The Russian Economy Explained – A 3-Part Series (Part 1)
Originally posted in October 2015. Updated in November 2016.
FocusEconomics presents a 3-part series on the economy of Russia. In Part 1, we provide an overview of Russia’s economy from the time of the dissolution of the Soviet Union until 2015, detailing the assets and risk factors from an economic perspective as well as analysis and forecasts for GDP and inflation in the near-term.
A Bit of Russian History
Russia’s history dates all the way back to the 9th Century when the medieval state of Rus was formed. Although Rus was shortly broken up into smaller states by the Mongols, they were gradually reunified by the Grand Duchy of Moscow, eventually growing into a vast empire. The Russian Empire expanded over the centuries and by the 18th Century the empire stretched from Poland in the west to Alaska in the east—the third-largest empire in history. Russia became the first constitutionally-recognized socialist state in 1917, with the creation of the Soviet Union following shortly thereafter. The USSR played a large part in the defeat of the Axis Powers in World War II after which it was considered one of the two world “super powers” engaging in decades of rivalry with the U.S. during what is known as the “Cold War”. By the 1980s the “Era of Stagnation” began to take hold of the Russian economy, which threatened to dislodge the country from its position as a world super power. By the end of the 1980s, the economy was in a shambles—shortages of food, massive budget debts, and immense growth in money supply led to inflation. The dissolution of the Soviet Union followed in 1991 as a result of economic and political turmoil along with social unrest, which had proven too much for the once mighty Soviet Union.
Economic Overview – The Russian Federation
Following the collapse of the Soviet Union, the first decade of transition from a centrally-planned economy to market economy was disastrous for Russia: nominal gross domestic product (GDP) fell from USD 516 billion in 1990 to USD 196 billion in 1999, which represented a plunge of over 60%. In an attempt to address the economic turmoil and follow the recommendations from the IMF, the Soviet government began to privatize many Russian industries during the 1990s. Important exceptions were, however the energy and defense sectors.
The devaluation of the Russian ruble in 1998—after the financial crisis known as the ruble crisis—together with the uninterrupted upward trend that oil prices experienced in the period from1999 to 2008 propelled the Russian economy—heavily reliant on its energy sector exports—to grow at an annual average rate of 7%. Russia was among the hardest-hit economies by the 2008-2009 global economic crisis: the economy plunged 7.8% in 2009 as oil prices plummeted and foreign credit dried up. The economic contraction was the sharpest since 1994, but no long-term damage was caused due to the government and Central Bank’s proactive and timely response to ring fence key sectors of the economy, in particular the banking sector, from the effects of the crisis. As a result, Russia’s economy began to grow again and increased 4.5%, 4.3% and 3.4% in 2010, 2011 and 2012, respectively, before slowing to 1.3% in 2013 and 0.6% in 2014.BpbAlonka (Own work) [CC BY-SA 3.0]
The Russian economy experienced two major shocks in 2014, narrowly avoiding recession with moderate growth of 0.6%. The first shock was the sharp decline in oil prices during the third and fourth quarter of 2014, exposing Russia’s extreme dependence on global commodity cycles. After fluctuating within a tight band near USD 105 per barrel from 2011-2013, crude oil prices ended 2014 at less than USD 60 per barrel. The second shock was the economic sanctions resulting from geopolitical tensions, which negatively affected investor appetite for Russian investments. Capital flights and high inflation compound Russia’s economic woes as the economy registered the steepest contraction since 2009 contracting 3.7% in the full year 2015. Forecasts are pointing to an end to the recession coming soon in 2017.
Inflation has been falling rapidly since August 2015, when it reached a peak of 15.8%. Along with the fall in inflation, Central Bank lending rates have been reduced. Russian bonds and equities are performing well against those of other emerging markets and a modest recovery in oil prices has bolstered economic sentiment.
Considering that the price for Urals oil will average USD 38 per barrel in 2016, the Central Bank expects the economy to contract between 0.3% and 0.7% this year, which is less than the Bank’s previous estimate that saw the economy contracting between 1.3% and 1.5%. The Bank expects the economy to expand at a rate of between 1.1% and 1.4% in 2017, assuming that Urals oil prices average USD 40 per barrel. Previously, the Bank had expected the price for Urals oil to average USD 35 per barrel and had projected economic growth rising to within a range of minus 0.5% and plus 0.5% in 2017.
Following the economy’s collapse in 2015, analysts surveyed by FocusEconomics expect the Russian economy to continue contracting in 2016, although at a more moderate pace. FocusEconomics Consensus Forecast panelists project that Russia’s GDP will fall 0.7% in 2016, which is up 0.1 percentage points from last month’s forecast. Panelists expect the economy to expand 1.3% in 2017.
Despite some serious downside risks, the Russian economy enjoys a number of strong strengths. Russia is the largest nation in the world in terms of landmass with abundant oil, gas and other natural resources, low debt, and high labor force participation. Its leading global position in space technology indicates untapped potential in other sectors. Russia is the 6th largest economy in the world in GDP based on purchasing power parity and has the 9th largest population. Russia also represents the largest retail trade market in Europe.
Although Russia might be in for a rough couple of years in the near future as it attempts to claw its way back to the top, it must be said that the Russian economy is much better shape than it was during the economic crisis in the 1990s. The Central Bank of Russia, Bank Rossii, stopped the free fall of the ruble in December of 2014 and unlike the country’s financial and debt crisis in 1998, no defaults have occurred and no official capital controls have been imposed.
Be sure to look out for part 2 of our three part series on Russia's economy next Tuesday, 27 October in which we detail Russia’s balance of payments as well as their exports and imports and the role they play in Russia’s economic outlook.
Anthony Halley and Senior Economist Ricardo Aceves contributed to this piece.
Originally posted in October 2015. Updated in November 2016.
Date: October 21, 2015
TagsGreece Sub-Saharan Africa Venezuela Agricultural Commodities Bitcoin Latin America France G7 Consensus Forecast Major Economies India South Africa oil prices Colombia Asia Portugal United States Turkey Exchange Rate Commodities Nordic Economies Infographic Base Metals Commodities Spain Company News Russia Emerging Markets Forex Japan Australia TPP Healthcare China European Union Euro Area Economic Growth (GDP) Brazil Inflation Argentina Brexit Africa Germany Mexico Canada Italy Investment Gold Precious Metals Commodities OPEC IMF Banking Sector Oil Trade Eastern Europe precious metals United Kingdom Iran Tunisia Cryptocurrency Unemployment rate Ukraine MENA Energy Commodities Vietnam Housing Market UK USA
Investment in Colombia's non-oil sector will be essential to boosting growth. Read more: https://t.co/tXgOlxSqwK
1 hour ago
1 hour ago
2 hours ago
Politics and trade negotiations remain key risks to Latin America's outlook. Find out more: https://t.co/y7SHpzGwJF
3 hours ago
3 hours ago
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- 2018 & 2019 Economic Outlook for the Top Oil Producing Countries
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- China’s growing influence on the Latin American economy
- Top Economics & Finance Blogs of 2018
- How Latin America emerged from recession in 2017
- Is this the beginning of the end for Bitcoin?
- Risks and Opportunities for 2018 - Daniel Lacalle
- Emerging Markets 2018 Economic Outlook
- The role of FDI in Vietnam’s socio-economic development
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will emerging market economies perform in 2017?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- Sub-Saharan Africa's 2016 & 2017 growth rates
- China: Recent postive economic data may be papering over the cracks
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit