Russia has one of the largest economies is the world that is ranked seventh. This is measured by GDP, which was $2.553 trillion in 2013. The US came in at first with a GDP of $16.72 trillion. The per capita income of a typical Russian is $18,100 ranking at a meager 77th in the world, while a US citizen would see $52,800 a year. Russia’s economy is still very much in its early stages since it only began in 1992 with the fall of the Soviet Union. The problem was the only people with money after the fall were the oligarchs so they bought all of the former governments assets at cheap prices. This widened the gap of rich and poor immensely at first. When Russia joined the World Trade Organization in 2011 this was a huge stride for their economy. This made it safer for other countries to do business with them because they then had to comply with a set of international trade standards. Inflation rates have been falling since then and are currently 6.8% ranking 179th in the world. The US is doing much better with inflation hovering around 1.5% the last few years. Over the couple years Russia invested $50 billion into the Olympics surpassing the next highest spending by $8 billion, which was the Beijing Olympics in 2008. Most would say this was a huge waste of money, while others might say it makes a transition to being a world player as it did for Beijing and Seoul. For now it looks like there was too much spending with too little effect.
Russia is currently in a deficit state, sitting right at around -0.5% of their GDP of $2.553 trillion. This means that their budget deficit is a mere $12 billion compared to the US deficit of $649 billion this year. This ranks at #55 in the world, compared to the US ranking of 122. However, in the recent years, due in large part to the Russian acceptance into the WTO, there has been an increased climate of reducing foreign import tariffs across the board. In fact, Russian president Vladimir Putin has stated that improving investment opportunities and increasing FDIs in general is a major priority for him. He has done this so far by reducing barriers and providing incentives for foreign businesses. In addition, there are some natural monopolies in Russia, that lie within the public utilities sector. The government does control pricing, however, and keeps them relatively low for all citizens of Russia, to avoid any unfair pricing caused by the monopoly.
Even with this sense of government control, however, corruption runs rampart throughout business and governments in Russia. Citizens and businesses alike agree that there is much more corruption now then even in the Soviet Union. The amount of corruption in Russia has risen drastically during the years since the cold war. 74% of citizens are convinced there is more corruption now then ever before. During an investigative study, it was concluded that 79% of Russian business has some form of corruption, and that it is almost common place in the work force to expect something of this nature. This means business might have to give bribes or favors, install larges amounts of security measures and still run the risk of harmful actions.
During the Soviet era, private ownership of businesses and property had been largely illegal. After the fall of the Soviet Union, many economic changes were made. Many industries previously run by the government began to be privatized. The greatest changes were made in the industrial, financial and energy sectors of the economy. Some of these companies were turned over to the complete control of their pre-existing executives, but most were distributed using free voucher privatization, where citizens were given vouchers for free shares in state owned industries. From 2004-2006, the Russian government reclaimed some industries in strategic categories such as aviation, energy and finance. Most recently, in 2010 the government approved a privatization plan for 2011 to 2015 to privatize many government owned business in energy, transportation, banking and agriculture.
Another government influenced part of the economy has to do with the privatized businesses. There are still many regulations placed on privately owned industries, which give the government control over various aspects, including price. This puts a strain on the economy as business owners are being restricted by government laws and policies. Much deregulation occurred post-Soviet Union, but a large proportion of that has been reversed under Putin. In 2006, regulations on the exchange of currency were lifted, making the rouble freely convertible, easing restrictions on foreign investors. First Deputy Prime Minister Igor Shuvalov is working to get back to actions such as this as Russia labeled deregulation as a top priority in 2012, lasting through 2018. If these trends continue, Russian business will be greatly freed up in both domestic and international markets.
Russia uses Subsidies and social welfare programs to help round out this corruption, in an effort to protect its citizens. The effectiveness of these programs is definitely open to interpretation. Russia subsides the export of the fossil fuels it produces, to try and help business sell this vastly desirable product in the world market. It also subsidizes domestic vehicles, trying to promote the sell of its own transportation. Russia is also looking to capitalize on newer, greener methods of renewable energy and is now offering subsidies to people who are investing and creating the facilities for this purpose. In addition to these subsidies are the social welfare programs. These include Social Security, welfare, pensions, and workers benefits. Social Security and welfare have been reallocated to subnational organizations in Russia, but as time goes on are getting less and less funding. On top of that, the process to get these programs is long, complicated, and has no guarantee of actual success. These programs may not exist in their current state for much longer. Pensions in Russia was very big during the cold war era, but since then has significantly been dropping as more and more pension plans are disappearing. Workers benefits in Russia are mostly geared towards families, or women with children. They allow for special prices on good children and families need, as well as additional income up to 45% minimum wage (60% for military families) to be added on to pay to help support the children.
There has been a lot of talk about Ukraine in the news lately, and we felt like we would be amiss if we didn’t mention such a huge topic. Ukraine, obviously, has many ties to Russia. It borders Russia, and it once was a satellite state of the former USSR. To make the situation worse, many Russian natives live in Ukraine. Since November, Ukraine has been in the news for the bevy of riots, protests, and demonstrations that have taken place in the country. This upheaval started when Ukraine, under major pressure from Russia, rejected a deal from the European Union that would have helped the country’s ailing economy. In mid-February, the sitting Ukraine government fell, much to the consternation of Russia. Protestors demanded a new government and new elections. This did not sit well with Russia, who immediately put their armed forces on high alert and stationed 150,000 troops on its border with Ukraine. In late February, there were reports that Russian speaking gunmen had seized Ukrainian interests on the peninsula of Crimea. Both the West and Ukraine feel that Russia has basically invaded the southern peninsula, which is a charge that Russia denies.
Now, we have the major question. Why does Ukraine matter? Why is this happening? It’s fairly simple. Ukraine straddles both Eastern and Western Europe, along with Russia. Many of the native Russians live on the eastern side of Ukraine, while the native population mostly resides in the western half of the country. So, you have a split between those who want to join the EU, and those who want to align themselves back with Russia. Additionally, Ukraine’s economy is very bad right now. Inflation is high, and many feel that the EU is better suited for the country’s needs. However, most of Ukraine’s energy comes from Russia. After that, Russia uses Crimea to funnel Russian energy into Europe, which additionally complicates things. As far as the U.S.’s interests in Ukraine go, it’s mostly tied to the need to protect democracy. The U.S. wants to stand up for its allies and not allow Russian power to go unchecked.
In conclusion, from all the information we have gathered about Russia and its economy, It might not be a completely safe option at this particular moment. While it does have lower entry barriers and vast natural resources, the current trouble in Ukraine is very problematic. Russia cannot take a direct hit to a major income supply like that and still be as strong as it currently is. In addition to that, the amount of corruption and the increasingly expensive social programs that must be taken into consideration with running a business there make for a difficult environment to survive in. businesses should approach a wait-and-see method with moving into Russia at the moment, due to the unrest in Ukraine. If things can smooth out, then Russia might look more appealing.