Investors looking for greater diversification or trying to tap into fast growing parts of the world may have considered emerging market economies, such as Brazil, Russia, India, or China. Of those, Russia is certainly the largest in terms of landmass, but it ranks only 11th in terms of worldwide gross domestic product (GDP)—well behind China (2nd) and India (6th), and just ahead of Brazil (12th).
- Russia's GDP is primarily made up of three sectors—agriculture, industry, and service.
- The agricultural sector makes up less than 4% of GDP, while industry and services make up 30% and 56.3%, respectively.
- In 2021, Russia saw the best GDP growth since 2008, posting a 4.7% growth rate. For 2022, the expected GDP growth rate is 2.8%.
- In February 2022, the U.S. and other countries imposed new sanctions on the country over its invasion of Ukraine.
Russia: Then and Now
The initial transition period for Russia falling the fall of the Soviet Union in 1991 was tough, as it inherited a devastated industry and agricultural sector along with the fundamentals of a centrally planned economy. The regime introduced multiple reforms that made the economy more open, but a high concentration of wealth still continued.
Russia’s economic growth rate remained negative during most of the 1990s, before the start of the subsequent golden decade. From 1999 to 2008, Russia's GDP grew by at least 4.7% each year. This growth made Russia one the fastest growing economies. This growth, however, was mostly driven by the boom in commodity prices, notably oil.
The Russian economy got a jolt as oil prices dipped—triggered by the 2008-09 global financial crisis—exposing Russia’s dependence on oil. The economy gradually recovered as oil prices stabilized.
The Russian economy then grew at a decent pace for 2011 and 2012, but structural issues started to emerge that caused a slowdown during 2013. The next couple of years saw a continued slowdown as the country faced multiple issues including falling oil prices, geopolitical pressures, and sanctions by the West due to its invasion of Ukraine. Its GDP fell 2% in 2015. Russia's GDP managed to grow in each year from 2016 to 2018, before tapering off and falling 3% in 2020.
In 2021, Russia saw the best GDP growth since 2008, posting a 4.7% growth rate. For 2022, the expected GDP growth rate is 2.8%.
In February 2022, Russia once again invaded Ukraine. On Feb. 22, 2022, U.S. President Joe Biden announced sanctions against Russia in response to its military aggression against Ukraine, including the advancement of Russian troops into two separatist regions of eastern Ukraine. The administration noted this is the "first tranche of sanctions that go far beyond 2014, in coordination with allies and partners in the European Union, United Kingdom, Canada, Japan, and Australia."
The sanctions are mostly economic and include blocking two state-owned Russian financial institutions—Vnesheconombank and Promsvyazbank and their subsidiaries, which provide financing to the Russian military, from accessing the U.S. financial system. Other sanctions include the U.S. Treasury prohibiting the purchase of new Russian sovereign debt and banning U.S. companies and individuals from buying sovereign debt in the secondary market. Five Russian elites and their families have also been targeted.
Russia's GDP Composition
Russia’s GDP is largely made up of three broad sectors—a small agricultural sector that contributes about 3.7% to GDP, followed industry and service, which contribute 30% and 56.3%, respectively.
Harsh weather and tough geographic conditions make cultivation of land arduous and restricted to a few small areas of the nation. This is one of the main reasons behind the minimal role of the agricultural sector in Russia’s economy.
The agrarian sector is characterized by the coexistence of both the formal sector, represented by large producers for commercial purposes, and the informal sector, where small landholders produce for self-sustenance. The sector includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production.
Despite being a large exporter of certain food items, Russia is a net importer of agriculture and food. Other than the non-availability or shortage of certain food products domestically, a few factors explain Russia’s rising food imports.
One is the higher inflation in Russia vis-à-vis its trading partners, which makes foreign imports more price competitive. The second reason is its sound economic progress, especially from 2000 to 2008. This boom period led to income growth, further pushing up consumer demand for food, which was met by imports.
In 2014, in response to the West's food embargoes, the Russian government banned certain food categories including dairy, meat, and produce from several countries including the U.S. and the European Union, which significantly dropped Russia's share of food imports.
The contribution of Russia’s industry sector to its GDP has remained more or less stable, averaging about around 30% over the last decade. For context, the U.S. only generates 18% of its GDP from industry. Industry comprises mining, manufacturing, construction, electricity, water, and gas. Russia has an array of natural resources, with a prominence of oil and natural gas, timber, deposits of tungsten, iron, diamonds, gold, platinum, tin, copper, and titanium.
Major industries in Russia have capitalized on the country's natural resources. One of the prominent industries is machine building, which suffered heavily after the disintegration of the Soviet Union as there was a severe shortage of capital. It re-emerged with time and is the leading provider of machinery and equipment to the other industries in the economy.
Going by importance, the fuel and energy complex (FEC) is one of the most crucial for the Russian economy. It comprises the mining and production of energy resources, processing, delivery, and consumption of all types of energy. The FEC complex not only supports multiple sectors in the economy, but its products are also Russia's main exports.
The service sector currently comprises over 56% of the country's GDP and employs the most people in the country—more than 67% of the population. The key segments of the Russian service sector of late are hotel and catering services, construction, culture and entertainment and trade. It is often pointed out that as the crisis that accompanied the fall of the Soviet Union devastated agriculture and industry, it gave services a chance to pick up.
The Bottom Line
Russia will likely need to further diversify its economy to establish a more balanced economy that is less susceptible to commodity price moves. Focusing on its manufacturing and service sectors may help achieve more sustainable long-term growth. Although the GDP composition reflects the growing importance of services, it is oil exports that drive most of its economy.