Russian Economy: Here’s Everything You Need to Know
The Russian economy is the world’s 9th largest economy ($1.86 trillion) by nominal value and the sixth largest by Purchasing Power Parity ($2.51 trillion). It was massively transformed by the introduction of the free market system in 1991 and despite early difficulties has gone on to become one of the most influential new world BRIC economies.
Since 1998 Russia posted 5% gains each year until the financial crisis of 2008 caused an 8% drop. This recession was short lived however, growth was restored in 2010, but this had more to do with recovering oil prices, rather than the overall resilience of the Russian economy.
An Non-Diversified Economy
Russia is a country rich in minerals, the Ural mountains are a rich source of nickel, chromium, gold and magnetite, while Siberia contains vast reserves of oil, gas and coal. These minerals form the bedrock of the Russian economy.
Over 80% of Russian exports are mineral based. By far the biggest of these is crude oil, which represents 32% of exports, followed by natural gas at 13% and coal at 2.3%. Other mineral commodities such as aluminum, nickel and titanium make up the rest.
Overreliance on minerals makes the Russian economy susceptible to oil price movements. If the price of oil were to halve for instance, Russia’s GDP would drop dramatically and the country would be plunged into a recession. As a result the Russian rouble is heavily dependent on the oil price, when the price of oil goes down, so does the rouble.
This lack of diversification is a major concern; the World Economic Forum has expressed doubts about Russia’s long term growth plans and warns of social unrest if the economy were to collapse. It says the vast majority of Russia’s population are unaware of their economy’s frailties and are living under an illusion of economic stability.
Steps to Diversification
Russia desperately needs to diversify its economy, they’re showing signs of improvement, particularly in the technology sector, but progress is painfully slow. With the energy and mining sectors representing 80% of exports there’s a lot of work to do.
One of the first steps President Medvedev took when coming to power in 2008 was to build a more robust financial system, in order to attract foreign investment. But Russia is still viewed as a wild west town with regards to company compliance and financial regulations, making foreign investors wary of investing money.
There needs to be massive infrastructure development, greater compliance and a strong independent regulatory authority before foreign investors take Russia seriously as a financial center.
The aerospace sector is another area Russia is keen to develop, aerospace currently accounts for around 335,000 jobs. The airplane manufacturer Sukhoi, famous for building fighter jets during the cold war, has developed the Sukhoi Superjet which they’re hoping to sell in key Asian markets.
But they face strong global competition in this sector, from both established players like Boeing and Airbus to emerging manufacturers like Embraer and Bombardier. Not to mention China is also looking to enter this arena.
There is more hope in the technology sector; Russia is already home to 3% of the worlds offshore software development and some Russian technology companies are starting to make a name for themselves in the west, namely internet security specialist’s Kaspersky.
There are plans to build several technology parks and create silicon valley like communities to further develop the Russian technology industry. But this sector alone isn’t enough to counterbalance the massive energy and mining sectors.
Long Term Outlook
In the long term term Russia has some major issues to contend with, so long as there isn’t a collapse in global commodities prices, they should be OK.
On the plus side, they’re saying all the right things and recognise there is a problem. But there is no quick fix. Massive infrastructure investment needs to be undertaken and stronger regulatory requirements need to be established. Then Russia can sit at the big table, but it could be a generation or more before they get there.