The Russian Federaion is blessed by an abundance of natural resources of every description. This includes rich agricultural land from which grain, potatoes and livestock are the main products. Land reform has been one of the most awkward problems facing Russia’s post-communist governments: much has been turned over to private ownership but a substantial proportion, especially in the more remote areas, is still owned collectively. Agriculture now accounts for 5 per cent of total economic output while employing 13 per cent of the workforce. Russia has huge deposits of oil and gas – its major export earners – as well as coal and minerals including gold, diamonds, nickel, manganese, copper, iron ore and phosphates. Further unexploited deposits have been located and there are undoubtedly more to be discovered, but they are often in areas (such as the permafrost-covered regions of Siberia and the Russian Far East) where exploitation is technically difficult and transport systems limited.
Energy products and heavy industry – production of vehicles, metal goods, construction materials and machinery – are the kernel of Russia’s industrial sector. Textiles and chemicals are other important industries. By contrast, Russia’s light industry – especially production of consumer goods– is paltry, accounting for just 2 per cent of total industrial production. The fastest growing part of the economy since 1990 has been the service sector. Here, banking, insurance and property have developed from a base close to nothing, and services now account for just over half of economic output. Both the industrial and service sectors have been hampered by the paucity of small and medium-sized businesses: this is a major flaw in the Russian economy. The sheer size and diversity of the country has made economic reform in the Russian Federation a gargantuan task, especially by comparison with its former East European allies and the other 14 Soviet republics. The economy underwent significant contraction after 1990: Russian economic statistics are notoriously unreliable but, by 1998, it is likely that GDP had declined by between 35 and 50 per cent. That year, a combination of internal and external factors led to the virtual collapse of the economy which was staved off by a large financial injection from the IMF (of the order of US$22 billion). Since then, the economy has undergone a significant recovery with average annual growth of 5 per cent in the last five years (the current figure is 7.3 per cent). The Government has got on top of the hyper-inflation which caused so much damage in the initial stages of the reform process. At 13.7 per cent, current inflation is high by recent Western standards but not unmanageable. The official unemployment rate is 8.5 per cent, with considerable underemployment. Russia hosts a substantial informal or ‘grey’ economy in which between 25 and 40 per cent of the workforce are engaged to some extent. But there are some causes for optimism: the success of the Putin government in stabilizing the economy has boosted international confidence, especially given the difficult situation inherited from his predecessor, Boris Yeltsin. In what amounted to a firesale, the Yeltsin government sold off the major components of the Russian economy – including the vital oil and gas sector – at knock-down prices to favored bidders. This process gave rise to the so-called ‘oligarchs’, a small group of immensely rich individuals who – mostly by virtue of political contacts, good judgement and luck – now own the bulk of the Russian economy. (It is estimated that 20 conglomerates are now responsible for 70 per cent of Russia’s GDP.) There is little Putin can do about corporate ownership, but there are other areas where the government can make a difference. Perhaps the most important of these is modernization of the national infrastructure: the Russian Federation suffers from insufficient and poor-quality transport networks as well as an erratic and antiquated telecommunications system. Moreover, neither commercial law nor the taxation system are functional and effective, with the result that operating conditions for most businesses are difficult. Organized crime thrives in such an environment: billions of dollars of international aid have simply disappeared. Moreover, the removal of exchange controls (as demanded by Western financial donors) has meant that there has also been a large legitimate exodus of money from Russia. In May 2004, five former Soviet bloc states and the three ex-Soviet Baltic republics joined the European Union. This development – unimaginable 15 years ago – presents both opportunities and dangers for the Russian Federation. On balance, the Russian economy will probably benefit from immediate proximity to the EU. Russia’s trade patterns have gradually shifted towards Western industrialized nations (not least to meet their high energy demands). Apart from the former Soviet republics of Kazakhstan, Belarus and Ukraine, Russia’s main trading partners are Germany, the USA and Japan.
