Capital - Moscow (GMT+2) Largest City - Moscow Population - 141,377,752 est. Languages - Russian Demonym - Russian Currency - Ruble (RUB) GDP per capita - $12,100 est. Calling Code - +7 Internet TLD - .ru (.su reserved)
Russia, also known as the Russian Federation, is a transcontinental country extending over much of northern Eurasia (Asia and Europe). With an area of 17,075,400 km², Russia is the largest country in the world, covering almost twice the total area of the next-largest country, Canada, and has significant mineral and energy resources. Russia has the world's ninth-largest population. Russia shares land borders with the following countries (counter-clockwise from northwest to southeast): Norway, Finland, Estonia, Latvia, Lithuania, Poland, Belarus, Ukraine, Georgia, Azerbaijan, Kazakhstan, China, Mongolia, and North Korea. It is also close to the United States (Alaska state), Sweden, and Japan across relatively small stretches of water (the Bering Strait, the Baltic Sea, and La Pérouse Strait, respectively).
Formerly the Russian Soviet Federative Socialist Republic (RSFSR), a republic of the Union of Soviet Socialist Republics (USSR), Russia became the Russian Federation following the dissolution of the Soviet Union in December 1991. After the Soviet era, the area, population, and industrial production of the Soviet Union (then one of the world's two Cold War superpowers, the other superpower being the United States) that were located in Russia passed on to the Russian Federation.
After the breakup of the Soviet Union, the newly-independent Russian Federation emerged as a great power (although it is also considered to be an energy superpower). Russia is considered the Soviet Union's successor state in diplomatic matters (see Russia's membership in the United Nations) and is a permanent member of the United Nations Security Council. Russia is the leading nation of the Commonwealth of Independent States, a member of the G8 as well as other international organisations.
Economy
Russia ended 2006 with its eighth straight year of growth, averaging 6.7% annually since the financial crisis of 1998. Although high oil prices and a relatively cheap ruble initially drove this growth, since 2003 consumer demand and, more recently, investment have played a significant role. Over the last five years, fixed capital investments have averaged real gains greater than 10% per year and personal incomes have achieved real gains more than 12% per year. During this time, poverty has declined steadily and the middle class has continued to expand. Russia has also improved its international financial position since the 1998 financial crisis. The federal budget has run surpluses since 2001 and ended 2006 with a surplus of 9% of GDP. Over the past several years, Russia has used its stabilization fund based on oil taxes to prepay all Soviet-era sovereign debt to Paris Club creditors and the IMF. Foreign debt has decreased to 39% of GDP, mainly due to decreasing state debt, although commercial debt to foreigners has risen strongly. Oil export earnings have allowed Russia to increase its foreign reserves from $12 billion in 1999 to some $315 billion at yearend 2006, the third largest reserves in the world. During PUTIN's first administration, a number of important reforms were implemented in the areas of tax, banking, labor, and land codes. These achievements have raised business and investor confidence in Russia's economic prospects, with foreign direct investment rising from $14.6 billion in 2005 to an estimated $30 billion in 2006. In 2006, Russia's GDP grew 6.6%, while inflation was below 10% for the first time in the past 10 years. Growth was driven by non-tradable services and goods for the domestic market, as opposed to oil or mineral extraction and exports. Russia has signed a bilateral market access agreement with the US as a prelude to possible WTO entry, and its companies are involved in global merger and acquisition activity in the oil and gas, metals, and telecom sectors. Despite Russia's recent success, serious problems persist. Oil, natural gas, metals, and timber account for more than 80% of exports and 32% of government revenues, leaving the country vulnerable to swings in world commodity prices. Russia's manufacturing base is dilapidated and must be replaced or modernized if the country is to achieve broad-based economic growth. A 20% appreciation of the ruble over 2005-06 has made attracting additional investment more difficult. The banking system, while increasing consumer lending and growing at a high rate, is still small relative to the banking sectors of Russia's emerging market peers. Political uncertainties ahead of the elections, corruption, and widespread lack of trust in institutions continue to dampen domestic and foreign investor sentiment. From 2002 to 2005, the government bureaucracy increased by 17% - 10.9% in 2005 alone. President PUTIN has granted more influence to forces within his government that desire to reassert state control over the economy. Russia has made little progress in building the rule of law, the bedrock of a modern market economy. The government has promised additional legislation to make its intellectual property protection WTO-consistent, but enforcement remains problematic.
Market Overview
In 2005, the Russian economy continued its sustained steady growth. GDP grew by an estimated 6.4% to $765.5 billion. However, this represented a decline from 7.1% growth in 2004.
As in 2004, high world prices for oil and natural gas continue to be the engine behind much of this impressive growth. The Russian economy remains dependent on energy and other extractive sectors, such as timber, precious metals, non-ferrous metals and steel, despite the Russian Government’s renewed efforts to build more of a manufacturing base. Extractive industries taken together account for more than 80% of overall exports and provide a significant part of federal budget revenues. Russia’s industrial production grew only 4% in 2005 compared to 7.3% in 2004.
The overall balance of trade continues to register healthy surpluses, as does the federal budget. In 2005, Russia’s total exports during the first 11 months were $220.6 billion and imports were $111.1 billion. U.S exports to Russia for the first 11 months of 2005 totaled $5.7 billion, while U.S. imports from Russia were $13.9 billion. Federal budget expenditures in 2004 are estimated at $96.3 billion with an estimated surplus of 4.3% of GDP. Federal budget expenditures in 2005 reached 136.5 billion, with a surplus of 7.5%
Due to high energy prices, Russia’s financial situation continues to strengthen, with a decline in its total external debt to $230 billion as of June 2005 and an increase in its sovereign credit ratings to investment grade. Moreover foreign investors have found the stock of Russian energy firms like Gazprom to be very attractive. During the past year the ruble has remained relatively steady against the dollar, trading within a band of 28.9 to 28.2 rubles to one U.S. dollar.
Adding to overall economic development, the year 2005 continued a multi-year trend of strong consumer spending and a construction boom. This dramatic growth shows more signs of spreading beyond Moscow and St. Petersburg to the regions. Per capita GDP is estimated to have reached $5,300 in 2005 as compared to $4,039 in 2004. With an 8.7% growth rate in 2005, real disposable incomes continue to outpace GDP growth.
Leading European companies, especially those from Germany, France, Scandinavia and Turkey, are well established in both consumer and industrial markets in Moscow and St. Petersburg and are branching out to the smaller regional cities. Many well-known U.S. consumer brands are also successful and many Asian companies from Japan, South Korea and China are also doing well.
This past year President Putin and the Russian state apparatus continued to reassert more state control, both direct and indirect, over the economy, especially in strategic sectors such as energy, aluminum, steel, automotive, machine tools and aerospace. At the same time there was the “privatization” of the major oil and gas companies by increasing the state’s controlling share of the stock, while allowing foreign investors more access to energy stocks, like Gazprom.
Terrorism remains an issue, but to date it has not been directed at Western interests. At present, it remains primarily connected to the ongoing conflict in the breakaway Republic of Chechnya in southern Russia.
Market Challenges
Major barriers to the Russian market remain its distance from the U.S. and its erratic transition from a socialist, centrally planned economy to a more open, market-oriented one.
European and Asian companies remain tough competitors for U.S. firms, due to their proximity to Russian markets and their long-standing relations with Russian organizations and companies.
Government bureaucracy, poorly established rule of law and corruption affect such areas as establishing a business, tax collection, dispute settlement, property rights, product certification and standards, as well as Russian Customs clearance.
Finding qualified local partners and employees is a difficult process. The pool of managers who understand Western accounting and business practices remains limited, as well as the pool of qualified, experienced Russians proficient in English.
Adequate financial resources for Russian buyers still remain a problem, but it is not as acute as it was in years past. There are more foreign banks operating in Russia and more cash circulating within the economy due to the Russian oil and gas boom.
The Russian Government continues to use its oil and gas resources to increase state ownership in strategic industries and companies. So it is not completely clear to foreign companies which sectors are open to them for investment without Russian majority partners. The Russian Duma continues its work on defining Russia’s strategic sectors.
Market Opportunities
There are strong growth possibilities in a range of consumer goods and services, fueled by increases in disposable income in Moscow, St. Petersburg and the growing regional centers:
telecommunications equipment and services, especially wireless
autos and parts
computer hardware and software
cosmetics and toiletries
building products
franchising.
There is strong growth in the energy, machinery and healthcare sectors:
