The economic context of Russia

Economic Indicators

On February 24th 2022, Russia initiated a military conflict on the Ukrainian territory, which profoundly upsets the current political context in both countries and will have substantial political and economic ramifications. For the ongoing updates on the developments of Russia-Ukraine conflict please consult the dedicated pages on BBC News.

The latest specific information on economic sanctions against Russia in response to the conflict in Ukraine is available below:
•    What sanctions are being imposed on Russia
•    The list of global sanctions on Russia for the war in Ukraine

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

After a strong recovery from the COVID-19-induced recession, the Russian economy contracted again in 2022 (-3.4%), in the context of the war in Ukraine and the subsequent economic sanctions imposed by Western countries (IMF). The invasion of Ukraine by Russian military on February 24th 2022 prompted exceptionally harsh sanctions, including the freezing of central bank assets, aimed at pushing the Russian economy into a deep and lasting recession. According to IMF forecasts, the Russian economy should contract again in 2023 (-2.3%) before renewing with positive growth in 2024 (1.5%). High inflation negatively impacts private consumption, which is the traditional growth driver (Coface), and the exodus of foreign capital hits investment activity. Increasing economic isolation will weigh on long term growth potential (Focus Economics).

In 2022, the Russian economy was hit by the unprecedented number of sanctions imposed by Western countries. The stockmarket collapsed along with the rouble and both supply and demand dropped. Inflation soared to 13.8% in 2022 (from 6.7% in 2021). However, the Russian central bank reacted promptly, doubling interest rates, and managed to avoid a financial crisis (The Economist). According to IMF forecasts, inflation should decrease to 5% in 2023 and 4% in 2024, owing to softening demand. The Russian government introduced numerous economic policy measures to dampen the effect of sanctions and trade shocks on the domestic economy. Prime minister Mikhail Mishustin has estimated the overall financial impact of government support measures at more than USD 76 billion in 2022. Combined with increased social spending, total fiscal stimulus measures exceeded 6% of 2021 GDP (The Economist). After recording a balanced budget in 2021, Russia posted a budget deficit of -2.3% GDP in 2022, which is expected to persist in 2023 (-2.1% GDP) and 2024 (-1.2% GDP) according to IMF estimates. Public debt decreased to 16.2% GDP (from 17% GDP in 2021), and is expected to slightly increase to 16.9% GDP in 2023 before declining to 16.4% GDP in 2024 (IMF). Compared to other emerging markets, this is a relatively low ratio. In addition, Russia benefits from substantial savings in the National Wealth Fund. Limited restrictions on the sale of hydrocarbons allowed Russia to post a current-account surplus of over USD 220 billion, restraining Russia’s downturn (The Economist). The 2023 budget allocates a third of total spending to defence and security to support Russia’s military campaign in Ukraine (Reuters). Before the start of the war, the government’s key priorities were to manage the fluctuating COVID-19 pandemic evolution, as well as to achieve budgetary balance and stability. In addition, the government was pursuing the de-dollarization of the economy (Euler Hermes). Russia was already facing many challenges: a large state footprint, weak governance and institutions, insufficient infrastructure, low levels of competitiveness, underinvestment, low production capacity, dependence on raw materials, poor economic climate, lack of structural reforms and ageing of the population.
 
Social inequalities remain high, especially between large cities and rural areas. Only 1% of the population owns around 70% of private assets. Despite the emergence of an urban middle class, the poverty rate remains at around 13%. A middle class protest movement calls for an end to corruption and patronage. According to IMF estimates, the unemployment rate increased to 5.8% in 2020 under the effect of the pandemic, but decreased to 4% in 2022. It is forecast to slightly increase to 4.3% in 2023 and 4.4% in 2024 (IMF). The war in Ukraine darkened the outlook, with high inflation reducing the purchasing power.

Main Sectors of Industry

Russia has significant natural resources. It is the world's second largest producer of natural gas and the third largest producer of petroleum, but also one of the main producers and exporters of diamonds, nickel and platinum. In addition to the Russia-China and Russia-Turkey gas pipelines, a new gas pipeline to Germany was scheduled to start operating in 2022, but the launch was postponed due to Russia’s invasion of Ukraine. Despite its large area, Russia has relatively little arable land due to unfavourable climatic conditions. The country nevertheless owns 10% of the world's agricultural land and is one of the main exporters of cereals. The northern regions of the country focus mainly on livestock, while the southern regions and western Siberia produce cereals. Agriculture contributes 3.8% of the national GDP and employs around 6% of the total working population.
 
Industry accounts for 33.2% of Russia's GDP and employs 27% of the workforce. The country inherited most of the industrial bases of the Soviet Union. The most developed sectors are chemistry, metallurgy, mechanics, construction and defence. In response to economic sanctions from the United States and the EU, the government has implemented an import substitution policy that could boost domestic production.
 
The service sector employs 67% of the population and generates 52.9% of the GDP. Since the 1998 financial crisis, the banking sector has not undergone complete restructuring. Given the size of the country, the transport, communications and trade sectors are particularly important. Tourism is also becoming an important source of income.
 
After recovering from the COVID-19 pandemic in 2021, Russia’s economy was hit by the sanctions imposed by Western countries and the divestments that occurred following the invasion of Ukraine.

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	5.8	26.9	67.3
Value Added (in % of GDP)	3.9	32.8	54.0
Value Added (Annual % Change)	6.7	-0.2	-2.3

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

61,5/100

World Rank:

92

Regional Rank:

42

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:

5.72/10

World Rank:

60/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Sources of General Economic Information

Ministries

Russian Government
Ministry of Agriculture
Ministry of Economic Development
Ministry of Foreign Affairs
Ministry of Finance
Ministry of Energy
Ministry of Commerce and Industry

Statistical Office

Federal State Statistics Service

Central Bank

Russian Central Bank

Stock Exchange

Moscow Exchange

Economic Portals