RaboResearch - Economic Research

Country Report Russia

Country Report


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Economic growth in Russia is falling to a lower longer-term trend growth of 3-4%. While domestic political stability has been restored and president Putin faces no real challenges to this rule, underlying tensions remain. Tensions with the EU have recently risen but are unlikely to escalate. 

Strengths and weaknesses


Strong external position

Russia has a vast amount of FX-reserves of USD 486bn at end-2012 and an acceptable external debt burden of 26% of GDP at end-2012.

Strong fiscal position

Russia has a structurally very low government debt of only around 8% of GDP and posts marginal budget deficits.


Weak governance and weak rule of law

Corruption is deeply embedded and widespread throughout society, severely hindering the business environment, especially for foreign investors.

High dependence on single commodity export revenues

The oil and gas sector dominates the economy by making up 70% of total exports and by contributing 28% to GDP.  This makes government revenues highly susceptible to global oil price fluctuations. 

Key developments

1. Economic trend growth on lower path

Russia’s GDP growth recorded 3.4% in 2012, down from 4.3% in 2011. This was the result of the deepening of the Eurozone crisis last year, which affected Russia’s main export partners. Around 25% of Russia’s total exports go to Eurozone countries. However, a key point is that growth slowed sharply over the course of the year. While 1Q12 GDP growth was 5% yoy, economic activity is estimated to have slowed to less than 2% yoy in 4Q12. GDP growth is forecasted at only 3% in 2013, as we expect the troubles in the Eurozone to continue this year and affect demand for Russia’s oil and gas exports. While private and government consumption are expected to remain robust, investment growth slowed sharply, growing only by 6% in 2012, down from 10.2% in 2011. The fall in fixed investments is exactly the opposite of what Russia needs. In the past, Russia relied on making better use of underutilized resources to generate growth. Since 2000, capacity utilization has risen sharply and over the next decade economic growth will have to be driven by an expansion of productive capacity, which requires much greater investment. The government appears to recognize the importance of raising investment. Recent efforts included encouraging Russian businesses to invest domestically instead of overseas and trying to boost Russia’s international reputation. However, Russia’s international reputation is very weak concerning governance issues and its attitude towards foreign investors is very poor. International companies have been subject to erratic economic policies which often change to their disadvantage. Foreign investors are further deterred by the widespread and embedded corruption in the corporate and legislative environment. Overall, the Russian government has a long way to go improve its business environment and gain the confidence of foreign investors. As long as the Russian government fails to improve its international reputation, foreign investment is expected to remain low and this would imply a markedly lower GDP trend growth of 3% from 6-7% previously.  

Figure 1: Growth slows
Figure 1: Growth slowsSource: EIU
Figure 2: Fixed Investments falling
Figure 2: Fixed Investments fallingSource: Bloomberg

2. Domestic political stability restored

The return of Putin to the presidency in December 2011 has been marred with social unrest. Although the rallies were held to protest against the (claimed to be rigged) election outcome, the key source of anger was Putin’s decision to return to the presidential office in the first place. A rise of new opposition movements occurred and mass street protests ensued in 2012. However, Putin resorted to a heavy-handed approach to anti-government rallies and a fierce crackdown on key opposition leaders. As a result, protests have now faded away, but the underlying grievances and tensions remain. Public opinion polls suggest that the popular standing of Putin and Prime Minister Medvedev is still weak. Even so, there is no imminent threat to their authoritarian rule, since the opposition remains too fragmented to stand against them. Furthermore, candidates from Putin’s United Russia party won nearly all of the municipal and regional elections held across the country in October 2012 and no mass protests have occurred in 2013. Nonetheless, if the economy takes a turn for the worse, it is highly likely that protests commence again, as underlying tensions remain.

3. Tensions with the EU are unlikely to escalate

In 2013, relations between Russia and the EU were soured by the Cyprus bail-out package. The initial reaction to the deal, proposed by the EU and involving a substantial haircut for (many Russian) depositors, was furious. The fury was almost entirely directed at Germany, and there was open talk in the Russian press about retaliatory economic measures against Germany. However, retaliation was limited to raiding offices of foreign, mostly German, NGO’s in Russia, claiming they were “foreign agents”. We believe that tempers have now cooled and Russia is unlikely to retaliate further against the EU or Germany in particular, especially given the importance of the economic ties between the countries. Trade relations between the two countries are strong, as German exports to Russia grew by 10% in 2012 and Russian exports to Germany increased by 4% in the same year. Also, Russia stands to lose more than Germany and the EU from a possible deterioration in trade relations in the medium-term. Germany wants to diversify its energy sources, and the development of new sources around the world, notably of shale gas in the US, makes diversification easier. Russia may find it more difficult to diversify away from German machinery and technology, since equipment and engineering products accounted for 51% of German exports to Russia in 2012. In a speech on April 7th, Chancellor Angela Merkel made a point of emphasizing how much Germany could help Russia to modernize technologically, while highlighting the importance of NGOs as engines of innovation. Whatever the ups and downs of the German-Russian relationship, the economic interdependence of the two countries runs deep. The form and structure of the German-Russian relationship will certainly change and evolve in the coming years, but the underlying pattern of mutual self-interest will not.

National facts of Russia
National facts of RussiaSource: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank.

Background information

Since the fall of the USSR in 1991, Russia has shifted its post-Soviet democratic ambitions in favour of a centralized semi-authoritarian state. Russia’s economy has undergone significant changes since 1991, moving from an isolated, centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industries. These privatizations were marred by corrupt conduct of the government, which resulted in an oligarchic economy and created very wealthy and lawless elite. By maintaining a firm grip on these elite, President Putin ensures their continuing economic and political support. Nominal GDP amounted to USD 2,030bn end-2012, making Russia the 10th largest economy in the world.  Demographics are unfavorable, as the population of Russia is shrinking; it has decreased from 148 million in 1991 to 143 million in 2012 due to an unhealthy life style and alcohol abuse among men specifically. The business environment is hampered by a plethora of factors. The Russian labor force is skilled, but there are shortages in banking and other professional services. While the level of infrastructure varies throughout the country, the roads are generally poor. Corruption remains deeply embedded in Russia and is a widespread problem. Although the country’s economy is somewhat diversified, the non-energy sector is largely uncompetitive. Therefore, the economy is overly dependent on commodity production, particularly on the oil and gas sector, which accounts for around 28% of GDP and 70% of total exports. To sustain economic growth in the longer term, Russia must diversify its economy away from the hydrocarbon sector, especially by improving the business climate. 

Economic indicators of Russia
Economic indicators of RussiaSource: EIU

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