Russia’s Economic Performance and Policies
and Their Implications for the United States
William H. Cooper
Specialist in International Trade and Finance
June 29, 2009
Congressional Research Service
7-5700
www.crs.gov
RL34512
CRS Report for Congress
P
repared for Members and Committees of Congress
Russia’s Economic Performance and Policies and Their Implications for the United States
Summary
Until recently, the Russian economy was one of the fastest growing economies in the world. The
growth brought an improvement in the standard of living of the average Russian citizen and also
brought economic stability that Russia had not experienced in at least a decade. This strong
economic performance had been a major factor in the popular support that the Russian leadership
enjoyed and was also arguably a factor in the boldness with which that leadership reasserted
Russia’s status as a world power, challenging the United States, Europe, the neighboring former
Soviet states in economic and national security areas.
However, as has been the case with most of the world’s economies, the Russian economy has
been hit hard by the global financial crisis and recession, the effects of which have been readily
apparent since the fourth quarter of 2008. The crisis brought an abrupt end to the decade’s long
(1999-2008) economic growth with real gross domestic product (GDP) increasing 6.9% annually
on average. Russia is expected to experience negative growth in 2009 and only modest growth at
best in 2010. Its real GDP decreased 9.8% during the first quarter of 2009
The high oil prices were a major factor in the economic success Russian enjoyed, especially in
the early and middle parts of this decade; however, the collapse of world prices for oil and other
commodities in 2008 exposed the downside of Russia’s dependence on the production and export
of oil, gas, and other natural resources. The failure of Russia to complete important economic
reforms and the government’s penchant for re-asserting its control over key economic sectors
loom among the possible roadblocks to a return to high economic growth rates down the road.
Although its influence has been greatly diminished since the Soviet period, Russia remains a
formidable force on the global stage, and its influence seems to be growing. Russia’s economy is
large enough to influence global economic conditions. Many European countries and former
Soviet states are highly dependent on Russian natural gas. Russia is a significant player on a
number of issues critical to the United States, for example, nuclear proliferation by Iran and
North Korea. Russia’s perceived national interests do not always match those of the United
States, creating an environment for disagreement if not conflict.
While U.S. exports to Russia are still relatively small, it is an important market for U.S. exporters
of poultry, energy equipment, and technology. Russia is also an important supplier of a number of
raw materials that are critical to U.S. manufacturers. These links have drawn the attention of
some Members of Congress. Congress may consider in the near future whether to extend
permanent normal trade relations (PNTR) status to Russia.
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Russia’s Economic Performance and Policies and Their Implications for the United States
Contents
The Immediate Post-Soviet Period .............................................................................................. 2
10 Years of Economic Growth..................................................................................................... 5
Internal Economic Conditions and Trends ............................................................................. 5
Foreign Trade and Investment Trends.................................................................................... 7
Russian Economic Policies.......................................................................................................... 9
Rationalizing Government Expenditures and Revenues ......................................................... 9
Implementing Structural Economic Reforms ....................................................................... 10
Integrating Russia with the Global Economy ....................................................................... 12
Implementing Other Reforms .............................................................................................. 12
Reasserting State Control of “Strategic” Sectors .................................................................. 13
The Role of Oil and Other Natural Resources ............................................................................ 15
The Global Economic Crisis and the Outlook for the Russian Economy .................................... 18
Implications for the United States.............................................................................................. 21
Figures
Figure 1. Annual Growth of Real Russian GDP, 1992-2008 ......................................................... 6
Figure 2. Russian Oil Production, 1989-2008 ............................................................................ 15
Figure 3. Oil Prices, 1989-2009................................................................................................. 16
Figure 4. Net Russian Exports of Oil, 1992-2008....................................................................... 17
Tables
Table 1. The Russian Economy at a Comparative Glance............................................................. 2
Table 2. Major Russian Internal Economic Indicators, 1999-2008................................................ 6
Table 3. Select Russian External Economic Indicators, 1999-2008............................................... 8
Table 4. U.S. Merchandise Trade with Russia, 1992-2008 ......................................................... 21
Contacts
Author Contact Information ...................................................................................................... 23
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Russia’s Economic Performance and Policies and Their Implications for the United States
s has been the case with most of the world’s economies, the Russian economy has been
hit hard by the global financial crisis and resulting recession that became readily apparent
A in the last quarter of 2008. Even before the financial crisis, Russia was showing signs of
economic problems when world oil prices plummeted sharply around the middle of 2008,
diminishing a critical source of Russian export revenues and government funding.
The crisis brought an abrupt end to about a decade (1999-2008) of impressive Russian economic
growth that helped to raise the Russian standard of living and brought economic stability that
Russia had not experienced for more than two decades. This success was a major factor in the
popular support that former President (now Prime Minister) Putin and the current president,
Dmitrij Medvedev enjoyed, and it was also arguably a factor in the boldness with which the
Russian leadership reasserted Russia’s status as a world power, challenging the United States,
Europe, the other former Soviet states, including its military confrontation with Georgia in
August 2008. The sudden downturn could undermine the popular support and Russia’s ability to
project its foreign policy interests.
Russia has some of the world’s largest reserves of oil, natural gas and other raw materials, many
of which are critical to industrialized countries. Many European countries and former Soviet
states are highly dependent on Russian natural gas. Russia is a significant player on a number of
issues critical to the United States, such as nuclear proliferation by Iran and North Korea.
Russia’s perceived national interests do not always match those of the United States, creating an
environment for disagreement if not conflict.1 Russia is also a member of the G-8 group of highly
developed economies.
While U.S. exports to Russia are still relatively small, Russia is an important market to U.S.
exporters of poultry, energy equipment, and technology.. Russia is also an important supplier of a
number of raw materials that are critical to U.S. manufacturers. These links have drawn the
attention of some Members of Congress. Hearings have been held on Russian economic
performance and policies recently.2 Congress may consider whether to pass legislation to extend
permanent normal trade relations (PNTR) status to Russia.3
Russian economic policies and performance raise important policy questions for the United States
and the U.S.-Russian relationship which this report addresses. Might Russia’s robust economic
growth return? Is an economically strong Russia a threat or benefit to the United States? Is Russia
following economic strategies that promote a market economy that underlies the international
trade system manifested in the WTO?
1 For more information on U.S.-Russian relations, see CRS Report RL33407, Russian Political, Economic, and
Security Issues and U.S. Interests, by Stuart D. Goldman.
2 House of Representatives. Committee on Financial Services. Subcommittee on Domestic and International Monetary
Policy, Trade, and Technology. Hearing. U.S.-Russia Economic Relationship: Implications of the Yukos Affairs. Serial
No. 110-71. 2008. 65p.
3 For more details on PNTR for Russia see CRS Report RS21123, Permanent Normal Trade Relations (PNTR) Status
for Russia and U.S.-Russian Economic Ties, by William H. Cooper.
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Table 1. The Russian Economy at a Comparative Glance
(Key Economic Indicators)
Russia
China
United
States
GDP (2008)
-Nominal (billions of $U.S.)
$1,671
$4,194
$14,265
-PPP (billions of $U.S.)a
2,259
8,148
14,265
Per Capita GDP (2008)
-Nominal
$11,785
$3,160
$46,950
-PPP (U.S. Dollars)
15,930
6,140
46,950
Real GDP Growth Rates (2008)
5.6%
9.0%
1.1%
Average Annual Real GDP Growth Rate (1999-2008)
6.9%
9.8%
2.6%
Source: CRS with data from the Economist Intelligence Unit.
a. PPP stands for purchasing-power parity which measures the cost of a basket of goods and services in the
local economy in dollars in order to make international comparisons. A number of experts consider PPP to
be a more accurate estimate than nominal measurements.
The Immediate Post-Soviet Period
The first seven years of Russia’s transition from the Soviet central planned economy (1991-1998)
were not easy. This [period, which coincided with most of the regime of President Boris Yeltsin
were, by most accounts, a time of economic chaos, if not near collapse and failure.
During the period, Russia lost close to 30% of its real gross domestic product (GDP), a decline
reminiscent of the Great Depression of the 1930s in the United States.4 Russia also suffered very
high rates of inflation– over 2,000% in 1992 and over 800% in 1993– before it declined to more
tolerable, but still high, levels of around 20% by the end of the 1990s. The inflation robbed
Russian citizens of their savings as the value of the ruble collapsed, eventually forcing the
Russian government to sharply devalue the ruble on January 1, 1998, with 1 new ruble equaling
1,000 old rubles. As a hedge against inflation, some residents, who were in a position to do so,
invested in hard assets such as art works, foreign currencies, and real estate. But the greater
portion of the population saw their savings evaporate. The disposable income (income available
after taxes) of the average Russian declined 25% in real terms between 1993 and 1999.5
The quality of life of the average Russian deteriorated in other terms. In 1991, the life expectancy
of the average Russian male was 64 years and for the average Russian woman it was 74 years. By
1999, the life expectancy had declined to 59 years for males and 72 for females.
4 CRS calculations based on official Russian data collected by the Economist Intelligence Unit (EIU).
5 EIU.
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Russia did not perform much better in the foreign sector. Foreign direct investments (FDI) flows
were meager given the size and needs of the Russian economy. Furthermore, Russia was
incurring serious capital flight– some $150 billion worth between 1992 and 1999 by one
estimate.6 Russian foreign debt soared in part because Russia had taken on the foreign debts of
the entire former Soviet Union in an arrangement made with the other former Soviet states.
However, Russia had also incurred its own foreign obligations since the collapse of the Soviet
Union.
The economic problems were in part a continuation of economic collapse that was a factor in the
demise of the Soviet government. The problems were also in part the result of the rapid
disintegration of an economic system in which the state, guided by the communist party,
maintained complete control and market forces were an anathema. It was a system in which the
government emphasized heavy industry production regardless of cost and to the detriment of
other sectors, including agriculture, services, and consumer industries. The central planned
economy also operated huge production facilities that proved to be inefficient, not very adaptable
to change, often producing products of poor quality, and not competitive in world markets.
However, the problems were also the product of poorly executed, if not poorly conceived,
economic policies of the Yeltsin regime. The regime failed to rein in government spending as it
tried to deal with the Soviet legacy of massive subsidies for industry and the population. During
the period, the Russian government ran up large budget deficits that reached as high as 9.8% of
GDP, forcing the government to finance debt at very high interest rates. The Yeltsin regime was
also criticized for employing “shock therapy,” or radical macroeconomic measures, as part of its
economic reform program, largely attributed to then-Prime Minister Yegor Gaidar. Critics
claimed that the measures unnecessarily created inflation and destabilized the economy because
market prices were introduced too early in the reform process.
The most controversial aspect of the early post-Soviet economic transition was the effort to
privatize state-owned and operated production facilities, in particular, the so-called loans for
shares program. In 1995, the government auctioned off to local banks shares in 29 of the most
potentially lucrative firms, including major oil companies and mineral producers (Yukos, Lukoil,
Sufgutneftegas, and Novolietsk Iron and Steel).7 The banks held the shares as collateral against
which they issued loans to the government to finance its ballooning deficits. The auctions were
controlled by individuals with close ties to the Yeltsin regime and whose banks won the bids.
They obtained the shares at a fraction of their market value and were able to keep them when the
government failed to pay back the loans. The government did not challenge their control of these
assets because their owners, who became known as “oligarchs,” financed Yeltsin’s reelection as
president in 1996. They used their new wealth to gain control over other interests such as the
media. The privatization program also resulted in small and medium-sized firms owned by those
who managed them during the Soviet period–the “red directors.”8
6 Capital flight is an abnormal flow of funds whose holders seek safe havens from financial uncertainty and taxation or
to launder proceeds from illegal activities, It is a sign of lack of confidence in the local economy and deprives the local
economy of the use of the capital and decreases tax revenues.
7 OECD. The Investment Environment in the Russian Federation. 2001. p.148.
8 Aslund, Anders. Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed. Peterson
Institute for International Economics. Washington. October 2007. p. 161-164.
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Russia’s economic problems came to a head in the financial crisis of August 1998. The crisis
proved to be a pivotal event in Russia’s transition to a market economy. It exposed many of the
weaknesses of Russian economic policies and the need for economic reform.9
The crisis culminated in August 1998, when the government abandoned its defense of a strong
ruble. It also defaulted on official domestic debt, forcing its restructuring and imposed a 90-day
moratorium on commercial external debt payments. The crisis led to the demise of many Russian
banks, owned by “oligarchs,” which had held government debt.
Symptoms of the crisis developed months before August: Russian interest rates soared; prices on
the Russian stock market plummeted; and the value of the Russian ruble sank. (Between the end
of July 1998 and the end of September 1998, the ruble lost 60% of its (nominal) value in terms of
the dollar.10) In addition, foreign reserves declined sharply–between the end of July 1998 and
August 1998. The reserves, including gold, dropped from $18.4 billion to $12.5 billion,11 and real
GDP declined 4.9% in 1998.12
The immediate cause of the crisis was the accumulation of Russian government short-term debt in
the form of Treasury bills (the GKOs) and bonds (OFZs), to finance burgeoning budget deficits.
As long as the Russian government could service the debt, it managed to maintain large budget
deficits without incurring inflation and was able to keep the ruble stable. But beginning in 1997
and into 1998, a number of forces came into play that placed Russia in a financially vulnerable
position:
• World prices for oil and other commodities, on which Russia depends for much
of its foreign currency earnings, plummeted, putting downward pressure on
foreign currency reserves and making it more difficult to service the debt and
defend the ruble.
• The Asian financial crisis, which occurred at the same time, made investors much
more wary of holding risky short-term securities such as GKOs.
Foreign economic shocks that hit a financially vulnerable Russia largely explain the suddenness
of the 1998 financial crisis. But Russia became vulnerable because of more fundamental
problems associated with its economic policy and economic structure. These included the failure
to institute tax reform, property rights, and bankruptcy laws and procedures.
Despite the setbacks, Russia made some strides toward economic reform during this period. It
jettisoned the centrally planned economic system and introduced market prices for most goods
and services, it made the Russian ruble convertible for trade transactions, and the economy was
opened to foreign trade and investment. The downturn in the Russian economy was likely given
its a transition from an economy that was 100% controlled by the state at the direction of
9 For a more detailed analysis of the financial crisis see (archived) CRS Report 98-578, The Russian Financial Crisis of
1998: An Analysis of Trends, Causes, and Implications, by William H. Cooper.
10 Furthermore, the ruble continued to decline losing 71% of its value from April to the end of 1998. Measured on a real
effective exchange rate basis (adjusted for inflation), the ruble depreciated 41% between April and December 1998.
CRS calculations based on data in Central Bank of Russia data published in Russian Economic Trends. September 15,
2000. p. 29.
11 Ibid.
12 Ibid. p.22.
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ubiquitous communist party officials. At the same time, the downturn was exacerbated by bad
policies.
The turmoil of the economic crisis and Yeltsin’s poor personal health and very low level of
popular support led him to relinquish the Presidency to his Prime Minister, Vladimir Putin, whom
Yeltsin had appointed in July 1999. Putin became acting President on December 31, 1999, which
set him up to win election as president in his own right in March 2000.13
10 Years of Economic Growth
Beginning in 1999 and through mid-2008, Russia’s economic fortunes reversed on many
accounts. The radical improvement was arguably a factor in the wide popularity that Putin
enjoyed during his term. At the same time, improved economic conditions brought a significant
degree of economic stability to Russia.
Internal Economic Conditions and Trends
As Figure 1 and Table 2 show, Russia experienced strong economic growth over the last 10 years
(1999-2008), during which time its real GDP has increased 6.9% on average per year in contrast
to an average annual decline in GDP of 6.8% during the previous seven years (1992-1998). The
positive GDP trends are reflected in other measurements that point to an improved Russian
standard of living throughout the period. Average real wages in Russia increased 10.5% per year
from 1999-2008. In addition, real disposable income (the income that the average Russian
resident has available from all sources after taxes) grew 7.9% from 1999 to 2008. The Russian
unemployment rate also declined during the 1999-2008 period, from 12.6% to 6.3%.
During the first years after the collapse of the Soviet Union, the Russian population was plagued
by increasing rates of poverty. In 2000, 29% of the Russian population was living below the
officially calculated poverty line. By 2007, the rate had dropped to 13%.14 In addition, private
consumption increased–another sign of improved living standards—from 44.9% of Russian GDP
in 1992 and to 49.0% of Russian GDP in 2008.15
13 Economist Intelligence Unit. Country Profile 2007: Russia. p.5.
14 Official Russian government data from Goskomstat. http://www.gks.ru. A World Bank study shows similar trends
but using a different methodology. The World Bank. The World Bank in Russia. Russian Economic Report No. 18. p.
17.
15 Economist Intelligence Unit.
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Figure 1. Annual Growth of Real Russian GDP, 1992-2008
(in percents)
15
10
5
0
-5
-10
-15
-20
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: CRS constructed from data collected by the Economist Intelligence Unit.
Table 2. Major Russian Internal Economic Indicators, 1999-2008
(percentage growth from previous year)
Year Real
GDP Consumer Price
Average real
Real personal
Unemployment
Growth
Index
wages
disposable income
rate
1999 6.4 85.7
-23.2
-8.8
12.6
2000 10.0
20.8
18.0
11.3
10.5
2001 5.1 21.5
19.9
8.7
9.0
2002 4.7 15.8
16.2
9.7
8.1
2003 7.3 13.7
9.8
13.5
8.6
2004 7.2 10.9
10.3
8.6
8.2
2005 6.4 12.7
12.6
11.5
7.6
2006 6.7
9.7
14.4
10.2
7.2
2007 8.1
9.0
16.2
12.0
6.2
2008 5.6 14.1
10.3
2.7
6.3
Source: Economist Intelligence Unit.
Despite this favorable picture, Russia has been plagued by continuing problems. Inflation, while
down from the sky-high rates of the 1990s, inflation rates remained high. From 2006 to 2008, the
consumer price index rose by 9.7%, 9.0% and 14.1%, respectively. The life expectancy of the
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average Russian citizen, particularly males, remains low for an advanced country. In 2006, it was
73.2 years for a Russian woman and 60.4 years for a Russian male.16 Increases in alcoholism and
other diseases, some of which like tuberculosis have been nearly eradicated in developed
countries, have contributed to relatively low life span, especially for males. It is also explained by
the poor and deteriorating health system which has been slow to adjust to the transition from
central planning. The high mortality rate is contributing to shrinkage of the Russian population of
an average of 0.3% during 2002-2008 period. That means that the average age of the Russian
population will increase, leading to a decline in the pool of working age individuals–a trend that
does not bode well for future economic growth.
Economic data indicate also that, as the Russian economy has grown, the distribution of income
within Russia has become increasingly unequal during the post-Soviet period. A standard measure
of income distribution is the Gini coefficient (or index) which is on a 0.00 to 1.00 scale. The
lower the number, the more equal the income distribution. Thus, 0.00 is perfectly equal income
distribution, while 1.00 is totally unequal. In 1992, Russia’s Gini-coefficient was 0.289.17 By
2007, it had increased to 0.422.18
Before the collapse of the Soviet Union, the richest 20% of the Russian population accounted for
30.7% of Russian income, while the poorest 20% accounted for 11.9%. In 2006, the richest 20%
held 46.8% of the income, while the poorest 20%’s share had declined to 5.4%. The middle 60%
of the population’s share had declined from 57.4% in 1992 to 47.8% in 2006.19 The two sets of
income distribution measurements mean that while the Russian standard of living has improved, a
small segment of the population is enjoying close to half of the benefits. Inflation might explain
at least part of the skewered distribution as those who hold hard assets can protect themselves
from inflation more easily than the less wealthy. The income distribution trends might also be
explained by the large role played by exports, especially oil and natural gas, in Russian GDP
growth as owners of energy-related assets until recently reaped the benefits of the surge in world
energy prices.20
Foreign Trade and Investment Trends
The roots of Russia’s robust economic growth during the last 10 years are reflected in the surge in
Russian trade and capital flows. (See Table 3.)
16 Goskomstat.
17 Goskomstat.
18 Kommersant. February 27, 2008.
19 Goskomstat.
20 Economist Intelligence Unit. Country Profile 2007: Russia. p. 42.
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Table 3. Select Russian External Economic Indicators, 1999-2008
(billions of U.S. dollars unless otherwise noted)
Current
Foreign
Foreign Direct
Merchandise
Account
Exchange
Investment Flows
Year Exports Imports Trade Balance
Balance
Reserves
into Russia
1999
75.5
39.5 36.0
24.6
12.5 3.3
2000 105.0
44.9
60.1
46.8 28.0 2.7
2001 101.9
53.8
48.1
33.9 36.6 2.7
2002 107.3
61.0
46.3
29.1 47.5 3.4
2003 135.9
76.1
59.9
35.4 76.9 8.0
2004 183.2
97.4
85.8
59.0 124.5 15.4
2005 243.6
125.3
118.3
83.3 182.2 12.9
2006 304.5
163.9
139.3
94.4 303.7 30.8
2007 355.5
223.4
132.0
76.2 476.4 55.0
2008 471.6
291.9
179.7
102.3 427.1 60.0
Source: Central Bank of Russia; Economist Intelligence Unit..
Russia foreign trade has increased sharply in the last ten years (1999-2008). During that period
Russian exports grew close to 525%, from $75.5 billion to $471.6 billion and Russian imports
rose close to 640%, from $39.5 billion to $291.6 billion. As a result, Russia has experienced
rapidly increasing trade surpluses. Its merchandise trade surplus rose from $36.0 billion in 1999
to $179.7 billion in 2008. Russia’s current account balance (which includes balances on
merchandise trade, trade in services, investment income and unilateral transfers) increased
substantially, from $24.6 billion in 1999 to $102.3 billion in 2008. As a result, Russia
accumulated one of the world’s largest foreign reserve holdings that have skyrocketed from $12.5
billion in 1999 to $427.1 billion at the end of 2008.
Oil and petroleum-related products have dominated Russia’s exports for some time, even during
the Soviet period. However, they have become even more significant. In 2008, oil, natural gas,
and other fuels accounted for 64.8% of Russian exports. If metals are included, the share of raw
materials was 78.7% in 2008.21 Machinery and equipment accounted for 43.9% of Russian
imports, and food and other agricultural products accounted for another 16.9%.22
The 27-member European Union (EU) is by far Russia’s most significant trading partner. In 2008,
it accounted for 53% of Russian exports, mostly energy, and for 45% of Russian imports. China
has emerged as the second most important trading partner, accounting for 6% of Russian exports
and for 14% of Russian imports in 2008.23
21 Economist Intelligence Unit.
22 Economist Intelligence Unit.
23 Russian Customs Service data collected by Global Trade Systems, Inc in World Trade Atlas. 2009.
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Russia’s investment climate had improved during the last few years, a byproduct of Russia’s
robust growth. Between 1999 and 2008, annual FDI flows into Russia rose from $3.3 billion to an
estimated $60 billion.24 However, the Russian government recently passed a law which will
restrict foreign investment in key sectors, which could hamper foreign investment in the future.
Russian Economic Policies
The 1998 financial crisis proved to be a blessing in disguise, albeit one that exacted a huge price
in terms of Russian financial credibility. The economic growth that Russia experienced from 1999
to 2008 was largely driven by favorable trends in the Russia’s international economic
interactions. The sharp depreciation of the ruble in 1998 cut demand for imports and encouraged
domestic production of goods. But by definition, such factors are ephemeral. When Putin took the
reins of authority in 1999-2000, first as acting President, then in March 2000 as President, his
task was to avoid the economic chaos that had plagued Russia earlier and to put Russia on track
toward long-term economic growth. To do so required the Putin leadership to take advantage of
the window of opportunity of the post-1998 crisis economic surge and undertake some major
economic reforms.
By the end of 1999, the Russian government had achieved a degree of financial stabilization as
then Prime Minister Primakov instituted measures to cut government spending and increase tax
revenues. The Russian economy began to grow because of the severe depreciation of the ruble as
a result of the 1998 financial crisis which boosted exports.25 A key objective of the Putin regime
was to maintain stability, especially after the effects of the depreciated ruble had disappeared.
Rationalizing Government Expenditures and Revenues
The high inflation and general economic chaos of the 1990s contributed to political and social
instability. The instability undermined the government’s ability to build a market economy. In
order to attain economic stability, the government had to rein in profligate government spending
to keep inflation under control.
Russian government national accounts data show that it improved budget balances and
maintained tight control over fiscal policy. At the end of 1998, the Russian federal government
had a budget deficit equal to 6.0% of Russian GDP, with revenues equal to 11.4% of GDP and
expenditures equal to 17.4%. In 1999, the budget deficit declined slightly to 4.2% GDP. During
the ensuing years, Russian government revenues soared from 12.6% of GDP in 2000 to 22.6% of
GDP in 2008, largely because of tax revenues generated by the surge in oil revenues. At the same
time, the government managed to resist expanding expenditures, keeping them far below
revenues with expenditures equal to 18.2% GDP in 2008. As a result, the Russian government
had consistently earned budget surpluses, at least until recently, and had a surplus of 4.1% which
equaled GDP in 2008.26
24 EIU. Country Report: Russia. March 2008.
25 Aslund. p. 190-197
26 Data obtained from the Bank of Finland. BOFIT Russia Statistics. http://www.bof.fi.
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The Russian government’s ability to maintain prudent fiscal balances has been due in part to the
establishment in January 2004 of a stabilization fund. The Ministry of Finance deposits in the
fund government tax revenues obtained from oil production at oil prices (Urals crude) above
$27/barrel. (When the fund was established in 2004, the threshold price was $20). The funds are
to be used to finance government deficits that result when the oil price falls below $27. In
addition, by law the government is to use funds in excess of a balance of 500 billion rubles (about
$20 billion) for purposes approved by the Federal Assembly, the legislature. At the end of 2008,
the fund held an aggregate amount of $225.1 billion. The Russian government has used these
funds to pay off partially its International Monetary Fund (IMF) and Paris Club debts and also to
finance a deficit in the government-operated pension fund.27
The Putin government attempted to reduce government social and industrial subsidies as a
another step in rationalizing government spending. In January 2005, it replaced free access to
transportation and health care with cash payments to vulnerable groups and also reduced energy
subsidies for residents. The monetization program proved unpopular and protests erupted, a rarity
during an otherwise very popular regime. While having to slide back on some of the measures,
the government has maintained most of the reforms, thereby helping to keep expenditures in
check.28
Implementing Structural Economic Reforms
During Putin’s first presidential term (2000-2004), his government initiated some critical
economic reforms that helped Russia emerge from the post-1998 financial crisis period more
stable and stronger. During this period, reformers seemed to play the dominant role in economic
policymaking.
One of the factors that had harmed business environment in Russia for both foreign and domestic
investors was a plethora of high and overlapping taxes. They reflected the decentralized structure
of the Russia government at the time where local, regional, and federal government authorities
were not clearly delineated. At times, competing levels of government placed a claim on the same
revenues. As a result, businesses found it more advantageous not to pay taxes and risk getting
caught. The tax regime encouraged under-reporting of economic activity and hiding income
abroad. Tax delinquencies encouraged corruption. As a result, collected revenues were a fraction
of potential revenues. At one point, Russian residents and businesses were subject to around 200
separate taxes, 30 of which were federal and 170 were regional and local.29
By 2004, the government had reduced the number of taxes to 16, 10 of which were federal and
the remainder regional and local. Among the changes was an introduction of a 13% flat tax to
replace a graduated personal income tax that peaked at 30%.30 Four social taxes were compressed
into one. Tax collection was centralized into the tax ministry, which eliminated tax collection
competition among several collection agencies that bred corruption and abuse.31 Another
27 Russian Ministry of Finance. http://www.minfin.ru. In 2008, the economic stabilization fund was divided into two
funds—the Reserve Fund and the National Welfare Fund.
28 EIU. Country Profile 2007: Russia. p.36.
29 Åslund, Anders. Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed. Petersen
Institute for International Economics. November 2007. p.215.
30 Ibid. p. 216.
31 Ibid.
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important reform was the elimination of various turnover taxes that were legacies of the Soviet
period.
During the early post-Soviet period, the business climate was also hampered by a large number of
licensing requirements, inspections, and other regulations, often promulgated and implemented
by different local, regional, and federal government entities in conflict with one another. The
burden and the capricious manner that the regulations were implemented made the system ripe for
corruption and avoidance and also impeded the development of new business. The Putin
government introduced regulatory reform by cutting the number of mandatory licenses and
inspections to encourage the development of new small and medium sized enterprises.32 These
reforms have largely improved the business climate, although some authorities still conduct
inspections contrary to the new regulations.33
The Russian government also addressed the issue of corporate governance, particularly the
protection of the rights of minority shareholders that were notoriously subjected to abuse in the
1990s. For example, the government established regulations on the times and venues for
shareholders’ meetings to ensure that a majority bloc of shareholders do not try to impair minority
rights by holding meetings in secret and or at times and at places inaccessible to those
shareholders.34
Agriculture has been one of the slowest sectors of the Russian economy to shed the legacies of
collectivism rooted in Soviet central planning and even in earlier Russian history. Russian
policymakers have had trouble dealing with the issue of land and agricultural reform, particularly
converting land that been held collectively during the Soviet period to individual holdings and
private ownership. Russian agriculture had been hard hit during the early transition period as
demand for local production fell when it faced foreign competition from the United States and
Europe.
The Russian government kept agriculture afloat with subsidies and low-interest loans that were
eventually written off by the government. The sector rebounded, along with much of the rest of
the Russian economy, as a result of the sharp depreciation of the ruble in the wake of the 1998
financial crisis and the resultant increase in import prices. But, the temporary drop in foreign
competition reduced the incentives for reform and restructuring.
The agriculture sector once again faces problems as foreign competition has strengthened.
Agriculture and land reform have remained challenges. In 2003, the Duma, the lower house of the
Russian legislature, enacted a framework law on the sale and purchase of agricultural land, but its
implementation had been dependent on regional governments passing and implementing laws,
which they have been reluctant to do. The issue still remains a challenge for the government.35
32 Ibid., p. 217-218.
33 EIU. 2007. p. 38.
34 Organization for Economic Cooperation and Development. OECD Economic Survey of the Russian Federation.2004.
p. 66.
35 Aslund, p.219; OECD (2006), p.72-74.
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Integrating Russia with the Global Economy
Russia first applied to accede to the General Agreement on Tariffs and Trade (GATT) in 1993.
The application was converted to one for the World Trade Organization (WTO) in 1995 when that
organization was formed and became the administrative body for the GATT and other multilateral
trade agreements. The process slowed down during the Yeltsin period as the leadership was pre-
occupied with other political and economic issues. Putin adopted WTO membership as part of
Russian economic reform and a way to integrate Russia into the world economy. He said:
It is our duty to ... speed up the work on Russia’s accession to the WTO on conditions that
are acceptable to us and generally work to make Russia competitive in all senses of the
word.36
Russia is the largest economy not yet a member of the WTO. WTO members’ concerns about
weak protection of intellectual property rights (IPR) protection and Russian agriculture subsidies
have been among the issues impeding Russia’s accession. However, in what has been largely
considered a stunning announcement, Prime Minister Putin stated, on June 9, 2009, that Russia
would be abandoning its application to join the WTO as a single entity, but instead would seek to
join as a member of a customs union with Belarus and Kazakhstan. It is not clear at this time why
Russian leaders decided to change substantially its application status. Belarus and Kazakhstan
have also applied to join the WTO, but neither country was as far along as Russia was in the
process. At the least, the change will likely further delay Russia’s accession to the WTO. It is also
unclear if the three countries would be allowed to join as one entity.37
Despite the declared policies, the results in integrating with the world economy have been mixed.
From 1994 to 2000, Russian exports as a percentage of GDP increased from 27.7% to 44.1% but
declined to 31.3% in 2008. Russian imports as a percentage of GDP have declined from 22.9% in
1994 to 22.0% in 2008. On the other hand, trends in Russian foreign investment show clearer
signs of economic integration. The stock of FDI in Russia as a percent of GDP rose from 0.1% in
1993 to 12.0% in 2008 and Russian foreign direct investment abroad has increased from 1.3% of
GDP in 1993 to 10.6% of GDP 2008.38
Implementing Other Reforms
In 2002, the Putin government instituted pension reform to increase the level of retirement funds
and reduce poverty among retirees. In addition, the reform was to move the responsibility for
pensions from the government to employers. However, implementation of these reforms have
been slow.39
The Russian banking system has been notoriously inefficient. For much of the 1990s, the industry
was dominated by state-owned banks, especially, the Sberbank, which held more than 70% of
household savings deposits, and the Vneshtorgbank. The private-sector banking industry was
dominated by many small banks that were owned by one investor or a financial group and acted
36 Office of the President of Russia. Annual Address to the Federal Assembly. April 3, 2001. http://www.kremlin.ru.
37 For more information on Russia and the WTo accession process, see CRS Report RL31979, Russia’s Accession to
the WTO, by William H. Cooper.
38 Data obtained from the Economist Intelligence Unit.
39 EIU. Country Profile: Russia 2007. p. 38.
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as a financial conduit for the owners. Many of those banks failed during the 1998 financial crisis.
In 2003, the Russian government implemented a government deposit insurance program, to
partially level the playing field for private sector banks that had no such insurance, and the state
banks that were backed by state funds. The deposit insurance program also was a way to
introduce tighter supervision over the private sector banks that were required to meet financial
health criteria by the Russian central bank before being eligible for the insurance.40 Beginning in
2004, the Russian government also began phasing in the use of internationally accepted financial
standards to improve the transparency of Russian bank operations.41
In 2005, the regime launched “national projects” to strengthen education, health care, and
housing. Critics have maintained that implementation of these projects, which began under then-
First Deputy Prime Minister (now President) Dmitriy Medvedev, has been inadequate and a sign
that the Putin regime “dropped the ball” on reform during his second administration and that the
reforms have been stalled by those with vested interests in the status quo.42 The Russian
government also undertook reform of its judiciary to establish clear lines of responsibility for the
levels of courts and to root out corruption by increasing the salaries of judges.43
Reasserting State Control of “Strategic” Sectors
If President Putin’s first term of office was marked by achieving economic stability and launching
some critical reforms, the second term (2004-2008) was largely characterized by the
government’s re-establishing control over critical sectors of the Russian economy. It has done so
by acquiring the assets of companies that had been privatized during the Yeltsin regime and taken
over by so-called oligarchs via questionable transactions. The Putin Administration has been re-
nationalizing companies directly by taking control of assets or indirectly through ostensibly
private sector companies in which the Russian government has substantial ownership.
The first major step in this direction was the government’s attack on the Yukos oil company and
its president, Mikhail Khodorkovsky. On October 25, 2003, Khodorkovsky was arrested and
charged with tax evasion. Other Yukos executives were also arrested. Eventually Khodorkovsky
was sentence to eight and a half year in an East Siberian prison. Khodorkovsky had acquired
Yukos and several other companies in the loans for shares auctions in the mid-1990s. While his
ostensible violation was tax fraud, many experts contend that Khodorkovsky’s real “crime” was
to have crossed a “red line” in challenging Putin politically by financing several opposition
political parties. Khodorkovsky also challenged the government’s monopoly on oil transport by
proposing the construction of privately owned oil pipelines. In the end, the government seized
Yukos’s assets to pay tax penalties and sold them at below market value prices to Rosneft, a state-
owned oil company. Yukos was left bankrupt.44 The case is noteworthy not only for the
government’s reassertion of control of the oil sector but also for the apparent weakness of the
judicial system which allowed the government to skirt legal procedures that might have ensured
impartiality.45
40 OECD, 2004, p. 200.
41 Ibid., p. 204
42 Delany, Max. “Life Gets Better, But Only for Some.” Moscow Times. February 27, 2007.
43 OECD. 2004. p. 65.
44 Aslund. p. 234-241. OECD 2006. p. 37-38.
45 For more information, see (archived) CRS Report RL32873, Key Environmental Issues in the Energy Policy Act of
(continued...)
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From 2005-2007, the government increased its stake in the oil industry through Gazprom, the
state-controlled company that has a monopoly on Russian gas exploration and production. It
bought controlling shares in Sibneft, a once private company. It also bought Sakhalin Energy
company, which had been led by Shell Oil and in TNK-BP, a joint venture between BP and a
group of private Russian companies. The latter two acquisitions occurred after the Russian
government cited projects by these companies for environmental regulation infringements and
licensing issues. As a result of these acquisitions, state control of the oil industry increased from
around 18% to over 50% between 2004 and 2007, according to one estimate.46
From 2004 to 2006, the government took control of formally privatized companies in certain
“strategic” sectors. oil, aviation, power generation equipment, machine-building and finance. For
example, the state-owned defense equipment company Rosoboronexport took control of Avtovaz,
the primary producer of Russian cars. In June 2006, it took 60% control of VSMPO-Avisma, a
company that accounts for two-thirds of the world’s titanium production. In 2007, United Aircraft
Building Corporation (UABC), a company that is 51% government controlled, combined all of
the Russian companies producing aircraft .47 The OECD estimates that the government’s share of
Russia’s equity market capitalization increased from 20% in mid-2003, to 30% in early 2006. In
the oil sector alone, state-owned companies controlled 16.0% of crude oil production in 2003 and
33.5% in 2005, a figure that the OECD estimates to have risen eventually to over 40% after all of
Yukos’s assets had been distributed.48
According to the European Bank for Reconstruction and Development (EBRD), in 1991, just
prior to the collapse of the Soviet Union, 5% of Russian GDP was accounted for by the private
sector. By 1997, that share had grown to 70%, but decreased to 65% in 2005 where it has
remained. In comparison, in the Ukrainian economy, the share of GDP accounted for by the
private sector increased from 10% in 1991 to 65% in 2002 where it has remained. In contrast, the
share of the private sector in Poland’s GDP rose from 40% in 1991 to 75% in 2001 where it has
remained.49
The EBRD monitors the progress of former communist states’ transition to market economies.
One of the elements the bank examines is the degree to which the country has privatized state-
enterprises. It does so using a scale of 1.00-4.00 with 1.00 indicating little private ownership and
4.00 indicating more than 50% private ownership. According to the EBRD, the status of Russia’s
privatization of large-scale enterprises fell from 3.33 in 2004 to 3.00 in 2008. At 3.00, Russia
ranked ahead of Turkmenistan (1.00) and Tajikistan (2.33), is on par with Ukraine (3.00) and
Moldova (3.00), and is behind Romania (3.67), Armenia (3.67) and Georgia (4.00). EBRD
indices of small-enterprise privatization indicated that Russia has done better at 4.00 where it has
been since 1995.50
(...continued)
2005 (P.L. 109-58; H.R. 6), coordinated by Brent D. Yacobucci, CRS Report RS21678, Russia's Arrest of "Oligarch"
Mikhail Khodorkovskiy: Background and Implications for U.S. Interests, by Jim Nichol.
46 Hanson, Philip. The Russian Economic Puzzle: Going Forwards, Backwards, or Sideways? International Affairs. vol.
83. no. 5. p. 876-877.
47 EIU. Country Profile 2007–Russia. p.38-39.
48 OECD. 2006. p.38.
49 EBRD. Economic Statistics and Forecasts. http://www.ebrd.org.
50 Ibid.
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The Role of Oil and Other Natural Resources
Russia possesses the world’s eighth largest reserves of oil and is the world’s second largest oil
exporter (next to Saudi Arabia). It also possesses the world’s largest natural gas reserves and is
the largest exporter of natural gas. In addition, Russia has the second largest coal reserves.51
These natural resources, particularly oil, have been a major driving force of the Russian economy
for a long time and a significant determinant of Russia’s economic health. Therefore, the role of
oil requires special attention in a discussion of Russia’s economic conditions.
Figure 2. Russian Oil Production, 1989-2008
(millions of barrels/day)
12
10
8
6
4
2
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source: CRS from data of U.S. Department of Energy. Energy Information Administration.
The levels of Russian oil production have varied over the years and have roughly mirrored overall
conditions of the Russian economy and global demand. The graph in figure 2 above indicates
that from 1989 to 1996, the volume of oil production decreased appreciably, from 11.1 million
barrels/day (mbd) to 6.1 mbd or about 45%. This period is contemporaneous with the deep slide
in Russian economic growth shortly before and immediately after the collapse of the Soviet
Union. The decline was caused by a dramatic drop in world demand for oil, a decrease in world
oil prices, the depletion of exploited Russian oil fields, and the lack of investment in discovering
new ones. Production began to grow in 1997, at first gradually, then more rapidly reaching 9.8
mbd in 2008, still below the 1989 level.52 Oil production has continued to increase but at a
decelerating rate, with possible implications for the future.53
51 EIA. Country Analysis Briefs: Russia. April 2007. http://www.eia.doe.gov
52 Data were obtained from http://www.bp.com.
53 EIU. Country Profile Russia .2007. p. 45.
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Among the factors which contributed to the deceleration of oil production was the Yukos case
which led Russian oil companies to reduce investment in upstream activities. Also, the heavy
taxation of oil revenues is another contributing factor. Most oil-sector investment in Russia is
aimed at increasing current production rather than developing new fields; therefore, any
slowdown in the growth of capital spending is soon reflected in slower growth of production and
exports. Russia will be not be able to sustain oil production over the long term if the investment
in the sector is not increased.54
While oil production activities represent a small direct part of Russian GDP, the income derived
from oil production has contributed significantly through the multiplier effect to overall GDP
growth. According to the IMF, the Russian federal government budget enjoyed a fiscal surplus
equivalent to 4.6% of GDP in 2007; however, if oil-related revenues are excluded, the budget
would have been in a deficit equivalent to 4.7% of GDP.55 Of course, the IMF calculation
assumes that the Russian government would have maintained the level of expenditures. This
analysis suggests that Russia is becoming more reliant on world oil prices increasing or at least
remaining high.
Figure 3. Oil Prices, 1989-2009
($/barrel–Urals-32 at the end of the first week of the year)
100
90
80
70
60
50
40
30
20
10
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Source: CRS from data supplied by the U.S. Department of Energy. Energy Information Administration
The significance of oil and other natural resources to the Russian economy is perhaps no more
evident than in Russian foreign trade. Even during the Soviet period, oil and other natural
resources were by far the primary source of hard currency revenues. They have maintained and, at
times increased, their importance in post-Soviet era Russian foreign trade. In 2007, energy
54 OECD, 2006. p. 29-30.
55 IMF. IMF Country Report No. 08/309. September 2008.
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resources (oil, natural gas, and coal) accounted for 65% of total Russian export revenues. Metals
accounted for another 14% of Russian exports.56 Russia’s increasing reliance on exports oil and
other energy resources and raw materials has made Russian trade vulnerable to the volatility of
international commodity prices. Exports of machinery and equipment accounted for only 5% of
Russian exports.57
Figure 4. Net Russian Exports of Oil, 1992-2008
(millions of barrels/day)
8
7
6
5
4
3
2
1
0
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Data from the Department of Energy. Energy Information Administration.
While the volume of Russian energy production and net exports (exports minus imports) have
increased significantly since the mid-1990s, the rate of increase has reached a plateau, suggesting
that the growth, and perhaps even the maintenance, of surplus of oil-dependent revenues will
depend on world oil prices growing or at least remaining high. In 2005, the volume of net oil
exports reached 6.8 mbd and remained at that level in 2006. The volume of net exports rose to 7.1
mbd in 2007 and declined slightly to 6.9 mbd in 2008 Nevertheless, the overall (current account)
Russian trade surplus continued to expand in U.S. dollar terms, as the increase in oil prices offset
both the weak export performance and the rise in imports. The trade surplus reached a record of
$102 billion in 2007, up from the previous record of $94 billion in 2006. However, world oil
prices have plummeted (as noted in Figure 3). After having peaked at $134.37 per barrel in mid-
July 2008, the price Urals-32 declined to $34.20 per barrel on January 2, 2009, a 75% decline.
The price has risen since that time to $57.02 per barrel as of May 22, 2009. The decline in oil
prices has contributed to a projected current account deficit of $7 billion in 2009.58
56 Economist Intelligence Unit data base.
57 EIU. Country Profile Russia. 2007. p. 52.
58 Department of Energy. Energy Information Administration. http://www.eia.doe.gov.
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The Global Economic Crisis and the Outlook for the
Russian Economy
As the case with most of the world’s economies, the Russian economy has been hit hard by the
global economic crisis and resulting recession, the effects of which have been apparent since the
last quarter of 2008. Even before the financial crisis, Russia was showing signs of economic
problems when world oil prices plummeted sharply around the middle of 2008, diminishing a
critical source of Russian export revenues and government funding.
The crisis and other factors, brought an abrupt end to a decade of impressive Russian economic
growth. In 2008, it faced a triple threat with the financial crisis coinciding with a rapid decline in
the price of oil and the aftermath of the country’s military confrontation in August 2008 with
Georgia over the break-away areas of South Ossetia and Abkhazia.59 These events exposed three
fundamental weaknesses in the Russian economy: substantial dependence on oil and gas sales for
export revenues and government revenues; a decline in investor confidence in the Russian
economy; and a weak banking system.
The rapid decline in world oil prices discussed earlier has been a major factor in the overall
decline in Russia’s economy. Russian government revenues are expected to be adversely affected
because of the drop in oil revenues, but also because of the decline in income tax revenues, which
will cause the Russian government to incur a budget deficit for the first time in ten years, a deficit
of perhaps 8% of GDP.60 Russia has also been adversely affected by the world-wide credit crunch
that ostensibly began with the proliferation of subprime mortgages in the United States and the
subsequent burst of the real estate bubble. Because low interest credit was not available
domestically, many Russian firms and banks depended on foreign loans to finance investments.
As credit tightened, foreign loans became harder to obtain.
The economic downturn is showing up in Russia’s performance indicators. Although Russia real
GDP increased 5.6% in 2008 as a whole, it increased more slowly than it did in 2007 (8.1%) and
grew only 1.2% in the fourth quarter of 2008.61 The economic slowdown has been reflected in the
Russian ruble exchange rate as well. The ruble has been declining in nominal terms because
foreign investors have been pulling capital out of the market to shore up domestic reserves,
putting downward pressure on the ruble. The ruble had declined as much as 45.6% between July
29, 2008 and April 21, 2009; it has recovered somewhat so, that by June 5, 2009, it had
depreciated 31.8% since July 29. Russian official reserves have declined substantially in part
because of Russian Central Bank has intervened to defend the ruble and current account surpluses
have shrunk. Russian official reserves declined from $597 billion at the end of July 2008 to $384
billion at the end of February 2009, although they have increased to $404 billion by the end of
May 2009.62 Another sign of financial trouble for Russia was a rapid decline in stock prices on
Russian stock exchanges. At the close of business on May 10, 2009, the RTS index had lost 62%
59 For more information on the conflict, see CRS Report RL34618, Russia-Georgia Conflict in August 2008: Context
and Implications for U.S. Interests, by Jim Nichol.
60 Economist Intelligence Unit. Country Report—Russia. June 2009. p. 3.
61 INS Global Insight. June 3, 2009.
62 Economist Intelligence Unit. June 8, 2009.
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of its value from its peak reached on May 19, 2008, although the index has shown signs of rising
recently.63
The Russian government has responded to the crisis with various measures to prop up the stock
market and the banks. The packages, valued at around $180 billion, are proportionally larger in
terms of GDP than the U.S. package that Congress approved in September 2008.64 In mid-
September, the government made available $44 billion in funds to Russia’s three largest state-
owned banks to boost lending and another $16 billion to the next 25 largest banks. It also lowered
taxes on oil exports to reduce costs to oil companies and made available $20 billion for the
government to purchase stocks on the stock market In late September, the government announced
that an additional $50 billion would be available to banks and Russian companies to pay off
foreign debts coming due by the end of the year. On October 7, 2008, the government announced
another package of $36.4 billion in credits to banks.65 In 2009, the government changed strategies
by focusing on macroeconomic measures rather than measures to assist specific industries or
firms. For example, the government reduced the corporate tax rate from 24% to 20% and the tax
rate on small companies to try to stimulate investment.66 The government expects to rein in
expenditures as it anticipates lower revenues but still anticipates its first budget deficit in 10
years, which the government will be able to finance at least for the time-being from accumulated
reserves.67 While cutting expenditures might be considered fiscally responsible on the one hand, it
could retard government investment in obsolete infrastructure and expenditures on pensions and
other social income transfers, contributing to a drag on the rest of the economy.
The Russian political leadership headed by former President, now Prime Minister, Putin had
enjoyed unprecedented popularity since 2000 in part because of the economic stability and
growth that many Russians have attributed to him over the last ten years. The economic success
also likely contributed to confidence that Putin and now President Medvedev had shown in
projecting Russia’s national interests beyond its borders, for example, in Georgia and other
neighboring states. It is possible that the global economic crisis and its impact on the Russian
economy could lead to at least popular discontent and could force Russia to limit its foreign
ambitions. A recent poll indicated that in May 2009 Russians were less inclined to believe that the
Russian economy was on the right track than they were in May 2008 (42% vs. 59%), although
they largely approved of the job performances of Prime Minister Putin and President Medvedev,
78% and 72%, respectively.68
What are the prospects for the Russian economy? The IMF projects that Russia’s real GDP will
decline over 6% in 2009.69 INS Global Insight, and the Economist Intelligence Unit (EIU), both
private economic forecasting firms, project Russia’s GDP to decline in 2009 by 4.7% and 5.0%,
respectively.70 These forecasts are supported by data showing a continuing decline in both
domestic and external demand (exports), among other things, although the rates of decline have
63 RTS.
64 Ibid. 6-7.
65 Economist Intelligence Unit. Country Report–Russia. October 2008. p. 6
66 Economist Intelligence Unit. Country Report—Russia. June 2009. p. 5.
67 Ibid. p. 6.
68 Economist Intelligence Unit. Country Report–Russia. June 2009. p. 4.
69 IMF. Statement of IMF Mission to the Russian Federation. June 1, 2009.
70 INS Global Insight. June 3, 2009. Economist Intelligence Unit. Country Report—Russia. June 2009. p.7.
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slowed possibly indicating bottoming out, if not a full-fledged economic recovery. INS Global
Insight, Inc. and the EIU each forecasts mild recoveries in 2010 of 1.5% and 2.3%, respectively.
Russia remains highly dependent on oil and natural gas exports as a source of income. If world oil
prices continue to be depressed, the Russian economy would likely experience slow growth, if
any. Many economists have argued that, in the long run, for Russia to achieve sustainable growth,
it must reduce its dependence on exports of oil, natural gas, and other commodities and diversify
into more stable production.
Until the economic crisis hit in late 2008, Russia had shown signs of some diversification.
Russian fixed capital investment increased 12.3% on average per year 1999-2008. In 2007 alone,
it increased 21.1% , the highest in recent Russian history, but declined to a still robust 10.0% in
2008.71 Official Russian economic data show that investment is spread throughout the economy.
About 14% of the fixed investments (in 2007) were in the energy sector, 15% were in
manufacturing, 22% were in transportation and communication, and 17% were in real estate,
renting, and business activities.72 Growth in fixed investment indicates confidence in the future as
firms replenish or add to production capacity. However, the EIU estimates that gross fixed
investment will decline by 16% in 2009 and increase only modestly, about 3%, in 2010.73
The OECD indicates that despite the surge, Russia still lags far behind other emerging economies
in terms of capital investment. The OECD calculated that from 2000-2005, Russia’s average
capital investment as a percent of GDP was around 18%, while that of China was close to 40%,
South Korea’s was 30%, and the Czech Republic’s was 27%. These data would indicate that
Russia still has much room to catch up with similar economies.74 One study has concluded much
of the economic growth prior to the current downturn could be attributed to Russia employing
increasing amounts of unused production capacity inherited from the Soviet period., but this
capacity was being used up or getting out of date and will have to be replaced if Russia is to
achieve sustainable economic growth. The same study concluded that the Russian labor force is
shrinking due to low birth rates and low average life-spans which will impede increases in labor
productivity and overall growth.75
The increase in state control over the economy has also coincided with a sharp decline in the pace
of economic restructuring and reforms that occurred during Putin’s first term. One indicator of the
decline in economic reforms is the measure of the business environment in Russia. Each year the
World Bank evaluates the ease of doing business in 181 countries by examining a range of
criteria, such as ease of starting a business, closing a business, employing workers and, protecting
workers. In April 2006, Russia ranked 96th.76 In April 2008, it ranked 106th, although it had
improved from 112th during the previous year. In April 2009, Russia had slipped to 120th. Russia
has ranked behind such former Soviet republics as Azerbaijan (33rd), Armenia (44th), Georgia
(15th), and Kazakhstan (70th ). Singapore was ranked first and the United States was ranked
71 Economist Intelligence Unit. Country Report—Russia. June 2009. p. 7.
72 Russian Federal Statistics Service.
73 Economist Intelligence Unit. Country Report—Russia. June 2009. p. 7.
74 OECD 2006. p. 27.
75 McKinsey Global Institute. Lean Russia: Sustaining Economic Growth Through Improved Productivity. April 2009.
p. 12.
76 Cited in Hanson, Philip. The Russian Economic Puzzle: Going Forwards, Backwards, or Sideways? in International
Affairs. vol. 83. no. 5. p. 872.
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third.The Congo Democratic Republic was ranked 181st .77 Another indicator is Russia’s
economic growth compared to those of other former Soviet states. In 2008, Russia’s real GDP
increased 5.6%, and it was only 8th among the 15 former Soviet states.78
However, it is highly likely that Russia’s continued dependence on oil and the world price of oil
will be a dominant factor in Russia’s economic prospects for foreseeable future. This is a double-
edged sword for Russia. On the one hand, Russia has benefitted from record-high prices. On the
other, its oil production capacity is limited and showing signs of strain.
Implications for the United States
Russia’s economic prospects have direct and indirect implications for the United States. One way
to measure the direct implications is by examining the status of U.S.-Russian economic ties.
U.S.-Russian trade and investment flows have increased in the post-Cold War period reflecting
the changed U.S.-Russian relationship. Many experts have suggested that the relationship could
expand even further. U.S. imports from Russia have increased substantially, rising from $0.5
billion in 1992 to a peak of $26.8 billion in 2008. The large increase in U.S. imports reflects not
so much an increase in the volume of trade but the rise in world prices of raw materials,
particularly oil, that comprise the bulk of those imports (64% in 2008). U.S. exports have
increased from $2.1 billion in 1992 peaking at $9.3 billion in 2008. Major U.S. exports to Russia
consist of machinery, vehicles, and meat (mostly chicken).79
Table 4. U.S. Merchandise Trade with Russia, 1992-2008
(in billions of dollars)
U.S.
U.S.
U.S.
U.S.
Trade
U.S.
U.S.
Trade
Year
Exports
Imports
Balances Year Exports
Imports
Balances
1992
2.1 0.5 1.6
2001
2.7 6.3 -3.5
1993
3.0 1.7 1.3
2002
2.4 6.8
-4.4
1994
2.6 3.2 -0.6
2003
2.4 8.6 -6.2
1995
2.8 4.0 -1.2
2004
3.0 11.9 -8.9
1996 3.3
3.6
-0.3
2005
3.9
15.3
-11.3
1997 3.4
4.3
-0.9
2006
4.7
19.8
-15.1
1998 3.6
5.7
-2.1
2007
7.4
19.4
-12.0
1999 2.1
5.9
-3.8
2008
9.3
26.8
-17.5
2000 2.1
7.7
-5.6
Major U.S. exports: machinery; vehicles; meat; aircraft. Major U.S. imports: mineral fuels; inorganic chemicals
77 http://www.doingbusiness.org. Accessed April 14, 2008.
78 Azerbaijan’s GDP increased 10.8%, Armenia 10.0%, Uzbekistan 9.0%, Tajikistan 7.9%; Kyrgyz Republic 7.6%;
Moldova 7.2%; and Armenia 6.8%. Economist Intelligence Unit.
79 CRS calculations based on data from the Department of Commerce, Bureau of the Census. Global Trade Information
System.
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Russia’s Economic Performance and Policies and Their Implications for the United States
U.S.
U.S.
U.S.
U.S.
Trade
U.S.
U.S.
Trade
Year
Exports
Imports
Balances
Year
Exports
Imports
Balances
aluminum; steel.
Source: Compiled by CRS from U.S. Department of Commerce, U.S. Census Bureau data. FT900.
Despite the increase in bilateral trade, the United States and Russia still account for small shares
of each others’ trade. In 2008, Russia accounted for about 0.7% of U.S. exports and 1.3% of U.S.
imports. It was the 17th largest source of imports and 28th largest export market for the United
States. The United States accounted for 3.4% of Russian exports and 5.4% of Russian imports. It
was the fifth largest source of imports and 10th largest export market for Russia.80
According to Russian government data, by the end of 2008, the United States accounted for 3.3%
of total accumulated foreign direct and portfolio investments in Russia and was the eighth largest
source of foreign investment. However, the first three countries were Cyprus (21.5%), the
Netherlands (17.5%), and Luxembourg (13.0%), suggesting that at least 50% of the investments
night have been repatriated Russian funds.81
Russia and the United States have never been major economic partners, and it unlikely that the
significance of bilateral trade will increase much in the near term. However, in some areas, such
as agriculture, Russia has become an important market for U.S. exports. Russia is the largest
foreign market for U.S. poultry. Furthermore, U.S. exports to Russia of energy exploration
equipment and technology, as well as industrial and agricultural equipment, have increased as the
dollar has declined in value. Russian demand for these products will likely grow as old equipment
and technology need to be replaced and modernized. Russia’s significance as a supplier of U.S.
imports will also likely remain small given the lack of international competitiveness of Russian
production outside of oil, gas, and other natural resources. U.S.-Russian investment relations
could grow tighter if Russia’s business climate improves; however, U.S. business concerns about
the Russian government’s seemingly capricious intervention in energy and other sectors could
dampen the enthusiasm of all but adventuresome investors.
The greater importance of Russia’s economic policies and prospects to the United States lie in
their indirect effect on the overall economic and political environment in which the United States
and Russia operate. From this perspective, Russia’s continuing economic stability and growth can
be considered positive for the United States. Because financial markets are interrelated, chaos in
even some of the smaller economies can cause uncertainty throughout the rest of the world. Such
was the case during Russia’s financial meltdown in 1998 and more recently with the 2008-2009
crisis. Promotion of economic stability in Russia has been a basis for U.S. support for Russia’s
membership in international economic organizations, including the IMF, the World Bank, and the
WTO. As a major oil producer and exporter, Russia influences world oil prices that affect U.S.
consumers.
The impact of Russian economic policies and prospects also plays a role in U.S. national security
interests. For example, Russia is a major supplier of natural gas to many U.S. European allies. In
2006, Russia accounted for 20% of France’s, 25% of Italy’s, and 36% of Germany’s consumption
80 Global Trade Information Systems, Inc. World Trade Atlas.
81 Tendentsii I perspectiva (Trends and Outlook). Russian Economic Report. April 2006. p. 24..
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Russia’s Economic Performance and Policies and Their Implications for the United States
of natural gas, making these allies possibly vulnerable to political pressure.82 On several
occasions, most recently on January 1, 2009, Russia has temporarily shut-off gas supplies to
Ukraine over a price dispute, and in so doing cut supplies to Europe. Although supplies were
resumed two weeks later, the disruptions have affected European views of Russia as a reliable
supplier of gas.83 Russia is also a primary supplier of natural gas to other former Soviet republics,
providing it with potential political leverage. The United States has been promoting the
construction of pipelines that by-pass Russia, thus decreasing Moscow’s monopoly control of
Caspian and Central Asian energy flows.
Author Contact Information
William H. Cooper
Specialist in International Trade and Finance
wcooper@crs.loc.gov, 7-7749
82 Department of Energy. Energy Information Administration.
83 CRS Report RL34261, Russian Energy Policy Toward Neighboring Countries, by Steven Woehrel. p. 9.
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