In 2020, Russia had the sixth largest economy in the world, but since then, it subsequently has been cut off from much of the global trade and finance. The country has a long and complicated history that has led to its present geopolitical and economic situation.
Russian Economic Features
Russia sits between Europe to the west and the Pacific Ocean to the east, covering eleven time zones. Despite its large geographic footprint, the average Russian citizen has less wealth than citizens of other nations with high gross domestic product. Russia’s economy is heavily influenced by natural resources, but that’s not the only factor that drives its money and people. Among the features of the Russian economy:
Russia has a market-based economy with a high level of state involvement, and many government officials are quite wealthy.The Russian currency is the ruble. One ruble is worth approximately $0.016 U.S. dollar.In 2021, Russia’s GDP was equivalent to $1.78 trillion.Russia has a population of 143.4 million. Of these people, 71.8 million are in the labor force.The country’s leading imports before sanctions imposed by the 2022 invasion of Ukraine were cars and vehicles, packaged medicines, and broadcasting equipment.
The Formation and Dissolution of the Soviet Union
Prior to 1917, Russia was ruled by a series of dynastic monarchies. In 1917, Communists overthrew the Russian monarchy and established a new, authoritarian government steeped in Marxist-Leninist Communism. The newly Communist nation of Russia united with other Communist nations surrounding it to form the Union of Soviet Socialist Republics, also known as the USSR or the Soviet Union. The Communists remained in power until 1991, when Mikhail Gorbachov promoted a climate of openness that led to the dissolution of the USSR and the fall of the Communist government. After an experiment with democracy under the presidency of Boris Yeltsin, the government returned to authoritarianism under the leadership of Vladimir Putin. Putin served as president from 2000 to 2008 and again from 2012 until the present.
Transition to Oligarchy
Russia exited the Soviet era with rich natural resources, especially oil and gas, and a high literacy rate. The Communist government promoted education, and Russia continues to have a large network of schools and universities. Under the current government, elections are managed to generate predetermined outcomes. The economy gives a nod to a market-based system, but Russia’s businesses face a high degree of state control. Economic assets and wealth are concentrated in the hands of the government and government officials, keeping government and business interests aligned, and property rights are weak.
Perceptions of Corruption
One of the problems that has dogged Russia is the perception that its government is corrupt and that its business leaders accept it. Transparency International, which rates a country on a scale of zero (perceived as the most corrupt) to 100 (perceived as the least corrupt), assigned Russia a score of 29 in 2021, ranking the nation 136 out of 180 countries rated. By contrast, three nations shared a top score of 88: Denmark, Finland, and New Zealand.
Economic Growth in Russia
Heading into the COVID-19 pandemic, Russia’s 2019 inflation and unemployment rates were both at 4.5%. This was a period of stability following decades of economic tumult, with GDP growth moving erratically throughout the last two decades. Russia’s economy is closely tied to the energy industry, and it faced a recession in 2014 and 2015, in large part due to falling oil prices. Russia’s aging, shrinking population and reliance on natural resources could be signs that the long-term potential for economic growth is weak. In addition, if the world succeeds in reducing its reliance on fossil fuels, much of Russia’s export economy will dry up.
Russia’s Energy Industry
Investors thinking about Russia usually start by looking at its energy industry because it is the main driver of the economy. Russia is the world’s third largest producer of crude oil, behind the United States and Saudi Arabia. It’s also the second largest exporter of crude oil, behind Saudi Arabia. The International Energy Agency reports that Russia’s crude oil output is 14% of the global supply. The largest export market for this crude is China, followed by the European Union. The Russian government operates pipelines that take oil and gas to China, Japan, and Eastern and Central Europe. Russia’s largest oil company is Rosneft, which is owned by the Russian government. The next largest company is Lukoil, which is privately held.
How International Conflicts Impact the Russian Economy
Russia’s international trade has been disrupted by the country’s expansive foreign policy, which has led to conflicts with its neighbors. Russia controls less area than it did during the Soviet era, and it seems that this rankles some folks in the country’s government. The Russian leadership may want to incorporate some neighboring nations into the Russian Federation, but those neighbors don’t seem to share the same interest. The result has been expensive military conflicts and international sanctions. In addition, Russia’s problems with doping athletes and real or perceived corruption have created levels of distrust that affect the ability of Russians to interact with or do business in other countries.
Invasion of Ukraine
Russia’s invasion of Ukraine began in February 2022 and created shockwaves in the global financial markets. Russian President Vladimir Putin made moves to take over the country and the Ukrainian people fought back. In reaction to the invasion, many nations imposed sanctions on the Russian economy. Among the sanctions imposed by the United States, the European Union, and the G7 nations were a full block on two of Russia’s largest banks: Sberbank and Alfa Bank; a prohibition on new investments in Russia; blocking of trade with Russia’s state-owned enterprises; and blocking of transactions involving many Russian public officials and their families.
