Russia, the world’s largest country by landmass, returned to become an independent nation with the fall of the Soviet Union in 1991. Although it hasn't been an easy nut to crack or understand—mainly because of its economic past—the potential for returns has been dynamic. Investors who want to park their money may have considered emerging market economies like Brazil, India, China, and Russia. And they may have seen Russia as a possibility at one point. Before you put your money into Russia—or any investment, for that matter—it helps understanding how the country's economy has transformed from the centrally planned economy it once was to the market economy it transitioned into.
- Russia's GDP is primarily made up of three different sectors: The agriculture, industrial, and service sector.
- The agricultural sector, which includes forestry, hunting, fishing, farming, and livestock production, is small and makes up about 5% of GDP.
- Russia's industrial sector has remained more or less stable, averaging about 35% of GDP over the years.
- The service sector contributes almost 62% to Russia's GDP and employs more than 67% of the population.
Russia Then and Now
The initial transition period for Russia's economy was tough, as it inherited a devastated industrial 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. That's when the nation's economy grew at an average rate of 7%. This stellar growth brought Russia to a level where it was recognized as a fast-growing economy. Although the economy did exceedingly well between 1999 and 2008, its growth was mostly driven by the boom in commodity prices, especially 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 grew at a decent pace between 2010 and 2012, but structural issues started to emerge that caused a slowdown during 2013 when the economy grew by 1.3%. The year 2014 was hard for Russia, as it faced multiple issues including crashing oil prices, geopolitical pressures, and sanctions by the West. Its GDP dropped to 0.6%, the currency lost value, inflation spiked, and the stock market tumbled. Russia's economy suffered a recession between 2015 and 2017, ending 2016 with a 0.2% decrease in GDP. According to the World Bank, Russia's gross domestic product (GDP) is expected to grow by 1.8% in 2020, with more modest growth forecasted for 2021.
Russia's GDP Composition
Russia’s GDP is largely made up of three broad sectors: A small agricultural sector that contributes about 5% to GDP, followed by its industrial sector and service sector, which contribute 32% and 62%, respectively, according to the most recent World Bank data.
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 in terms of its contribution to GDP. The agricultural sector is small—just under 5% of Russia’s GDP. But it provides employment to almost 6% of the population. 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 in agriculture and food. According to the World Bank, food also includes live animals, beverages and tobacco, animal and vegetable oils and fats, and oilseeds, oil nuts, and oil kernels. 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 United States and the European Union, which significantly dropped Russia's share of food imports. Its domestic food production increased by over 4.7% in 2018, with drink production increasing by 3% from the previous year.
The contribution of Russia’s industrial sector to its GDP has remained more or less stable, averaging about 35% over the years. The industrial sector comprises mining, manufacturing, construction, electricity, water, and gas and currently provides employment to around 27% of the Russian population. 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 the Russian Federation have capitalized on its 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.
Next is the chemical and petrochemical industry which contributes about 1.5% to Russia’s GDP. According to an Ernst & Young Report, “A large number of products with higher added value (such as specialty composites and additives) are not produced in Russia. China and Europe, for example, produce about 25% and 20% of the world’s primary plastics respectively, while Russia produces only 2%.” 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 other competitive Russian industries include mining and metallurgy, aircraft building, aerospace production, weapons and military machinery manufacture, electric engineering, pulp-and-paper production, the automotive industry, transport, road, and agriculture machinery production.
The service sector's contribution to Russia’s GDP has increased over the years from 38% in 1991 to 57% in 2001. The service sector currently comprises almost 62% of the country's GDP and employs the most people in the country—more than 67% of the population. The important segments of the Russian service sector are financial services, communications, travel and tourism, advertising, marketing and sales, real estate, healthcare and social services, art and culture, IT services, wholesale, and retail trade and catering. 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 needs to diversify its economy further to establish a more balanced economy that is less vulnerable. Focusing on its manufacturing and service sectors can help achieve more sustainable long-term growth. Although the GDP composition reflects the growing importance of services, it is oil exports that command most of its economy as it directly and indirectly affects everything else.