Russia, the world’s largest country by landmass, returned to an independent existence with the fall of the Soviet Union in 1991. The initial years for its economy were 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 continued.
Russia’s economic growth rate remained negative during most of the 1990s, before the start of the subsequent golden decade, when it 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 during the years 1999 to 2008, it 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; this exposed Russia’s dependence on oil. The economy gradually recovered as oil prices stabilized. (See also: Why The Russian Economy Rises and Falls With Oil.)
The Russian economy grew at a decent pace during 2010-12, 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: crashing oil prices, geopolitical pressures and sanctions by the West. The GDP dropped to a 0.6%, the currency lost value, inflation spiked and stock market tumbled. Russia's economy suffered a recession between 2015 and 2017, ending 2016 with a 0.2% decrease in GDP. In 2017, economists expect the Russian gross domestic product (GDP) to increase by 1.3% and 1.7%, provided oil prices stay near $50 a barrel.
Russia's GDP Composition
Russia’s GDP is largely made up of three broad sectors: a small agricultural sector that contributes 4% to GDP followed by its industrial sector and service sectors, which contribute 32% and 63%, respectively, according to the 2016 World Bank data.
Harsh weather and geographic conditions make cultivation of land arduous and restricted to 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 4% of Russia’s GDP, but it provides employment to almost 10% 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 land holders produce for self sustenance. The sector includes forestry, hunting and fishing, as well as cultivation of crops and livestock production.
Agricultural land is just about 13% of Russia’s total land area, much less than that of other prominent nations. According to the World Bank, agricultural land refers to the share of land area that is arable, under permanent crops or under permanent pastures. However, since Russia is a huge country, this small percentage is big enough in terms of total area. Russia’s main agricultural production includes wheat, potatoes, sunflower seeds, sugar beets, tomatoes, apples, vegetables, barely, rice, maize and onions.
Despite being a large exporter of certain food items, Russia is a net importer in agriculture and food. According to the World Bank, food comprises food and live animals, beverages and tobacco, animal and vegetable oils and fats, and finally oil seeds, 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 during 2000-08. 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 during 2014 through 2017 by over 11%. (See also: How US & European Union Sanctions Impact Russia.)
The contribution of Russia’s industrial sector to its GDP has remained more or less stable, averaging around 37% over the years. The industrial sector comprises mining, manufacturing, construction, electricity, water and gas and currently provides employment to around 27% 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 with 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, its products are Russia's main exports.
The other competitive industries of Russia 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 contributes almost 63% to its GDP. The important segments of its service sector are financial services, communications, travel and tourism, advertising, marketing and sales, real estate, health care 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. Focus on its manufacturing and service sector can help achieve more sustainable long-term growth. Although the GDP composition reflects the growing importance of services, it’s oil exports that command most of its economy as they directly and indirectly affect everything else. (See also: How Embargoes Affect International Business.)