Russia flag Russia: Economic and Political Overview

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 several years of negative growth due to massive capital flight, the collapse of the rouble, falling oil prices and trade sanctions imposed by the West after the Ukrainian crisis, the Russian economy had returned to modest growth since 2017, driven mainly by mineral resource extraction and private consumption. However, due to the COVID-19 pandemic, the economy contracted to -3% GDP in 2020, as exports, investment activity and consumer demand all plunge. According to the IMF’s estimates, GDP growth rebounded strongly in 2021 (+4,7%), supported by dynamic exports and domestic consumption. Growth was expected to slow down to 2.9% in 2022 and 2% in 2023, with the waning of recovery momentum in private spending and investment activity (IMF ; Focus Economics). However, the invasion of Ukraine by Russian military on February 24th 2022 prompted exceptionally harsh Western sanctions, including the freezing of central bank assets, aimed at pushing the Russian economy into a deep and lasting recession. Due to this economic war, the economy is now forecast to contract by -7.5% in 2022 according to Coface. High inflation will also negatively impact private consumption, which is the traditional growth driver (Coface).

The Russian economy entered the COVID-19 crisis with a sound fiscal framework and substantial policy space thanks to prudent and well-tuned macroeconomic and monetary policies (IMF). The general government balance and debt deteriorated in 2020 due to the strong public health and economic package (equivalent to 3.5% GDP) adopted in response to the crisis, the sharp drop in oil prices and lockdowns, but indicators improved in 2021 with the recovery. The recovery was mainly supported by non-commodity sectors, retail trade and higher consumer spending (Euler Hermes). The public deficit recovered from a deficit of -4.4% GDP in 2020 to -0.6% GDP in 2021 (IMF). Public finances were expected to reach balance starting 2022, with a surplus of 0.1% GDP in 2022 and 0.2% GDP in 2023 (IMF), supported by higher oil prices. However, due to the war in Ukraine and the Western sanctions hurting Russia’s financial and energy sectors, public deficit is now expected to widen to -6.5% GDP, according to Coface. Similarly, the public debt level was expected to decrease slowly, from 19.3% GDP in 2020 to 17.9% GDP in 2021 and 2022 and 17.7% GDP in 2023 (IMF). However, Coface now forecasts public debt to increase to 26% GDP in 2022. Compared to other emerging markets, this is a relatively low ratio. In addition, Russia benefits from substantial savings in the National Wealth Fund. According to IMF estimates, inflation increased from 3.4% in 2020 to 5.9% in 2021, and was expected to decrease to 4.8% in 2022 and 4.5% in 2023. However, Western sanctions put considerable downward pressure on the Russian rouble, which was down close to 30% against the dollar a week after the invasion. As a result, inflation is now projected to reach 23% in 2022 (Coface). The Russian central bank raised its key interest rate to 20% and could increase it even further (Coface). Rating agencies Fitch and Moody's downgraded Russia's sovereign debt to ‘junk’ status. Western sanctions are expected to spark a banking crisis leading Russian major banks to bankruptcy. 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.
 
The unemployment rate was falling before the COVID-19 crisis, but real wages had also fallen. 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 4.9% in 2021 and was forecast to decrease to 4.6% in 2022 and 2023. The war in Ukraine will darken the outlook, with high inflation reducing the purchasing power. 

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 1,690.051,478.571,647.571,703.531,753.94
GDP (Constant Prices, Annual % Change) 2.0-3.04.52.82.1
GDP per Capita (USD) 11,51710,115e11,27311,66512,024
General Government Balance (in % of GDP) 2.0-4.4-0.60.10.2
General Government Gross Debt (in % of GDP) 13.819.3e17.917.917.7
Inflation Rate (%) 4.53.4e6.721.314.3
Unemployment Rate (% of the Labour Force) 4.65.8e4.94.64.6
Current Account (billions USD) 65.4036.1194.6275.1167.74
Current Account (in % of GDP) 3.92.45.74.43.9

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

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 gas pipeline launched late 2019, two new gas pipelines (to Germany and Turkey) are scheduled to start operating. 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 3.7% of the national GDP and employs around 6% of the total working population.
 
Industry accounts for 30% 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 56.3% 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.
 
In 2020, due to the COVID-19 pandemic, most economic sectors decreased. Tourism, restaurants, entertainment and the beauty industry were the hardest sectors hit. To a lesser extent, the agriculture sector has been temporarily impacted by the lockdown measures preventing seasonal workers from coming to Russia, but it proved to be very resilient to the crisis. Total losses of 1.78 million jobs were concentrated in four sectors: manufacturing, construction, retail and hospitality, and health/social services (World Bank, quoting Kommersant). In 2021, the recovery was mainly supported by non-commodity sectors including agriculture, construction and manufacturing, as well as retail trade (Euler Hermes).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 5.8 26.8 67.4
Value Added (in % of GDP) 3.7 30.0 56.3
Value Added (Annual % Change) 0.2 -3.2 -2.2

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:

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:

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

 

Country Risk

See the country risk analysis provided by Coface.
 

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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
 

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Latest Update: June 2022