11.9 percent), and investment began to increase again.
Russia had an extremely poor record of attracting FDI until very recently. For example, Russia’s cumulative FDI stock between 1991 and 2004 was US$4,478 million. In comparison, Poland, being a significantly smaller country than Russia, had a cumulative FDI stock of US$51,906 million over the same period of time. Integrating the Russian economy with the rest of the world through commerce and expanded foreign investment has been a high priority of Russian economic reform. However, a significant drawback for investment is the banking sector, which lacks the resources, capability, and 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 percent of overall investment in Russia.
Labor collective under communism issued the essential benefits to the labor force, but tied workers to the enterprise. The labor system under postsocialism needs a redevelopment of its role. Russian companies tend to mostly focus on core competencies and cannot afford to ensure workers’ effective representation. Many of the social provisions are therefore passed on to the local councils who also cannot afford them. Hence, employees in Russian enterprises have few means of representation, and the development of new, independent trade unions is slow.
After the collapse of the Soviet Union, companies in Russia had severe debts to their staff, utilities providers, and materials suppliers. Thousands of companies could not pay their staff in the period 1993–2000. Many thousands of staff left these firms and the country suffered from a high unemployment rate. However, after the turn of the century, the situation was gradually improving and it is less of a problem now, employees generally being paid on time and the unemployment rate decreasing to 5.9 percent in 2007.
There has been an increasing importance of financial-industrial groups (FIGs), which are large holding companies acquiring hundreds of smaller enterprises and are based around a main bank. There has been a remarkable growth of huge business empires. Russia has three multinational corporations in the Fortune Global 500 and a larger number of billionaires than any other country in the world after the United States. While strategic FSEs in oil, gas, metals, and some parts of automobile and aircraft sectors are surviving and prospering, the vast majority of FSEs, on the other hand, are left in a state of slow decay and will eventually collapse.
On the downside, political, legislation, and management problems still remain in Russia today. On the one hand, the end to state planning liberated Russian enterprises: they can choose any sector, products, or strategies they want. On the other hand, they lost their previously guaranteed customers, clients, and most importantly, subsidies overnight. Russian companies were established with quite different environments in mind. Many are located far from their markets, with no customers and no market for their goods. Technologies and processes still remain extremely outdated. Skills development is also troublesome because some educational institutions are still turning out skilled staff whose skills are now redundant.
Even though there have been some successful investments in energy and services, there has been very little investment in technology. Despite software being a major domestic growth sector, there is no high-technology sector in manufacturing. Moreover, conversion of Soviet plants from military to civilian use has been a major disappointment. In addition, there have been very limited reforms of actual management and work systems in Russian companies.
Another major problem in Russia today is that public sector workers are often horrendously underpaid. Local government bureaucrats, police, army, and educational institution workers often do not receive a living wage, thus becoming vulnerable to bribery and corruption.
As for institutional reforms, they remain very slow. Although law and tax reforms are in place, they are not widely trusted and there is a lack of law enforcement in many areas of the economic activity. For example, the Russian state has a very poor tax collection record. In addition, crime has increased costs for both local and foreign businesses. On the positive side, however, Russian businesses are increasingly turning to the courts to resolve disputes.
Russia’s leading cities like Moscow, the capital, and St. Petersburg, the second-largest city, are now modern consumer metropolises, but there are massive differences in wealth between the cities and the more traditional countryside. Nevertheless, the middle class has grown from just 8 million people in 2000 to 55 million people in 2006.
Russia is a vast and diverse nation with a rich cultural heritage that after almost seven decades of communism continues to evolve politically and economically. With the world’s largest supplies of raw materials, oil and gas revenues heavily support Russia’s economy. Recently, within the big cities, a consumer economy has been established. Russia also has a well-educated labor force with substantial technical expertise. Since the turn of the century, rising oil prices, increased foreign investment, higher domestic consumption, and greater political stability have boosted economic growth. The country ended 2007 with its ninth straight year of growth, averaging 7 percent annually since the financial crisis of 1998. In 2007 Russia’s GDP was $2.076 trillion, the seventh-largest in the world, and GDP per capita was US$14,600. Although the immediate prospects of the Russian economy appear uncertain, and political, legislation, and management problems still remain, the longer-term potential of the country is enormous.
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- Douglas W. Blum, Russia and Globalization: Identity, Security, and Society in an Era of Change (Woodrow Wilson Center Press, 2008);
- Simon Clarke, The Formation of a Labour Market in Russia (Edward Elgar, 1999);
- Federal State Statistics Service, www.gks.ru (cited March 2009);
- Thomas Gomart and Andrew Kuchins, EURussia Relations: Toward a Way Out of Depression (Center for Strategic & International Studies, 2008);
- Thane Gustafson, Capitalism Russian Style (Cambridge University Press, 1999);
- Ted Hopf, Russia’s European Choice (Palgrave Macmillan, 2008);
- Andrew Kuchins, Amy Beavin, Anna Bryndza, and Thomas Gomart, Russia’s 2020 Strategic Economic Goals and the Role of International Integration (Center for Strategic & International Studies, 2008);
- Katlijn Malfliet, Lien Verpoest, and Evgeny Vinokurov, The CIS, the EU and Russia: The Challenges of Integration (Palgrave Macmillan, 2007);
- Robert W. Orttung, Russia’s Energy Sector Between Politics and Business (Forschungsstelle Osteuropa an der Univ. Bremen, 2008);
- Charlie Patel and Oliver J. Dhesi, Russia: Economic, Political & Social Issues (Nova Science, 2008);
- Thomas Rutherford and David Tarr, Regional Household and Poverty Effects of Russia’s Accession to the World Trade Organization (World Bank, 2008);
- Peeter Vahtra, Economic Power and Economic Strategy in Russia (Routledge, 2008);
- Tobias Weigl, Strategy, Structure and Performance in a Transition Economy: An Institutional Perspective on Configurations in Russia (Gabler, 2008);
- Stephen White, Media, Culture and Society in Putin’s Russia (Palgrave Macmillan, 2008).
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