Submitted by: Nur Shafayat

Course : Russian and Central Asian Studies

Course Instructor: Syeda Rozana Rashid, PhD
Assistant Professor
Department of International Relations
University of Dhaka

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Contents
Executive Summary and Findings03
Introduction...05
Transformation Prerequisite..05
Immediate Post USSR Years (1991-1998)..09
10 Years of Economic Growth11
Russian Economic Policies....................................................................................................13
The Role of Oil and Other Natural Resources16
Present Russian Economic Overview..19
Future Challenges to Russian Economy..20
Conclusion24
Bibliography25













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Executive Summary and Findings
Seven decades of Socialist economic system comes to an end when USSR breaks down and the
economic system had to go through a period of massive transformation along with socio economic
change, initially it was hard for Russia to adapt with the new system of. After few years of economic
downturn and hiccups Russia got themselves under control and a fast growing and very promising
economy in the world until today.
Transformation of economy is a gradual process. Transition is the phase between the form of economy
Socialism and Capitalism or Market Economy. Successful transformation needs Economic stabilization,
Market infrastructure, Property ownership, Change in mentality and Public support along with legal
environment of business and Foreign Investments.
1992 Russia's first post-communist government launched a comprehensive economic program to
transform the Soviet command system into a market economy. Privatization was and remains the heart
of this plan .Neo liberal shock therapy notion views liberalization as a necessary evil, a fast--as well as
nasty--way to achieve economic stabilization. But Russia lost 30% of its real gross domestic product and
suffered very high rates of inflation, because of weak Governance, incapable of dealing with the socio
economic and political transformation.

With Stabilized Growth From 1999 to mid-2008, Russias economic luck reversed. Inflation came under
control. GDP has increased 6.9% on average per. Wages increased Unemployment declined Russian
exports grew where oil, natural gas, and other fuels accounted for 64.8% of total exports, on the other
hand Russian imports rose.

The economic growth that Russia experienced from 1999 to 2008 was largely driven by favorable trends
in the Russias international economic interactions. The Russian economy began to grow because of the
severe depreciation of the ruble which boosted exports.

Russian government national accounts data show that it improved budget balances and maintained
tight control over fiscal policy. Rationalizing Government Expenditures and Revenues was remarkable in
the 10 years of economic growth. Russian government had consistently earned budget surpluses and
manager state expense never exceeded revenue. The Putin government introduced regulatory reforms
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by which 13% flat tax replaced graduated personal income tax that peaked at 30% and introduced
reform on pension and judiciary sector and cutting the number of mandatory licenses for easing up
business opportunities for small and medium enterprise. Present Russian economic overview where
GDP $ 2.022 Trillion and Unemployment rate 5.4% and Trade organizations affiliation with WTO, G-20,
G-8.

Present Economic outcome is very much focused on energy market. Government policy till 2020
suggests that Russia has focused on one sector heavily. The stability of the economy is heavily
interlinked with oil and gas price globally. Russia has huge investments in the energy pipeline projects.

Future Challenges to Russian Economy is that the economy is highly dependent on energy sector strong
and relationship between oil price and GDP. Quality of Russias institutional environment regulates the
interaction among economic actor and Russia got access in WTO. Excessive inequality becomes threat
for maintaining stability of different societal group.

Research Findings

A transformation has taken place towards capitalism and liberal market economy however it is obvious
Government holds significant portion of the market control in Russia especially the most lucrative sector
energy sector and other strategic sectors as well. One third of the market share belongs to the
government which was roughly over 90% in the Soviet Union.

The success of the economy is largely dependent on the energy sector and oil price.

Russia needs to focus on legal standard better infrastructure and corruption free business environment
along with Foreign Investment in other sector of their industries and services if they want not to be too
much energy reliant.



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Introduction
The transition to a market economy was inevitable, as night follows day, and is the only way to
economic revitalization for this country. We have no current alternative. ANATOLY SHOVCHAK
Seven decades of Socialist economic system comes to an end when USSR breaks down. The
economic system had to go through a period of massive transformation along with socio
economic change which were obvious political economic consequences of the end of cold war.
Initially it was hard for Russia to adapt with the new system of capitalism which they detested
for long and fought against. After few years of economic downturn and hiccups Russia got
themselves under control and so their economy got stabilized under the strong leadership of
Putin since 1999.
Despite initial setbacks after USSR collapse, Russia has a fast growing and very promising
economy in the world until today. Although its influence has been greatly diminished since the
Soviet period, Russia remains a formidable force on the global stage, and its influence seems to
be growing. Russias economy is large enough to influence global economic conditions. Many
European countries and former Soviet states are highly dependent on Russian natural gas.

Transformation Prerequisite
Transformation of economy is a gradual process. Transition is the phase between the the form
of economy Socialism and Capitalism or Market Economy. According to Anatoly A. Sobchak five
conditions along with proper legislation and Foreign Investment are essential for a successful
transition to a market economy.
1. Economic stabilization
2. Market infrastructure,
3. Property ownership
4. Change in mentality and
5. Public support
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Economic stability can be assured through activation of administration and economic drivers. In
Russia it could be done by spending certain government reserved and stockpiles and also by
controlling governments both domestic expenditure and expenditures to maintain the
governments offices abroad, revise foreign aid policies, stop government spending on large-
scale economic projects that do not yield immediate benefits, sell off frozen uncompleted
units to private owners, and so forth. In other words, it can be described as comprehensive
program of economic action whose content is fairly well known.
Creating market infrastructure was essential because Russias economy was primitive and
represented by huge monopolistic state enterprise and amalgamations but it did not have the
infrastructure required for a market economy to function. What Anatoly A. Sobchak had in
mind is a labor market, a capital market, and, as a necessary condition, numerous small and
midsize enterprises that will fill the gaps in the economy and create the possibility of
competition among producers and, most importantly, the possibility of economic maneuvering.
Moreover creation of a market infrastructure requires efficient transportation and well-
developed information networks with adequate means of communication, which Russia did not
have on a sufficient scale or on a modern level.
Transition to a market economy needs a well-developed stratum of commodity producers who
own property in different forms.
Ownership right of property is a basic need for market economy to develop and flourish the
business by empowering and motivating the commodity producers of community. Privatization
of trade, grocery, eateries, household services agriculture and major part of the state run
industry was required to de-monopolized and get rid from fully state run economy. As can be
seen from the experience of the Moscow and Leningrad City Councils when they attempted to
privatize trade and household services, such a program of privatization could not be carried out
quickly for a number of reasons and one of the reason was need of credit resources to
encourage small entrepreneurs and workers collectives. But Russia did not control such
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resources so its only hope was establishment of investment banks, which would attract foreign
investment and allow to secure the credits needed for privatization
People needed a change in mentality in Russia. A profound, fundamental revolution in more
than just the industrial and economic conditions of Russia was necessary for a change in the
structure of life in Russia. People was long accustomed with in a way of life, in thinking, and in
the way they see their place in the system of social production. For decades Russian people
fostered beggar and parasitic mentality indicates that the state will provide and decide
everything for you. Poorly, perhapsbut it will provide equally for everyone and supply all the
basic necessities. In contrast market economy creates a different type of responsible mentality
where every person must be responsible and solve his or her own problems. Governments
interference in economic life will be limited and drastically reduced and this change requires a
revolutionary transformation in the minds of people, in their psychology.
Transition to a market economy can be accomplished only when it is carried out by a
government that enjoys the full support and confidence of its people. Without public support,
one can say in advance that any program of transition to a market economyno matter how
good it may look in theory and in the abstractis doomed to failure. More than once in our
recent history and during perestroika, we have found that the most logically correct,
theoretically well-grounded and seemingly impeccable projects turned out to be absurd in
practice and led to absurd results. The failure of all these efforts was largely due not only to the
methods or means by which they were pursued but also to the lack of necessary trust and
support by the people.
Russia legal conditions were needed for the transition to a market economy. To create the legal
foundation for the functioning of the market requires a fundamentally different approach to
the legislative regulation of the economy than Russia had in legislation up to 19
th
century.
Economy of Russia on that time was dominated by legal-administrative regulation but it was
needed relations of a civil and legal nature. The transition to a market economy will require a
fundamental change not only in civil and economic legislation but also in labor laws. This
transition will be from a system of blind universal guarantees for any worker, even a lazy one,
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to a contractual system under which a worker who does his job poorly or sloppily will lose his
job. There is also a need to overhaul financial, tax, and land legislation. . These laws should
comprise all necessary regulations to protect the environment and to balance the interests of
producers and entrepreneurs with those of the city, the region, and the republicthat is to say,
of society as a whole
Anatoly A. Sobchak found that it needed to work on legal mechanisms for attracting foreign
investors and for creating joint ventures, as well as foreign-owned firms, on Russian territory.
Several options are there to attract funds of Western investors into Russian economy which
allow ensuring that they would get adequate returns.
One option is to create an investment bank or get Westerners to invest in joint-stock
companies that buy back enterprises and their properties from the state. As investors
channeled money into enterprises, there would be funds to rebuild and to change product lines
to goods that are in demand and are competitive in domestic and foreign markets alike.
Another option is for Western investors, through Russian banks or investment banks created
with the help of investors, to give loans to small enterprises and to workers collectives that
want to set up new enterprises or buy back existing ones from the state. Investors do not
acquire shares in these enterprises but rather extend loans at interest rates that would be
attractive to investors and would not be prohibitive to small enterprises.
A third option is also The Western investor gives the necessary funds to Soviet banks or to a
government body, such as a municipal council. The latter uses these funds to invest in
privatization and repays the Western investor on a barter basis.




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Immediate Post USSR Years (1991-1998)
1992 Russia's first post-communist government launched a comprehensive economic program
to transform the Soviet command system into a market economy. Privatization was and
remains the heart of this plan.
Russian market and economy has gone through a period of transition after the breakdown of
USSR and the socialist economy. During the period, Russia lost close to 30% of its real gross
domestic product (GDP), a decline reminiscent of the Great Depression of the 1930s in the
United States1 In this period the Russian citizens saw a sharp decline in their standard of living.
The key factor was inflation, which is said to be the robber of the Russian people. The first
seven years of Russias transition from the Soviet central planned economy from 1991 and 1998
were not easy. This period coincided with most of the regime of President Boris Yeltsin. This 8
years most accounts for a time of economic chaos, if not near collapse and failure.
Russia suffered very high rates of inflation over 2,000% in 1992 and over 800% in 1993
before it declined to more tolerable, but still high, levels of around 20% by the end of the
1990s. The inflation robbed Russian citizens of their savings as the value of the ruble collapsed,
eventually forcing the Russian government to sharply devalue the ruble on January 1, 1998,
with 1 new ruble equaling 1,000 old rubles.
As a hedge against inflation, some residents, who were in a position to do so, invested in hard
assets such as art works, foreign currencies, and real estate. But the greater portion of the
population saw their savings evaporate. The disposable income available after taxes of the
average Russian declined 25% in real terms between 1993 and 1999.
Foreign direct investments (FDI) flows were very low given the size and needs of the Russian
economy. Furthermore, Russia was incurring serious capital flight some $150 billion worth
between 1992 and 1999 by estimate. Russian foreign debt soared in part because Russia had
taken on the foreign debts of the entire former Soviet Union in an arrangement made with the
other former Soviet states.
1
CRS calculations based on official Russian data collected by the Economist Intelligence Unit (EIU)
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Weak governance added more negative impacts to this situation of sharp economic decline.
Problems were also the product of poorly executed, if not poorly conceived, economic policies
of the Yeltsin regime. The regime failed to rein in government spending as it tried to deal with
the Soviet legacy of massive subsidies for industry and the population. Russian government ran
up large budget deficits that reached as high as 9.8% of GDP, forcing the government to finance
debt at very high interest rates. The Yeltsin regime was also criticized for employing shock
therapy or radical macroeconomic measures, as part of its economic reform program. Critics
claimed that the measures unnecessarily created inflation and destabilized the economy
because market prices were introduced too early in the reform process.
The most controversial aspect of the early post-Soviet economic transition was the effort to
privatize state-owned and operated production facilities, in particular, the so-called loans for
shares program. In 1995, the government auctioned off to local banks shares in 29 of the most
potentially lucrative firms, including major oil companies and mineral producers eg. Yukos,
Lukoil, Sufgutneftegas, Novolietsk Iron and Steel etc.
2
They obtained the shares at a fraction of
their market value and were able to keep them when the government failed to pay back the
loans. The government did not challenge their control of these assets because their owners,
who became known as OLIGARCH financed Yeltsins reelection as president in 1996.These new
directors were called as RED DIRECTORS.
Despite the setbacks, Russia made some strides toward economic reform during this period.
Russia became vulnerable because of more fundamental problems associated with its economic
policy and economic structure. These included the failure to institute tax reform, property
rights, and bankruptcy laws and procedures, according to William Cooper in his CRS published
report. At the same time, the downturn was exacerbated by bad policies.



2
OECD report. The Investment Environment in the Russian Federation. 2001.
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10 Years of Economic Growth
From 1999 to mid-2008, Russias economic luck reversed on many accounts. At the same time,
robust developed economic conditions contributed a significant level of economic stability to
Russia. Economic growth of this time-frame can be understood from two perspectives one is
Internal Economic Conditions and Trends and the other is Foreign Trade and Investment
Trends.
Internal Economic Condition
During this time line Russias real GDP has increased 6.9% on average per. The positive GDP
trends are reflected in other measurements that point to an improved Russian standard of
living throughout the period. Average real wages in Russia increased 10.5% per year from 1999-
2008. In addition, real disposable income (the income that the average Russian resident has
available from all sources after taxes) grew 7.9% from 1999 to 2008. The Russian
unemployment rate also declined during the 1999-2008 period, from 12.6% to 6.3%. Economic
data indicate also that, with the growth of Russian economy the distribution of income within
Russia has become increasingly unequal during the post-Soviet period. A standard measure of
income distribution is the Gini coefficient (or index) which is on a 0.00 to 1.00 scale. The lower
the number, the more equal the income distribution. Thus, 0.00 is perfectly equal income
distribution, while 1.00 is totally unequal. In 1992, Russias Gini-coefficient
3
was 0.289 by 2007,
it had increased to 0.422
4
The income distribution trends might also be explained by the large
role played by exports, especially oil and natural gas, in Russian GDP growth as owners of
energy-related assets until recently reaped the benefits of the surge in world energy prices.



3
The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical
dispersion intended to represent the income distribution of a nation's residents.
4
WB CIA factbook and Russias Economic Performance and Policies and Their Implications for the United States by
William H. Cooper , Specialist in International Trade and Finance 2009
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Foreign Trade and Investment Trends
During the 10years time-frame the roots of Russias increased economy are reflected in the
surge in Russian trade and capital flows. Russia foreign trade has increased sharply and during
that period Russian exports grew close to 525%, from $75.5 billion to $471.6 billion and Russian
imports rose close to 640%, from $39.5 billion to $291.6 billion. As a result, Russia has
experienced rapidly increasing trade surpluses. Its merchandise trade surplus rose from $36.0
billion in 1999 to $179.7 billion in 2008. Russias current account balance which includes
balances on merchandise trade, trade in services, investment income and unilateral transfers
increased substantially, from $24.6 billion in 1999 to $102.3 billion in 2008. As a result, Russia
accumulated one of the worlds largest foreign reserve holdings that have skyrocketed from
$12.5 billion in 1999 to $427.1 billion at the end of 2008. In 2008, oil, natural gas, and other
fuels accounted for 64.8% of Russian exports

Figure 01: Russian GDP since 1992 to 2012 (IMF)
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This IMF figure suggests that Russian Economy has gone through a disaster in the immediate
postcommunist era in 1992 to 1999 and then it has revived under Putins command and later
on Putin-Medvedev partnership in Russian premier leadership era. The GDP of Russian
Federation shows it has overcome and moved to a stable growth rate.

Russian Economic Policy
The economic growth that Russia experienced from 1999 to 2008 was largely driven by
favorable trends in the Russias international economic interactions. By the end of 1999, the
Russian government had achieved a degree of financial stabilization as then Prime Minister
Primakov instituted measures to cut government spending and increase tax revenues. The
Russian economy began to grow because of the severe depreciation of the ruble as a result of
the 1998 financial crisis which boosted exports. A key objective of the Putin regime was to
maintain stability, especially after the effects of the depreciated ruble had disappeared.
Rationalizing Government Expenditures and Revenues
Russian government national accounts data show that it improved budget balances and
maintained tight control over fiscal policy. At the end of 1998, the Russian federal government
had a budget deficit equal to 6.0% of Russian GDP, with revenues equal to 11.4% of GDP and
expenditures equal to 17.4%. In 1999, the budget deficit declined slightly to 4.2% GDP. During
the ensuing years, Russian government revenues soared from 12.6% of GDP in 2000 to 22.6% of
GDP in 2008, largely because of tax revenues generated by the surge in oil revenues.
5
At the
same time, the government managed to resist expanding expenditures, keeping them far below
revenues with expenditures equal to 18.2% GDP in 2008. As a result, the Russian government
had consistently earned budget surpluses, at least until recently, and had a surplus of 4.1%
which equaled GDP in 2008.
6

5
William H Cooper ,Russias Economic Performance and Policies
and Their Implications for the United States Federation of American Scientists Report
6
ibid
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Implementing Structural Economic Reforms
During Putins first presidential term (2000-2004), his government initiated some critical
economic reforms that helped Russia emerge from the post-1998 financial crisis period more
stable and stronger. One of the factors that had harmed business environment in Russia for
both foreign and domestic investors was a plethora of high and overlapping taxes. By 2004, the
government had reduced the number of taxes to 16, 10 of which were federal and the
remainder regional and local. Among the changes was an introduction of a 13% flat tax to
replace a graduated personal income tax that peaked at 30%.30 Four social taxes were
compressed into one. Tax collection was centralized into the tax ministry, which eliminated tax
collection competition among several collection agencies that bred corruption and abuse.
During the early post-Soviet period, the business climate was also hampered by a large number
of licensing requirements, inspections, and other regulations, often promulgated and
implemented by different local, regional, and federal government entities in conflict with one
another. The burden and the capricious manner that the regulations were implemented made
the system ripe for corruption and avoidance and also impeded the development of new
business. The Putin government introduced regulatory reform by cutting the number of
mandatory licenses and inspections to encourage the development of new small and medium
sized enterprises. These reforms have largely improved the business climate, although some
authorities still conduct inspections contrary to the new regulations. The Russian government
also addressed the issue of corporate governance, particularly the protection of the rights of
minority shareholders that were notoriously subjected to abuse in the 1990s.
Integrating Russia with the Global Economy
Russia first applied to accede to the General Agreement on Tariffs and Trade (GATT) in 1993.
The application was converted to one for the World Trade Organization (WTO) in 1995 when
that organization was formed and became the administrative body for the GATT and other
multilateral trade agreements. The process slowed down during the Yeltsin period as the
leadership was pre- occupied with other political and economic issues. Putin adopted WTO
membership as part of Russian economic reform and a way to integrate Russia into the world
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economy. Despite the declared policies, the results in integrating with the world economy have
been mixed. From 1994 to 2000, Russian exports as a percentage of GDP increased from 27.7%
to 44.1% but declined to 31.3% in 2008. Russian imports as a percentage of GDP have declined
from 22.9% in 1994 to 22.0% in 2008. On the other hand, trends in Russian foreign investment
show clearer signs of economic integration. The stock of FDI in Russia as a percent of GDP rose
from 0.1% in 1993 to 12.0% in 2008 and Russian foreign direct investment abroad has increased
from 1.3% of GDP in 1993 to 10.6% of GDP 2008.
7

Implementing Other Reforms
In 2002, the Putin government instituted pension reform to increase the level of retirement
funds and reduce poverty among retirees. In addition, the reform was to move the
responsibility for pensions from the government to employers. In 2003, the Russian
government implemented a government deposit insurance program, to partially level the
playing field for private sector banks that had no such insurance, and the state banks that were
backed by state funds. The deposit insurance program also was a way to introduce tighter
supervision over the private sector banks that were required to meet financial health criteria by
the Russian central bank before being eligible for the insurance. Beginning in 2004, the Russian
government also began phasing in the use of internationally accepted financial standards to
improve the transparency of Russian bank operations. In 2005, the regime launched national
projects to strengthen education, health care, and housing. The Russian government also
undertook reform of its judiciary to establish clear lines of responsibility for the levels of courts
and to root out corruption by increasing the salaries of judges.
Reasserting State Control of Strategic Sectors
If President Putins first term of office was marked by achieving economic stability and
launching some critical reforms, the second term (2004-2008) was largely characterized by the
governments re-establishing control over critical sectors of the Russian economy. It has done
so by acquiring the assets of companies that had been privatized during the Yeltsin regime and
7
ibid
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taken over by so-called oligarchs via questionable transactions. The Putin Administration has
been re- nationalizing companies directly by taking control of assets or indirectly through
ostensibly private sector companies in which the Russian government has substantial
ownership. From 2004 to 2006, the government took control of formally privatized companies
in certain strategic sectors e.g. oil, aviation, power generation equipment, machine-building
and finance.
According to the European Bank for Reconstruction and Development (EBRD), in 1991, just
prior to the collapse of the Soviet Union, 5% of Russian GDP was accounted for by the private
sector. By 1997, that share had grown to 70%, but decreased to 65% in 2005 .
8
The EBRD
monitors the progress of former communist states transition to market economies. One of the
elements the bank examines is the degree to which the country has privatized state-
enterprises. It does so using a scale of 1.00-4.00 with 1.00 indicating little private ownership
and 4.00 indicating more than 50% private ownership. According to the EBRD, the status of
Russias privatization of large-scale enterprises fell from 3.33 in 2004 to 3.00 in 2008. EBRD
indices of small-enterprise privatization indicated that Russia has done better at 4.00 where it
has been since 1995.
9


The Role of Oil and Other Natural Resources
Russia is by far the world's largest natural gas exporter. Most, but not all authorities believe
that Russia has the world's largest proven reserves of natural gas. Sources that consider that
Russia has by far the largest proven reserves include the US CIA (47.6 trillion cubic meters) The
Russian oil industry is in need of huge investment Strong growth in the Russian economy means
that local demand for energy of all types (oil, gas, nuclear, coal, hydro, electricity) is continuing
to grow.
10


8
ibid
9
ibid
10
BBC: 'Threat' to future of Russia oil http://news.bbc.co.uk/2/hi/business/7348463.stm
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The Energy strategy was changed under the presidency of Vladimir Putin. On 23 November
2000, the Russian government approved main provisions of the Russian energy strategy to
2020. On 28 May 2002, the Russian Ministry of Energy gave an elaboration on the main
provisions. Based on these documents, the new Russian energy strategy up to 2020 was
approved in 2003 and confirmed by the government in 2003.
11


Russian Government has invested a lot in Energy sector and energy pipelines. Fair share of the
recent accomplishments is tied to high oil prices. Boosted by supply constraints rather than
strong global demand, the price of Urals crossed US$125/barrel in early March 2012, the first
time since July 2008. High oil prices have translated into strong export receipts, buoyant fiscal
revenues, and a bullish stock market.

Figure 02: Russian Energy Pipelines
Russian government owns most of the shares in Energy sector, for an instance Rusian energy
ginat Gazprom is a jointstock company most shares held by Government which generates
revenue of 150 billion and over which is in relative figure quarter of Russian export earnings. In
2011, the company produced 513.2 billion cubic metres of natural gas, amounting to 17% of
11
THE SUMMARY OF THE ENERGY STRATEGY OF RUSSIA FOR THE PERIOD OF UP TO 2020 Report:Ministry of
Energy http://ec.europa.eu/energy/russia/events/doc/2003_strategy_2020_en.pdf
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worldwide gas production. In addition, Gazprom produced 32.3 million tons of crude oil and
12.1 million tons of gas condensate. Gazprom's activities accounted for 8% of Russia's gross
domestic product in 2011.
12


Figure 03: Global Oil prices from 1994 to 2008 (OPEC)
A closer look at the economic situation reveals a number of weaknesses. The growth of the
manufacturing industries slowed in the second half of 2011. Fixed investment has started
picking up only recently, foreign direct investment stays sluggish, and capital outflows are
elevated. The non-oil current account deficit reached a record 13 percent of GDP in 2011,
underlying the oil dependence of Russias export sector. The non-oil fiscal deficit remained
close to 10 percent of GDP, and is projected to increase further this year. Inflation is set to pick
up later in the year, as delayed increases in utility and gasoline prices kick in and prices
pressures increase as enterprises find it more difficult to fill job vacancies.
13


12
www.gazprom.com
13
Russian Economic Report Moderating Risks, Bolstering Growth, The World Bank in Russia ,2012


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Present Russian Economic Overview
Russia has undergone significant changes since the collapse of the Soviet Union, moving from a
globally-isolated, centrally-planned economy to a more market-based and globally-integrated
economy. Economic reforms in the 1990s privatized most industry, with notable exceptions in
the energy and defense-related sectors. The protection of property rights is still weak and the
private sector remains subject to heavy state interference. In 2011, Russia became the world's
leading oil producer, surpassing Saudi Arabia.
14


Figure 04: Russian Economy at a Glance
14
CIA Fact Book :Russian Federation https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html
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The government since 2007 has embarked on an ambitious program to reduce this dependency
and build up the country's high technology sectors, but with few visible results so far.
The economy had averaged 7% growth in the decade following the 1998 Russian financial crisis,
resulting in a doubling of real disposable incomes and the emergence of a middle class. The
Russian economy, however, was one of the hardest hit by the 2008-09 global economic crisis as
oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up.
According to the World Bank the government's anti-crisis package in 2008-09 amounted to
roughly 6.7% of GDP. The economic decline bottomed out in mid-2009 and the economy began
to grow again in the third quarter of 2009. High oil prices buoyed Russian growth in 2011-12
and helped Russia reduce the budget deficit inherited from 2008-09. Russia has reduced
unemployment to a record low and has lowered inflation below double digit rates. Russia
joined the World Trade Organization in 2012, which will reduce trade barriers in Russia for
foreign goods and services and help open foreign markets to Russian goods and services. Russia
has had difficulty attracting foreign direct investment and has experienced large capital
outflows in the past several years, leading to official programs to improve Russia's international
rankings for its investment climate. Russia's adoption of a new oil-price-based fiscal rule in 2012
and a more flexible exchange rate policy have improved its ability to deal with external shocks,
including volatile oil prices. Russia's long-term challenges also include a shrinking workforce,
rampant corruption, and underinvestment in infrastructure.

Future Challenges to Russian Economy
It is obviously an unmanageable task to predict economic future of a state, especially an
emerging economy like Russian Federation however I have tried to look through the futuristic
analysis on Russian economy based on the sources of World Economic Forum Report on
Scenarios for the Russian Federation. The report forecasts the future uncertainty factors.
Russias future economic development is affected by three identified uncertainties in different
directions.
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1. Evolutions in the global energy landscape
2. Quality of Russias institutional environment
3. Dynamics of domestic social cohesion
Evolutions in the global energy landscape
Russias economy is highly dependent on energy sector where there remains a strong
relationship between oil price and countrys GDP. Russia has no power to determine global
environment and price of energy which makes countrys future economic growth critical. It has
significant impacts which begin with supporting strong GDP growth through global energy
landscape which allowed Russia to benefit from high oil prices. Second impact is drawback for
non-resource sector which shows Russia has no motivation to invest in other sector except
energy sector. This makes difficulties to change the fiscal policies, institutional reforms and
adjusting the unbalanced economic nature. The last impact is the Russias fiscal fragility. Russia
has grown fast and also fragile because its future success is uncertain for the downward
dynamics in energy prices, given that financial spending has become adjusted to surging energy
revenues.
In future Russia will face challenges because of the changing global energy landscape. The first
challenge will be increased oil supply sources from the USA to Iraq. Second challenge will rise
from the threat of unconventional gas of Russia which gives the potential prospects to Shale gas
exploitation, one force already revolutionizing the global energy landscape, and Russias place
in it. The United States is already competing with Russia in natural gas production, and its
production prices are comparatively lower. Natural gas in the United States is about 60%
cheaper than in Europe, and there are prospects for the United States to become a major
Liquefied Natural Gas (LNG) exporter in the years to come, possibly changing the global gas
landscape in a fundamental way.
15
The third shift Russia will need to master is in response to a
changing demand landscape where, according to all major projections, non-OECD economies
will account for the largest share of future fossil fuel demand.
15
Scenarios for the Russian Federation, World Economic Forum ,2013
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According to the latest forecasts from the International Energy Agency (IEA), by 2020 the
United States is set to overtake Saudi Arabia and Russia as the worlds largest oil producer.
16
It
may decline oil and gas price globally and Russia would be affected with this global evolutions
and may have a great impact on future development. Also future demand for oil and gas of
Russia will influence not only by competing supplies but also by the prospects of global energy
demand.
According to some estimates, gas will be the fastest-growing fossil fuel globally to 2030, with
non-OECD countries accounting for 80% of the global rise in gas consumption against a
backdrop of limited European demand. This may put pressure on Russia to redefine its
distribution networks and adjust its infrastructure investments to continue benefiting from
strong global demand. Finally, the International Energy Agency recently reiterated the
significance of energy efficiency measures to ensuring energy security, saying such measures
could help reduce global needs by a factor larger than the level of Russias energy production.
Whether such measures are implemented will be critical to Russias energy future.
Institutional environment
The effective and properly running institutions consider as essential factor for economic growth
which regulate the interaction among economic actors. Russias institutional environment
ranking 133 out of 144 countries in the World Economic Forums Global Competitiveness Index
201213.
17
It caused great impacts on the Economy of Russia. Russia is one of the most corrupt
major economies in the world. According to Transparency International, public officials and civil
servants, including the police, are seen as the most corrupt institutions in Russia, followed by
the education system and parliament. This causes direct costs to well- functioning of economic
transaction. Russias Infrastructure stands at a very low level. In 2012, the overall quality of
Russias infrastructure ranked 101 out of 144 in the Global Competitiveness Index.
18
The quality
of the education of Russia is on a downward trend because of poor institutional environment.
16
IEA report http://www.iea.org/publications/freepublications/publication/English.pdf
17
Report: Scenarios for the Russian Federation, World Economic Forum ,2013
18
PWC report - Russia: A Snapshot
http://www.pwc.com/gx/en/capital-projects-infrastructure/assets/russia-snapshot.pdf
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The public health system is facing difficulties. Poor levels of infrastructure, along with a
mismatched and unhealthy workforce represent inadequate health facilities. So because of this
weak institutional environment capital of Russia uses only in the energy revenues not in other
sector for economic development.
State is growing, centralizing political and administrative power is taking place and the
expenditure of public service is increasing in Russia but bureaucratic apparatus has
simultaneously remained low. These situations put pressure not only on socio-political system
and business environment of Russia but also on its budgetary health. Centralization of power
was considered as an attempt to reduce corruption. But corruption has become a path for
wealth creation to maintain stability over productive process in the economy. Russia is the sixth
largest economy worldwide in GDP yet corruption levels are higher than in countries such as
Togo or Uganda, according to Transparency International data
In 2012 finally Russia got access in WTO (World Trade Organization) with the expectation to
regulate the change in economic sector and increase and enhance opportunities for foreign
investments in several sectors including banking, finance, business, telecommunications and
distribution.
19
But the effect of this achievement in the context of institutional environment
remains unclear.
Social Cohesion
Social cohesion is the last driver which creates uncertainties through discontent and weak
social integrity in Russias future economic development. Trust in social relations, decision
making process and in social institutions provide the opportunity to develop potentiality
production but lack of social cohesion makes Russias economic growth uncertain.
Impacts are heavy if there is a constant social disintegration. Law regulatory mechanisms,
police force can support social cohesion or can bring social reform to make trust worthy trade-
offs easier to achieve. So absence of social cohesion undermines the functions of legitimate
19
WTO press release WTO membership rises to 157 with the entry of Russia
http://www.wto.org/english/news_e/pres12_e/pr671_e.htm
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political and institutional consequences. Excessive inequality becomes threat for maintaining
stability of different societal group. Protests riots of different social and political group and
social unrest and strong deficiencies also provide political and financial stagnation. These
situations develop investors negative perception and undermine potential development.
In-between this situation middle class of Russia has grown significantly and wealth inequality
also increased as well. This rise in wealth has been came with in recent years by growth in
diverse forms of popular discontent, including frustrations with the delivery of public services,
perceived impediments to pursuing professional aspirations and restraints on political
freedoms. The skilled and talented young generation requires changing environment and
positive motivation to make a productive role in future economy of Russia but when they fail to
get these within home country they seek opportunities in abroad. Further, Russias ageing
population may also affect the dynamics of social cohesion within the country. Environmental
degradation, religious diversity may affect Russias future social cohesion.

Conclusion
A transformation has taken place towards capitalism and liberal market economy however it is obvious
Government holds significant portion of the market control in Russia especially the most lucrative sector
energy sector and other strategic sectors as well. One third of the market share belongs to the
government which was roughly over 90% in the Soviet Union.

The success of the economy is largely dependent on the energy sector and oil price.

Russia needs to focus on legal standard better infrastructure and corruption free business environment
along with Foreign Investment in other sector of their industries and services if they want not to be too
much energy reliant.



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