What Do We Know about Russia’s Economy?

Russia is the largest country in the world, and it represents 11% of the world’s land mass. The country is categorized as an ‘upper middle income’ economy by the World Bank, and Russia’s three-decade long journey includes periods of hyperinflation, stagflation and strong economic growth.

Here’s an overview of the Russian economy.

In 1992, Russia faced two severe problems: declining growth rate and very high inflation. Russian consumer prices rose 2,509% in 1992, followed by an 840% rise in 1993. By 1997, inflation rates were tamed to 11%. According to a 1998 IMF note, “Nineteen ninety-seven was a year of achievement for the Russian economy. For the first time since 1992, the economy grew, albeit barely. The current account of the balance of payments was in surplus.”

The phase of economic recovery and stabilized inflation was very short-lived. Russia’s economic situation started deteriorating in early 1998. At that time, the country’s exports of energy resources and other primary commodities made up 80% of merchandise exports. The waves of the Asian financial crisis hit the Russian economy in the form of weak demand and unprecedented fall in energy prices. Russia was already in a fragile state with its fixed exchange rate regime and fiscal position. The year 1998 witnessed inflation surged by 84%, significant devaluation of rubble and a default on government short-and-long term bonds.

Change in the country’s leadership and sharp rise in oil prices between February 1999 and September 2000 helped place Russia on a path of impressive progress in the new millennium. The country reached the milestone of becoming a trillion-dollar economy in 2006 on the back of domestic consumption, oil exports and a politically stable environment. It is estimated that “between 2000 and 2008, the GDP grew by 83%, productivity grew by 70%, and expenses for accumulating fixed capital doubled in real terms.”

However, the financial turmoil that emerged from the U.S. subprime crisis engulfed Russia, pushing it into recession with a significant budget deficit in 2009. This period reversed the economic success of the early 2000’s, and the country experienced a low annual growth rate of 1-1.5% before it faced a major economic strain in 2014. Oil prices more than halved between July and December 2014, resulting in a severe terms-of-trade shock for Russia. The situation worsened with mounting geopolitical tensions that began in March 2014 and led to multiple economic sanctions by the U.S. and the European Union (EU). The economic state gradually recovered, growing in the range of 1.5-2%. During 2020, its GDP shrunk by around 3.6%, bouncing back by 4.5% in 2021.

According to the U.S. Energy Information Administration (EIA) December 2021 data, Russia is the world’s third-largest producer of petroleum and other liquids behind the U.S. and Saudi Arabia, and the second-largest producer of dry natural gas. Russia has the world’s largest natural gas reserves. The country’s oil production is majorly controlled by domestic companies such as Rosneft, Lukoil, Surgutneftegas, Gazprom and Tatneft.

After the jolt to its economy in 2014, Russia began to work towards diversifying its economy to reduce dependence on oil and gas exports. Russian non-resource non-energy exports set a record of $193 billion in 2021, an increase of 37% over the previous year. The main non-resource includes metal (25.6%), chemical (19.6%), machine engineering (19.1%) and food (17.7%) industries. Russia has set an ambitious target to increase the share of non-commodity and non-energy exports by at least 70% by 2030.

The data by the World Gold Council suggests that Russian Federation holds 2,298.53 tons of gold in reserves, which is the fifth highest globally after the U.S., Germany, Italy and France. Russia’s gold reserves constitute 21.4% of its total foreign reserves.

The January 2022 update by IMF projected that Russia's GDP would grow by 2.8% in 2022 and 2.1% in 2023. However, the current developments are likely to bring a change to the growth projections. 

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional. The data mentioned is based on reports from IMF, World Bank and EIA.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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