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Economy and business in Russia

Russia has undergone major economic changes since the dissolution of the Soviet Union in 1991. The first time after the dissolution of the Union during Boris Yeltsin's presidency was characterized by mass privatization, economic instability and high inflation. Russia experienced steady economic growth in the period 1998-2008, mainly due to high oil prices. Since 2008, the country's economic growth has stagnated.

Business of Russia

According to COUNTRYAAH, Russia is heavily dependent on exporting commodities, making the economy particularly vulnerable to fluctuations in global markets. Furthermore, corruption and general unpredictability are what scare foreign investors away from the country. In 2014, among others, the EU and the US imposed economic sanctions on Russia because of the Ukraine crisis, which has further made international trade and economic growth even more difficult.

Perestroika and the Yeltsin Presidential Period (1991–2000)

Winding up the planning economy

Business of RussiaThe new Russian authorities faced major problems when Russia was established as a separate state towards the end of 1991. The centrally planned economy was about to collapse, and the danger of a major supply crisis seemed imminent. Russian authorities considered measures that could stabilize the situation in the short term as necessary. But the reformists who had come to power had far more extensive ambitions. They wanted to completely dismantle the Soviet economic system and replace it with a market-based economy. During the period 1990-1991, extensive reforms were implemented in several Eastern and Central European countries, but there was no established "recipe" for how the transition from a centrally planned economy should be implemented. The task was nevertheless more complicated in Russia because the planning economy had existed longer there than in Eastern Europe. In addition, the country's enormous size offered additional challenges.

It was relatively clear to the Russian leadership what measures had to be taken, but they disagreed on accrual and scope. In the Soviet economy, business was not just state-owned, it was woven into the state. In industrial development, the ideal would have been to create large units that could operate rationally. Many products had only one or two manufacturers during the Soviet era. In the phase-out of central government, one would face monopoly problems in most sectors of the economy. Another characteristic of the centrally planned economy was administratively fixed prices. Prices remained as constant as possible, although both the underlying production conditions and demand changed.

The last few years of the Soviet period were characterized by scarcity of goods. This was partly due to producers having gained some independence through Gorbachev's reforms, and did not find it worth producing and delivering at the set prices. The authorities first tackled the latter problem and the prices of most goods were released in January 1992. Exceptions were made for some important products, especially energy and fuel. The result did not wait, and prices tripled overnight. Quantities of goods previously withheld were now put up for sale, and the impression that there was a shortage of goods was lost.

However, the price increase did not lead to an increase in production, but only to a better balance between supply and demand. In some cases, monopoly producers reduced production to achieve even higher prices. The authorities failed to implement the so-called "shock therapy" they had originally intended, and compensated the business community with increasing transfers and credits. The price increase therefore remained at a high level throughout 1992 and 1993, with a monthly increase in consumer goods prices of about 20 per cent. Wages were also regulated, but many were not fully compensated for the rise in prices so that there were major changes in the real wage situation.for many regular wage earners. At the same time, inflation ensured that everyone saved money lost their value.

Russia was on the verge of hyperinflation, but the authorities managed, through a tight monetary policy, to get the situation under control. In 1995, the monthly inflation rate was below ten percent, and in 1997 it was down to approx. one percent. In August 1998 , the government devalued the ruble, followed by significant turbulence in the economy and new high inflation for some time. The devaluation made domestically produced goods more competitive and contributed to a growth period in the economy.

Falling industrial production had several causes: The collapse of the old central supply system made it difficult to get raw materials and part deliveries, as well as the lack of channels between producers and the market. Established ties with factories in other parts of the Soviet Union were broken, with major consequences for some sectors. Many sectors also struggled with run-down production equipment, which was due to low investment over a number of years. From 1990 to the end of 1996, industrial production fell by 50 per cent. The fall largely reflected the economic crisis and reduced economic activity. But the fall was also linked to restructuring of the economy, away from the areas prioritized during the planning economy. The huge reduction in steel production was associated with reduced military armament. From 1997 to 1999, the first signs of new growth in industrial production were seen.

Privatization

For the reform-oriented authorities, it was clear from the beginning that a change in property conditions would have to be implemented if the economy was to improve. In doing so, they submitted to an unprecedented privatization program. However, very little private capital was available that could be used to buy the enormous assets the state owned. In August 1992, the authorities chose to issue a privatization check or voucher to each citizen, which could be used to buy shares in companies that were privatized. This was explained by the fact that everyone really took part in the values ​​that were built up. The method provided no revenue to the state, but ensured that state property was redistributed.

The process was criticized by many for giving away great values ​​for nothing. It quickly became apparent that in most cases, the management of privatized companies was given control, and that they opposed the entry of outside owners. Although the management got stronger interests in the fact that the companies worked well, the efficiency gains were not as great as many had hoped. However, the reform politicians also had a political justification for the rapid privatization: by redistributing the values ​​in the economy, they would make it impossible to return to the old political system. Check privatization was completed in June 1994.

In the next round of privatization, buyers paid with "real" money. Many of the individuals and companies that now had money to invest in had established their fortunes through favorable positions in the old system, which they had then utilized during check privatization. During the period 1995-1997 there was a huge concentration of financial resources and power, with a group of Moscow banks and their leaders as a new power elite in Russia. The state has long retained the majority shareholding in companies in strategically important sectors such as energy production and telecommunications, but during 1997, ownership of most such companies was also transferred to private individuals.

However, government finances were not good, and the government raised large loans through the issuance of high- yield government bonds, which Russian banks in particular bought. In August 1998, the authorities had to declare that they could not repay the debt. Many Russian banks went over and depositors lost all their savings. The ruble was severely devalued. Many were expecting a protracted economic crisis, but the Russian economy recovered quickly. The devaluation made Russian products competitive in the domestic market again.

Putin's presidential term (2000-)

After the economic crisis of the 1990s, and especially after the 2000 presidential elections, economic policy became less reform-friendly. The relationship between the Russian government and the International Monetary Fund (IMF), which had supported the reform process with large loans, became very strained.

From 2003 it became clear that President Vladimir Putin wanted not only to reduce the political power the financial elite had gained under Yeltsin, but also to increase direct state ownership in strategic sectors, especially the energy sector. The strongest expression of this line was the process against Russia's largest oil company - Yukos - and its leader and principal Mikhail Khodorkovsky, the country's richest man. Khodorkovsky was arrested in October 2003, charged and later convicted of tax fraud. The company was broken up and its main assets sold to a state-controlled company - Rosneft.

The picture of Russia's economy is thus mixed. After many years of crisis, the state budgets came into balance and the macroeconomicthe situation was greatly improved. Economic growth in the period 1998-2008 was an average of seven per cent. Difficult restructuring processes began to yield results, but rising energy exports and high world oil and gas prices have also played an important role. The energy sector accounts for 50 per cent of the state's revenue. Foreign debt is repaid thanks to export surplus. The state's role as owner is increasing again, but around three-quarters of the business sector is privately owned. However, many companies are highly dependent on the state, for example export permits and tax benefits. The legislation and the tax system are deficient, and many issues must be resolved through unclear and time-consuming negotiation processes. Corruption has become a growing problem. The social differences have become very large, with some very rich people and many millions below the poverty line. Nevertheless, the vast majority of Russians have increased their living standards during Putin's years in power.

Foreign companies have not been allowed to play a truly decisive role in reshaping the Russian economy. In general, foreign companies have been restrained with heavy investments because they perceive Russian legislation and tax system as unpredictable. The largest foreign investments have been made in the oil industry in connection with the offshore development at Sakhalin in the Russian Far East. The largest Norwegian investment is made by Telenor, which has invested heavily in Russian telecommunications, in particular the mobile phone company Vimpelcom. See also the Vimpelcom case.

Agriculture

The physical conditions are in many places unfavorable to agriculture. Around five percent of Russia's land is cultivated, eight percent is pasture land. 80 percent is in the European part. Because of its enormous size, Russia still has a large agricultural production, see table.

Agriculture was nationalized under Soviet rule, and much of it was forcibly collectivized during the interwar period. In December 1990, Russia's Supreme Soviet decided to allow smaller land properties to be sold to private farmers. But it has proved difficult to establish a new stand of independent farmers. Many former state or collective farms have been turned into corporations or agricultural cooperatives. A new land ownership law from 2002 has allowed foreigners to lease agricultural land for 49 years. Investment in the sector is increasing. Agriculture is the only sector with significant growth since 2014.

Production of important crops, expressed in tonnes:

Product 2003 2015
potatoes 36 746 500 31 501354
Wheat 34 063 300 70,000,000 (2016 estimate)
sugar beet 19 383 600 33 513369
Building 17 968 ​​000 20 444258

Forestry

Russia has enormous forest resources, especially in its northern regions, but lack of infrastructure makes about 40 percent unavailable. Accessible areas, especially near the rivers, have often been over-taxed. Forestry has been in a deep crisis, which was partly due to under-investment. In 2005, a total of 183 million cubic meters were recovered, and in 2015 that figure had dropped to 120.7 cubic meters.

Fishing

Russian deep sea fishing, which has its major centers of gravity on the Kola Peninsula and the Pacific, has also undergone major changes. Fishing in distant waters has been greatly reduced due to excessive costs in the new economic system. The total catch volume decreased from 7.9 million tonnes in 1990 to 3 million tonnes in 2004. In 2014, the total catch volume was 4.2 million tonnes.

In the mid-1990s, Russian fishing boats began to supply large volumes, especially cod, for fishing in Northern Norway, because they provided better prices and faster processing than the Russian receipts. The value of Norwegian fish imports from Russia reached NOK 2 billion on an annual basis, but declined markedly when Russian fishermen began to deliver directly to the continent. At the same time, Norway exports semi and whole products, first herring and mackerel, but eventually large quantities of salmon. In 2006, Norwegian exports totaled more than NOK 3 billion. Russia later became the most important export destination for Norwegian seafood, and in 2013 had a total value of NOK 6.5 billion. Due to the conflict surrounding the Ukraine crisis, Russia imposed import bans on Norwegian seafood in the summer of 2014.

Mining and energy

Russia has ample access to minerals and energy resources. After drastically declining until the late 1990s, production began to rise again. 349 million tonnes of coal were produced in 2015. Russia also mines large quantities of iron ore, 97.6 million tonnes (2015). The largest deposits are in the Ural Mountains, but larger quantities of iron ore are also extracted on the Kola Peninsula and several places in Siberia, and not least in the Kursk area ("Kursk magnetic anomaly"). Significant quantities of gold are also mined (10.4 million ounces in 2015), copper,tin, nickel, platinum and diamonds. Russia is the world's second largest oil producer with 10.25 million barrels per day produced in 2014. Around two-thirds come from the oil fields in Tyumen county in the Western Siberian lowlands, especially the Khanty-Mansi Autonomous Region.

Russia is the world's second-largest natural gas producer after the United States, with 603.9 billion cubic meters produced in 2014. The country thus has close to 40 percent of the world's total proven reserves. Over 90 per cent of Russia's production takes place in the north of Tyumen (see Jamal-Nenet's autonomous area). Both gas and oil are transported through extensive pipeline systems to other parts of Russia, the former Soviet Union, as well as export markets in Central and Western Europe. Oil is also shipped by vessels from North-West Russia and the Black Sea. Russia's primary energy consumption is covered by natural gas (53 percent), oil (22 percent), coal(14 per cent), while nuclear power and renewable energy account for 11 per cent (2013). Of the electricity, around 64 per cent is produced by fossil fuels (natural gas and coal), 17 per cent by hydropower and about 18 per cent by nuclear power (2016).

Among the most important hydroelectric power plants are several plants along Volga and the very large plants at Jenisej (Krasnoyarsk, Sajano-Shushchenko) and Angara (Bratsk, Irkutsk, Ust-Ilimsk). Russia has ten nuclear power plants with a total of 36 reactors in operation (2018). The nuclear power industry strengthened its position after Putin became president, and several new reactors are under construction or planned.

Industry

Russia still has a large heavy industry, although production fell sharply after the disintegration of the Soviet Union. In 2015, 71.1 million tonnes of steel were produced, compared with 89.6 million tonnes in 1990. The most important heavy industrial areas are in the Ural Mountains and in the Kuznetsk basin.

The chemical and mechanical and textile industries are the most developed in the European part of Russia, especially in the Moscow region, which is economically the country's most important industrial area. By the large rivers, and especially by the Arctic ports, there is a large tree processing industry.

The automotive industry has its center of gravity in the Volga area. A total of 756,000 Russian cars were sold in 2007 (see Samara, Tatarstan and Nizhny Novgorod). They accounted for about 25 per cent of the number of passenger cars sold. A rapidly growing market share is covered by foreign brands produced in Russia (about 15 percent in 2007), especially in the St. Petersburg area. Imports of new and especially used cars also increased. In the years 2012–2014, however, Russian car sales dropped from 2.8 to 1.3 million cars sold. Sales of Russian car brands have also fallen sharply: from 410,000 in 2014 to 259,000 in 2015.

However, arms production and exports have continued to grow. Export revenues from this amounted to approximately $ 6.1 billion in 2005, and in 2014 to $ 8.6 billion. This makes Russia the world's third largest arms exporter after the United States and the United Kingdom.

Transport and Communications

In 2014, the railway network had a total length of approximately 87,000 kilometers. The network is the densest in the European part of the country, while in Siberia several thoroughfares have been built, including the Trans-Siberian railway and the Bajkal-Amur railway. The Russian railways have a larger gauge (1524 millimeters) than the Western European railway network. International traffic must therefore be run with material where the track width can be varied or with interchangeable bogies.

In 2012, there were around 927 721 kilometers of roads with a fixed tire. Of these roads, 39 143 kilometers are highways. Domestic waterways are also important transport routes for goods, totaling 96,000 kilometers. Compared to other industrialized countries, rail plays a much greater role than road transport in freight transport. Passenger car density increased from 60 to 285 cars per 1,000 inhabitants from 1995 to 2016.

Foreign Trade

Russia's foreign trade has since the dissolution of the Soviet Union turned away from the former Soviet republics in favor of other markets. In 2008, trade with states in just SUS accounted for 14.7 percent of the estimated total foreign trade of $ 685 billion. In 2008, trade with EU countries accounted for 52.2 per cent, with Germany being by far the most important single-trade partner with about 9.1 per cent of Russian foreign trade. In 2015, the most important trading partners were the Netherlands (11.9 percent), China (8.3 percent), Germany (7.4 percent), Italy (6.5 percent), Turkey (5.6 percent), Belarus (4, 4 percent) and Japan (4.2 percent).

Oil and gas are the dominant export products and for several years accounted for 50 per cent of exports of goods. With rising prices, they accounted for about 70 per cent of goods exports in 2007-2008. Following the fall in oil prices and Western sanctions, exports of fossil fuels stood at 63 per cent in 2015. Other important export goods are metals (9.6 per cent), timber (2.9 per cent) and chemicals (5.2 per cent). According to US authorities, Russia's export revenue fell from US $ 342 to US $ 259 billion from the years 2015 to 2016.

On the import side, machinery and equipment dominate. In addition to the officially registered foreign trade, there is a lot of unregistered border trade in food and consumer goods.

WTO membership

Russia joined the World Trade Organization (WTO) on August 22, 2012, after 19 years of negotiations. Before Russia joined the organization, the World Bank estimated that the country would have a short-term economic growth of just over 3 percent, and a long-term growth of around 11 percent. Greater foreign investment and competition in certain sectors, especially in the service sector, was highlighted as positive for the Russian economy.

However, economic growth was waiting: one year after Russia became a member of the WTO, the country's profits had fallen by 0.4 per cent. Exports fell by 3.8 per cent, while imports increased by 4.4 per cent. Russia also ended up in conflict with several of the WTO's member states shortly after joining the organization. Three months after Russia entered the WTO, the US, EU and Japan made a formal complaint that Russia still had trade barriers that were in violation of the organization's regulations. 11 months into membership, Russia was accused by, among others, the EU, China, Turkey, the United States and Japan of imposing taxes on imported cars.

The WTO estimated that economic growth related to Russian membership in the organization would not come until 2016, but the crisis in Ukraine and the Western sanctions has meant that this growth has been delayed.

Financial sanctions (2014-)

In 2014, the EU and the US imposed a series of diplomatic and economic sanctions on Russia because of Russian support for separatist groups in eastern Ukraine and the annexation of Crimea and Sevastapol. Many of the sanctions are similar, but the United States has several targeted sanctions against individuals in the Russian leadership. Norway has largely complied with EU sanctions. During the first seven months of 2015, the value of Norwegian goods exports to Russia fell from NOK 3.2 billion to NOK 1 billion.

EU

The EU considered Russia's appearance illegal, and in July 2014 imposed a ban on imports from the annexed territories. In December 2014, a ban was imposed on imports from Crimea and Sevastapol, as well as a ban on providing tourist services there. July 17, 2016, these measures were extended to June 23, 2017.

In addition, the EU imposed a series of economic sanctions aimed at affecting various economic sectors in Russia. In March 2015, the EU decided that these measures should be linked to whether Russia complied with the requirements of the Minsk Agreement. In December 2016, the measures were extended to 31 July 2017. The measures are:

  • Prevent five large state-owned Russian financial institutions, three defense industry companies and three energy companies from accessing the EU internal market;
  • Introduce bans on arms imports and exports to and from Russia;
  • Introduce a ban on exports of goods ending in the Russian weapons industry;
  • Introduce restrictions on Russian access to technology that can be used for oil recovery.

In addition, the EU imposed sanctions on economic cooperation: The European Investment Bank stopped initiating new financial operations in Russia, and some of the EU's bilateral and regional cooperation programs with Russia were wound up.

United States

Like the EU, US economic sanctions are based on Russia's progress in eastern Ukraine and the annexation of Crimea. U.S. economic sanctions include:

  • Sanctions against individuals, organizations and institutions. These sanctions include, among other things, travel restrictions for individuals and officials who the United States believes are responsible for the situation in Ukraine.
  • Restrictions on export and support to 14 Russian defense industry companies;
  • Restrictions on financing six of Russia's largest banks and four energy companies;
  • Prohibition on funding measures that encourage exports to Russia and economic development in Russia;
  • Prohibition of export and further export of goods, services and technology that can be used for oil business to five major Russian energy companies.

There is controversy over whether the sanctions are really capable of correcting Russia's behavior in the international arena. Some believe that the sanctions help marginalize the provocative segment of Russia's population and that it encourages Russia to compete with the West militarily rather than economically. Others claim that the sanctions are an effective means of tying what they believe to be Russia's aggressive foreign policy.

Russia, for its part, has responded by introducing embargo on a number of foods from the EU, Turkey, Norway, the United States and Canada. This had major consequences for Russian consumers. In 2015, prices of different types of meat rose by 15 per cent, while prices of vegetables rose by 25 per cent.

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