B&M \ About Russia \ Economy

Economy

Russia, a vast country with a wealth of natural resources, a well-educated population, and a diverse, but declining, industrial base, continues to experience formidable difficulties in moving from its old centrally planned economy to a modern market economy. One of the biggest problems in the transitions is that Russia has failed to make any progress in restructuring its social welfare programs to target the most needy – among whom are many of the old pensioners – or to pass needed tax reform. While approximately 75% of industry has now been privatized, the agricultural sector has undergone little reform since the break-up of the Soviet Union. Stockholder rights remain weak while crime and corruption are rampant in much of the economy. Many enterprises continue to operate without hard budget constraints, resulting in barter trade and increased inter-enterprise debts.

Seven years after the collapse of the USSR, Russia is still struggling to establish a modern market economy and achieve strong economic growth. Russian GDP has contracted an estimated 43% since 1991, including a 5% drop in 1998, despite the country’s wealth of natural resources, its well-educated population, and its diverse-although increasingly dilapidated-industrial base. By the end of 1997, Russia had achieved some progress. Inflation had been brought under control, the ruble was stabilized, and an ambitious privatization program had transferred thousands of enterprises to private ownership. Some important market-oriented laws were also passed, including a commercial code governing business relations and an arbitration court for resolving economic disputes. But in 1998, the Asian financial crisis swept through the country, contributing to a sharp decline in Russia’s earnings from oil exports and resulting in an exodus of foreign investors. Matters came to a head in August 1998 when the government allowed the ruble to fall precipitously and stopped payment on $40 billion in ruble bonds. Ongoing problems include an undeveloped legal and financial system, poor progress on restructuring the military-industrial complex, and persistently large budget deficits, largely reflecting the inability of successive governments to collect sufficient taxes. Russia’s transition to a market economy has also been slowed by the growing prevalence of payment arrears and barter and by widespread corruption. The severity of Russia’s economic problems is dramatized by the large annual decline in population, estimated by some observers at 800,000 people, caused by environmental hazards, the decline in health care, and the unwillingness of people to have children.

Real GDP in Russia over the past five years (1994-1998) has declined by 11.2%. Spill over from the ongoing East Asian economic crisis, as well as a sharp fall in the price of oil and gas – the source of almost 40% of Russia’s hard currency earnings and export revenues – have, among other things, led to increased pressures on Russia’s currency, the ruble. With world oil prices down a third since late 1997, Russia’s crude oil export revenues fell by 25% during the first half of 1998 compared with the same period last year. In addition, natural gas export revenues were down 18% during the same period, largely because of declines in natural gas prices.

Gross Domestic Product (GDP), which declined by 5% in 1998, rebounded to positive growth of 1.5 to 2.0 % in 1999. The government’s efforts to reduce inflation also produced positive results in 1999 as the annual rate dropped from 84% in 1998 to approximately 40% and dropped below 2% a month at the close of the year. Industrial production, which has been in “free fall” since 1990, achieved double-digit growth for the year. Forecasts of economic performance for 2000 are obstructed by the current impasse with the IMF, which suspended the latest tranche of financial aid due to Russia’s failure to comply with agreed structural reform conditions. Restructure of Soviet era debt with the London Club has also stalled and Russian foreign currency debt is falling on world markets as a consequence. Increasingly, western leaders are tying further aid to a resolution to the situation in Chechnya. Russia, with over $150 billion in foreign debt, may resort to ruble emission as a short-term solution.

GDP World Rankings:
In terms of key economic indicators, Russia in 1999 had a gross domestic product (GDP) of $US 583.6 billion (in 1995 $US), a population of 146.52 million and a GDP per capita of $US 3,983. In terms of global rankings, this placed Russia 14 out of 191 countries in terms of GDP, 6 out of 191 countries in terms of population and 84 out of 191 countries in terms of GDP per capita.

Regional Situation:
In terms of key economic indicators, Russia in 1998 had a gross domestic product (GDP) of 492.8 billion (in 1990 $US), a population of 146.9 million, and a GDP per capita of $3,356. In terms of global rankings, this placed Russia 14 out of 191 countries in terms of GDP, 6 out of 191 countries in terms of population, and 83 out of 191 countries in terms of GDP per capita.

B&M \ About Russia \ Economy