Economic Study of Russia

Economic Study Of Russia

Introduction:

The name Russia is derived from Rus, a medieval state populated mostly by

the East Slavs. However, this proper name became more prominent in the later

history, and the country typically was called by its inhabitant’s “russkaya zemlya”

which could be translated as "Russian Land" or "Land of Rus People".

Russia, officially known as both Russia and the Russian Federation, is

a country in northern Eurasia. It is a federal semi-presidential republic, comprising

83 federal subjects. At 17,075,400 square kilometers (6,592,800 sq mi), Russia is

the largest country in the world, covering more than one eighth of the Earth's

inhabited land area. Russia is also the eighth most populous nation with 143 million

people.

S.R.Luthra Institute Of Management 1


ECNOMIC STUDY OF RUSSIA

GDP composition and major industries & sectors:

GDP Composition :

Gross domestic product (GDP) refers to the market value of all final goods and

services produced within a country in a given period. GDP per capita is often

considered an indicator of a country's standard of living.

GDP Rates for last 5 years:

YEAR GDP RATES

2007 8.535

2008 5.248

2009 -7.8

2010 4

2011 4.9



The Gross Domestic Product (GDP) in Russia expanded 2 percent in the year

of 2011 over the previous year. Historically, from 2003 until 2011, Russia's average

quarterly GDP Growth was 1.22 percent reaching an historical high of 3.20 percent

in December of 2006 and a record low of -4.20 percent in December of 2008. The

Russian economy is commodity-driven. Payments from the fuel and energy sector in

the form of customs duties and taxes accounted for nearly half of the federal

budget's revenues. However, during the past decade, poverty and unemployment

declined steadily and the middle class continued to expand.

Major industry and sectors:

Russian industry sectors encompass a wide range of sectors, such as mining,

energy, automotive, defense, manufacturing and communication. Moscow is the

center for many manufacturing industries such as cars, steel and other heavy

manufacturing industries. In 2010, Russia’s industrial production growth rate was

estimated at 8.3%, having dropped 11% in 2009. At the start of 2011, the

Russian economy was showing reasonable to strong resilience in all of its

sectors.

Russia has a range of mining and extractive industries. These include coal,

oil, and gas extraction as well as the chemicals and metals industries. Russian

enterprises take part in all forms of machine building from rolling mills to high-

performance aircraft and space vehicles. Russian enterprises are involved in

shipbuilding, manufacturing of road and rail transportation equipment,

communications equipment, agricultural machinery, tractors, and construction

equipment. Russian firms produce electric power generating and transmitting

equipment, medical and scientific instruments, consumer durables, textiles,

foodstuffs, processed food products, and handicrafts.



Currently Russian consists of the following competitive industries: oil and gas,

mining, processing precious stones and metals, aircraft building, aerospace

production, weapons and military machinery manufacture, electric engineering,

pulp-and-paper production, automotive industry, transport, road and agriculture

machinery production, light and foodstuffs industries.

Machinery construction:

Machine building is the leading industry in Russia, which is concentrated

mostly in Moscow, St. Petersburg, the Urals, Volga region, and Westerns Siberia. It

provides all other industries with equipment and machinery. The share of machine

building in Russian economy is almost 30%. Machine building industries have a

rather quite complex structure consisting of over 70 branches. The most important

are electronics, computers, and robotics, instrument building, agricultural and

transport machine building, railway cars manufacture, aircraft building, ship building

etc.

Chemical and petro chemical industry:

Russian chemical industry plays an important role in the economic

development of the country. Chemical industry provides chemical raw materials

mining (apatites and phosphorites, common and potassium salts, sulfur and several

other products), basic chemistry and chemistry of organic synthesis.

Basic chemistry includes production of mineral fertilizers, chlorine, sodium,

sulfuric acid and other products. Chemistry of organic synthesis comprises

production of synthetic rubber, plastics, synthetic resins, and chemical fibers.

Fuel and energy:

Fuel and energy complex supplies fuel and electricity to all sectors of economy

and ensures economy development. Products of fuel and energy complex are

currently the main export of Russia. Fuel and energy complex is composed of mining

and processing of various fuels and electric power production

Metallurgical complex:

Metallurgy complex of Russia includes the extraction of metal ores, their

enrichment, metal smelting, and production of roll stock. This industry includes



ferrous and nonferrous metallurgy. More than 90% of the metal used in the national

economy is ferrous metals with steel leading the way. In the steel industry there are

following types of enterprises: full cycle metallurgical plants, the ones producing pig

iron, steel and roll stock, steel plants, ferroalloy production of iron alloys with

chromium, manganese, silicon and other elements; light metallurgy - steel and roll

stock production in the machine-building plants; direct ore reduction.

Non-ferrous metals metallurgy’s volumes of production are significantly lower

than those of in ferrous. But the price of its products is much higher. Among them

are heavy non-ferrous metals (copper, zinc, lead, nickel, chromium), lightweight

(aluminum, magnesium, titanium), alloys (used as an additive to steel - tungsten,

molybdenum, vanadium), and precious (gold, silver, platinum). Copper ores have

been mined in Russia in the Urals for a long time. The major center of mining and

melting of copper ores is Norilsk. Lead-zinc ores are mined in the mountainous areas

of Kuzbass and some - in North Ossetia. The largest aluminum plants are located in

Bratsk and Krasnoyarsk. Together they provide about half of Russia's aluminum.

Production of tin ore is situated in the Far East and Siberia, and metals melting - in

Novosibirsk

Agricultural complex:

Agro-industrial complex of Russian Federation consists of industries

specializing in production of agricultural products, their processing and storage, as

well as the ones supplying agriculture and processing industry with the means of

production. Agriculture is the main part of agro-industrial complex. It is characterized

by large-scale production. Agricultural lands make up 219.6 million hectares. Major

agricultural crops are grain, sugar beets, sunflowers, potatoes, and flax. Among the

crops cultivated in Russia are rye, wheat, barley, oats, corn, millet, buckwheat, rice,

and legumes (peas, beans, soy beans, lentils). Overall production of cereals and

leguminous plants puts Russia in the fourth place in the world (after China, USA and

India). Crop farming provides about 40% of the gross output of agriculture; livestock -

more than 60%. Livestock is represented by dairy, meat and wool industries



Composition of import and export:

YEAR EXPORT (in billion) IMPORT (in billion)

2007 355 223

2008 472 292

2009 303 192

2010 398 249

2011 426 273

Trade relationship:

Trade:

After hitting lows in 2009, trade between the U.S. and Russia grew to $31.7

billion in 2010, an increase of 35% from 2009. U.S. imports from Russia grew 41%

year over year to $25.7 billion while exports to Russia increased just 13% to $6.0

billion. The rapid increase in U.S. imports from Russia from 2009 to 2010 can be

attributed to the low base year and nascent economic recovery in the United States,

but also to the rising price of oil and other commodities. Oil and oil products

represent over two-thirds of the value of all U.S. imports from Russia. Russia is

currently the 37th-largest export market for U.S. goods. Russian exports to the U.S.

were fuel oil, inorganic chemicals, aluminum, and precious stones. U.S. exports to

Russia were machinery, vehicles, meat (mostly poultry), aircraft, electrical

equipment, and high-tech products.


YEAR TRADE SURPLUS (in billion)

2007 $129

2008 $180

2009 $112

2010 $152

2011 $118


Russia's overall trade surplus in 2009 was $112 billion--compared with $180

billion in 2008 and $129 billion in 2007. In 2010 the trade surplus increased to $152

billion and continued to grow in 2011 to reach $118 billion by July 2011 (versus

$96.4 billion at the same time in 2010), although import growth was beginning to

outpace export growth. World prices continue to have a major effect on export

performance, since commodities--particularly oil, natural gas, metals, and timber--

comprise nearly 90% of Russian exports. Russian GDP growth and the

surplus/deficit in the Russian Federation state budget are closely linked to world oil

prices.

Russia is in the process of negotiating terms of accession to the World Trade

Organization (WTO). The U.S. and Russia concluded a bilateral WTO accession

agreement in late 2006, and negotiations continue on meeting WTO requirements for

accession. Both Prime Minister Vladimir Putin and the General Director of the WTO,

Pascal Lamy, stated in early 2011 that they felt Russia would join within the year.

According to the 2010 U.S. Trade Representative's National Trade Estimate,

Russia continues to maintain a number of barriers with respect to imports, including

tariffs and tariff-rate quotas; discriminatory and prohibitive charges and fees; and

discriminatory licensing, registration, and certification regimes. Discussions continue

within the context of Russia's WTO accession to eliminate these measures or modify

them to be consistent with internationally accepted trade policy practices. Non-tariff

barriers are frequently used to restrict foreign access to the market and are also a

significant topic in Russia's WTO negotiations. In addition, Russia’s lax enforcement

of intellectual property rights had led to large losses for U.S. audiovisual and other

companies and is an ongoing irritant in U.S.-Russia trade relations. Russia continues

to work to bring its technical regulations, including those related to product and food

safety, into conformity with international

Standards.

Inflation:



YEAR INFLATION RATE

2007 11.87

2008 13.28

2009 8.80

2010 8.78

2011 5.21

What impact caused on 2007-08?

Russia Positives:

Very low sovereign debt; fiscal books are more or less balanced. High oil

prices for now. Moderately paced recoveries have almost returned output levels to

peak-2008. Households far less reliant on borrowing to finance consumption than in

typical developed nations.

Russia Negatives:

Dependence of the budget on oil prices:

In 2008, one of the main causes of the sudden collapse in industrial output

was the draining of liquidity. Russian industrial groups had relied on Western

financial inter-mediation for accessing capital. From August, this suddenly dried up

as the crisis exploded and global investors scurried to the “safe haven” of US

Treasury bonds.

In the case of a global credit crunch, On the one hand, its macroeconomic

fundamentals are very good, on the other hand, this was the same case in 2008 and

widespread sentiments that Russia was a “haven of stability” patently didn’t work out.



After all in 2008 investors parked their savings in the bonds of countries

perceived to be stable; above all, US bonds. This was because this was a primarily

financial / banking crisis and sovereigns remained solvent. This calculus may be

fundamentally different in the next crisis. Euro bonds are out of the question. No

bond vigilantes have yet appeared for US Treasuries.

So only commodities are left as a major investment vehicle which benefits

Russia), HOWEVER… big sovereign defaults will force the world economy back into

recession, lower oil demand, and relieve pressure on commodities leading to a

collapse of their prices – which is bad for Russia. Alternatively, prices may remain

high if investors remain big on commodities.

Dependence on credit for consumption:

Credit based purchases were beginning to play a huge role in Russian

consumption in 2007-2008; this was cut off and constitutes another main cause of

the depth of its 2009 recession. This dependence on credit for consumption is

already creeping back in 2011, though it has yet to reach the levels of early 2008.

Employment condition in Russia:

Russia has paid a high social price for its rapid progress in the transition from

communism. Under communism, economic growth was restrained but there was a

very low level of inequality. Most workers made roughly the same income. Extremes

of high and low incomes were rare. Since embarking on a market economy, Russia's

rapid macroeconomic and political reforms created anxiety among the citizens who

came to expect a modest but dependable lifestyle. Russia's abandonment of

subsidies for Soviet-era industries permitted a steep industrial decline, throwing

millions of citizens out of work. Today the Russian labor force is undergoing

tremendous change. Although well-educated and skilled, it is mismatched to the

rapidly changing needs of the Russian economy. Millions of Russian workers are

underemployed. Unemployment is highest among women and young people. Many

Russian workers compensate by working other part-time jobs.



Russia's financial crisis had a severe effect on wages in the country. Many

employees were helpless as ruble devaluation and price increases drastically eroded

the buying power of their salaries. Meanwhile, both foreign and Russian companies,

faced with their own challenges stemming from the crisis, resorted to pay cuts in

order to maintain what staff they felt able to keep. As a result of the financial crisis,

although nominal wages in Russia continued to climb, real wages in the country

continued to fall. The average nominal monthly wage in January 1999 was

approximately 1,200 rubles. In January 2000, the nominal wage was roughly 1,575

rubles or about US$58 at the prevailing exchange rate at the time. According to

official figures, real wages and real disposable income had fallen roughly 30 percent

by the end of 1999 compared to 1997.

According to a minimum wage law signed by President Putin in June 2000,

the minimum wage increased to 300 rubles per month by mid-2001. In December

1999, the average monthly subsistence minimum was 943 rubles, or approximately

US$36 at the prevailing exchange rate. Therefore, approximately one-third of

Russia's population is living below the subsistence level. As of 1 February 2000,

Russian pensions increased 20 percent. The minimum Russian pension is 410

rubles per month. The average pension is 650 rubles per month, which is still below

the subsistence minimum.

Although the Russian government has been using International Labor

Organization (an arm of the United Nations) statistical methods to determine

unemployment, officially reported unemployment levels in Russia, as with other

official statistics, have often been lower than figures determined by the international

community. Russia reported several years of very slowly growing unemployment,

which temporarily peaked at 9.6 percent in the spring of 1997 before dropping to a

low of 9 percent at the end of 1997. During this time, alternative estimates of

unemployment suggested a combined unemployment and underemployment rate of

between 12 and 15 percent. In 1998 unemployment levels resumed their climb. In

the wake of Russia's financial crisis, both Russian and foreign companies resorted to

layoffs and salary cuts. In November 1998, when the official unemployment rate was

11.6 percent, the Russian Ministry of Economy predicted that unemployment would

grow 70 percent by 2001. In early June 1999 the Russian government reported that



unemployment had reached 14.2 percent of the country's workforce, or 10.4 million

people, the highest level ever officially reported by Russia. For much of 1999 the

unemployment rate hovered at 12.4 percent, or 9.12 million people. Russia closed

1999 with an official unemployment level of 11.7 percent.

Russia's well-educated but relatively inexpensive labor force has been a

leading attraction for foreign firms. While in the early 1990s many Western firms

initially found it challenging to find employees educated in Western business

concepts and practices, there is a growing pool in Russia of individuals with Western

business exposure, education, and experience. Russian law requires that wages be

paid in rubles.

Infrastructure development:

The transportation infrastructure in Russia is underdeveloped. The transport

system is heavily Moscow-centered, Commercial transportation relies heavily on rail.

Roughly 90 percent of commercial haulage is rail-based and insufficiently integrated

into world transport systems. The Russian trucking industry is only minimally

developed, and roads are not designed to carry heavy and long-distance truck traffic.

The Russian railway system includes a total of 150,000 kilometers (93,210

miles) of broad gauge rail, making it one of the most extensive railway systems in the

world. However, of this total only 87,000 kilometers (54,061 miles) is in "common

carrier" service. The remaining 63,000 kilometers (39,148 miles) serve specific

industries or are dedicated railways lines and are not available for common carrier

use.

About 30 percent of freight cars, 40 percent of passenger cars, and nearly half

the locomotives are of such poor quality that they should be replaced immediately.

The Russian waterways system is an important component of the transportation

infrastructure. Total navigable routes in general use by the Russian River Fleet

amount to 101,000 kilometres (62,761 miles).



The Russian highway system includes a total of 948,000 kilometers (589,087

miles) of road including 416,000 kilometers (258,502 miles) that serve specific

industries or farms and are not maintained by governmental highway maintenance

departments. Of the total road system, only 336,000 kilometers (208,790 miles) are

paved. Russia's great territorial expanses and rugged terrain have hindered the

development of a nation-wide highway.

Russia has some 630 improved airport facilities, 50 of which are capable of

accommodating international flights. The country also has extensive oil and gas

pipeline system, with some 48,000 kilometers (29,827 miles) of pipelines for crude

petroleum, 15,000 kilometers (9,321 miles) designed for shipment of refined

petroleum products, and 140,000 kilometers (86,996 miles) designed for shipment of

natural gas.

Russia's overall electricity production (1998) was 771.94 billion kilowatt hours

(kWh). Of this amount, some 69 percent was produced through burning fossil fuel,

20 percent resulted from hydroelectric generation, and roughly 13 percent was

produced at commercial atomic generating stations. Electricity consumption

amounted to 702.71 billion kWh, while 21 billion kWh was exported and 5.8 billion

kWh was imported.

Russia's telecommunications system is in the midst of the global

telecommunications revolution by 2000, there were over 1,000 companies licensed

to offer communication services. During this period access to digital lines has

improved, particularly in urban centers. Internet and e-mail services are now

widespread and rapidly improving. In a few short years, Russia made significant

progress toward building the telecommunications infrastructure necessary for a

market economy.



SWOT Analysis:

Introduction:

Russia is a country found in northern Eurasia and is the world’s largest

country in terms of area. Massive changes have occurred to Russia’s economy since

the fall of the Soviet Empire. The economy has changed from a state of socialist,

controlled structure to a market based and globally integrated economy. Several

economic reforms were made in Russia in the 1990s and these reforms led to

privatization of most industries, defense and energy related sectors. However,

Russia’s vulnerability to economic crisis increased due to over-reliance on

commodity exports. This paper will give a detailed description of the SWOT Analysis

on Russia’s Economy.

Strengths:

SWOT Analysis is a method used for strategic planning by analyzing the

Strengths, Weaknesses, Opportunities and Threats that may arise in a project or

venture. The objective of this SWOT Analysis is to enable Russia know the essential

steps to take so that the country can achieve an economical stability.

One of the key strengths is the fact that Russia has a reliable central planning

and this has enabled the country to have one of the nest economies in the world.

There is also growth in foreign currency exchange and improved international

finances which have enable Russia to stabilize its economy to some extent. The

other strength that the country has is the improved facilities such as institutions,

investments, infrastructure and innovation. These facilities have greatly improved

Russia’s economy (Wehrheim, 2003).

It is also worth noting that Russia is rich in natural resources such as coal

reserves and oil reserves which constitute a large portion of the country’s exports.

This is one of the strengths that have enabled Russia to have an almost stable

economy.



Weaknesses:

One of the key weaknesses that Russia has is the high rate of poverty and

unemployment and this has greatly affected its economy. The other weakness and

challenge to Russia’s economy is the country’s limited access to foreign financing.

Moreover, the county also has a high rate of public expenditure and this may have

detrimental effects on the economy. There is also the political risk in Russia which is

also among the main weaknesses.

Opportunities:

One of the opportunities is the relation between Russia and India, Indo-

Russian Trade Relations. Both countries have formed a trade coalition and a joint

study group to help in the formation of the roadmap or way forward for increasing the

bilateral trade turnover. This memorandum of understanding between India and

Russia may lead to signing of a Comprehensive Economic Cooperation Agreement.

This may be the perfect opportunity for Russia’s economy to stabilize. Russia has a

high proximity to export its energy resources to Europe and this is also among the

main opportunities.

Threats:

It is evident that Russia has high public debts accounts and this is a key threat

to Russia’s economy. The increase in debts is due to the drop in the stock market

and also due to governance issues. The other threat is the increasing rate of

unemployment that Russia is experiencing. The rate of unemployment has recently

increased from 6.5% to 8.9%. The other key threats to Russia’s economy are the

fluctuating prices of oil and US dollar. If the country does not guard itself from these

fluctuating prices, the economy will be affected.


Economic Study of Russia

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