Economy and Trade
Following 10 years of economic pain and political instability after the collapse of the Soviet Union in 1991, Russia has enjoyed strong economic growth for much of the current decade, supported by buoyant commodity prices. For Russia is the world’s largest exporter of natural gas, and, since 2007, its largest exporter of oil. Fueled by income from Russia’s vast natural resources, including oil and gas, the economy grew by an average of 7% a year from 2000 to 2007. Real disposable income nearly doubled between 2002 and 2007.
Yet despite its ambitions to regain its superpower status, Russia exhibits the characteristics of a developing, rather than an advanced, economy. Resources dominate Russia’s economy, and its exports. The manufacturing base is narrow, and much of the infrastructure obsolete. Excessive bureaucracy, corruption, insufficient and insufficiently enforced legislation, and selective interpretation of laws remain considerable obstacles to conducting business in the country. The European Union is Russia’s largest trading partner, a relationship worth US$197 billion in 2006, and underpinned by Russia’s position as the EU’s major energy supplier—the European Union is dependent on Russia for approximately a quarter of both its gas and its oil imports.
Economic Policy over 12 Months
The government intends to maintain high public spending to support the economy. However, with tax revenues falling sharply along with international oil prices (the energy sector accounts for around half of total federal budget revenues), public finances are, inevitably, deteriorating. Indeed, officials have said that Russia faces a budget deficit of around 8% in 2009, up from 5.6% in 2008. The ratings agencies have responded by downgrading government debt. In December 2008 and February 2009, respectively, Standard & Poor’s and Fitch cut their ratings on the government’s foreign-currency bonds from BBB+ to BBB, with a negative outlook. The government may thus have little option but to cut public spending. The authorities have already announced that they may suspend the bailout of certain sectors other than finance.
In 2008, the government bowed to pressure from oil companies and announced wide-ranging tax cuts for the sector. Russian oil firms had complained that heavy taxes prevented them from investing in new exploration to offset declining output in mature fields in West Siberia. Russia’s oil output declined for the first time in a decade in 2008, dropping by 0.7%. However, the government may be considering further tax cuts for the sector. In March 2009, energy minister Sergei Shmatko argued that if wider tax breaks were not implemented, oil production could fall further.
The government’s failure to press ahead with economic reforms may be exacerbating the impact of the global financial crisis on Russia. Investors have certainly turned away from Russia faster than from other former Communist countries. Russia suffered capital outflows in excess of US$130 billion in the fourth quarter of 2008, following net inflows of US$1.3 billion in the first nine months of 2008, and US$85.9 billion in 2007. The government’s cavalier treatment of foreign investors may also be coming back to haunt the country. In 2008, the authorities abused tax and visa laws to eliminate the United Kingdom-based energy giant BP’s hold on its Russian oil joint venture, TNK-BP, the latest in a series of examples of trampling on the rights of foreign investors.
The collapse of the rouble in the second half of 2008 prevented the authorities from using monetary policy to boost liquidity and the economy. The central bank has sought to support the rouble through high interest rates and tight liquidity, prompting criticism from industrialists, who have complained that prohibitive lending rates are stifling their enterprises. The bank has also been concerned that the falling currency would ignite inflation. In early 2009, however, inflation appeared to be stabilizing, and the central bank hinted that it might cut interest rates if the rouble’s depreciation and inflation are contained. In February 2009, inflation amounted to 1.7% (month on month), higher than the 1.2% recorded in February 2008, but much lower than in January 2009, when prices jumped by 2.4%.
Economic Performance over 12 Months
Russia is among the emerging markets that have been hardest hit by the global financial crisis. Russia’s oil- and gas-fueled economy began to slump in fall 2008, as the international price of oil began to tumble along with global growth. Capital has flowed out of the country, and export earnings have plunged, along with the price of oil (hydrocarbon exports account for two-thirds of total exports). As a consequence, the rouble depreciated by more than 50% against the US dollar between mid-July 2008 and February 2009. By March 2009, the Kremlin had spent more than US$200 billion of its reserves to defend the rouble. The remaining US$380 billion constitute the third-largest reserves in the world, but the government appears divided over how best to use them.
The prospects for 2009 appear bleak. The economy ministry believes that the economy will shrink by 2.2% in 2009, but independent economists believe that it will shrink by at least 3%. The economy contracted at an annual pace of 8.8% in January 2009. The January reading of the leading growth indicator, compiled by VTB, one of Russia’s largest banks, showed its largest fall since February 1999 (in the wake of Russia’s 1998 economic crisis).
The authorities’ consumer confidence survey also fell to an eight-year low in the fourth quarter of 2008. Given the dire state of the labor market, this is unsurprising. Half a million workers lost their jobs in December alone, and two million had lost their jobs since September 2008, while real wages fell for the first time in nine years in December. Russia’s unemployment rate rose to 7.7% during the same month, the highest rate since November 2005. The unofficial unemployment rate is, however, much higher, and many Russians with jobs are on indefinite unpaid leave. By March 2009, around 500,000 Russians were also waiting to be paid late wages.
The country’s external finances remained in a healthy position in 2008, thanks to the high oil prices that prevailed for much of the year. The current account recorded a record surplus of US$98.9 billion. However, the outlook for 2009 is much bleaker. The central bank has forecast that the current account will fall into deficit if the oil price stays below US$66 a barrel, which it almost certainly will.
Support for Inward Investment and Imports
Russia has an ambivalent attitude towards foreign investors. In 2008, the Organization for Economic Cooperation and Development (OECD) urged the government to adopt a more investor-friendly regime, saying that “the biggest obstacle to further domestic and foreign investment in Russia remains uncertainty over government policy, notably the risk of greater state interference in the economy and the impact of the postponement of necessary administrative and regulatory reforms.” In the same year, the country’s investment image was further tarnished by a fierce shareholder struggle at the TNK-BP oil venture. BP accused its Russian partners of using corporate-raider tactics to wrest control of the company. The Russian government certainly appears intent on limiting foreign participation in the energy sector. However, the OECD warned in 2008 that “stricter restrictions on foreign participation in oil and gas prospecting and extraction risk further aggravating the difficulties faced in these sectors, which are already struggling to cope with difficult exploitation conditions and growing domestic and international demand.”
The Foreign Investment Promotion Center is the government agency responsible for foreign investment. For further information, see its website.
Russia maintains a number of barriers with respect to imports, including: tariffs and tariff-rate quotas; discriminatory and prohibitive charges and fees; and discriminatory licensing, registration, and certification regimes. Russia is currently negotiating to join the World Trade Organization (WTO), and will have to eliminate these measures or modify them to be consistent with internationally accepted trade policies. Non-tariff barriers are frequently used to restrict foreign access to the market, and are also a significant topic in Russia’s WTO negotiations.
Various tax exemptions are available in Russia, but, given the federal structure of the government, these vary from one region to another, and it is best to approach the local authority where you are planning to conduct business.
GDP growth: 5.6% (2008, government figures)
GDP per capita: US$15,800 (2008, est.)
CPI: 13.4% (January 2009 annual, government figures)
Key interest rate: 8.3% (December 2008, interbank rate)
Exchange rate versus dollar: roubles per US dollar—24.3 (2008, est.)
Unemployment: 7.7% (December 2008, government figures)
FDI: US$491.2 billion (2007)
Current-account deficit/surplus US$98.9 billion (2008)
Population: 140,702,096 (July 2008, est.)
Source: CIA World Factbook except where stated