россия

Russia: Country Analysis Report – In-depth PESTLE Insights Published 05/2010

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OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental structure in Russia. Each of the

PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects and future risks.

Summary

Key findings

Russia has an established political structure, but corruption and crime still pose a problem

Russian politics gained considerable stability after Vladimir Putin became president in 1999. Both political and economic

reforms introduced under his leadership were well received, prior to the recent global crisis. In the presidential elections of

May 2008, Dmitry Medvedev, previously the chief of staff and vice president under Putin, was elected as the new president.

There was considerable support for Medvedev, as it was believed that he would undertake policies very similar to that of

Putin. This was later proved when Putin was appointed prime minister in June 2008. With both Medvedev and Putin at the

helm, Russia was expected to have the twin advantages of political stability and high economic growth. However, with the

economic crisis, it is feared that the relationship between Prime Minister Putin and President Medvedev may not remain as

harmonious as before, especially due to differences in opinion on ways to tackle the economic crisis.

However, despite its established and seemingly stable political structure, Russia is considered to be one of the most

corrupt nations in the world. According to Transparency International (TI), Russia scored 2.2 out of 10 in 2009 Corruption

Perception Index (CPI), down from 2.3 in 2007, which is the lowest standing in the last eight years. The government has

not been very effective in controlling increasing criminal activities and corruption, which could prove to be a major

impediment for foreign investments.

COUNTRY ANALYSIS REPORT

Russia

In-depth PESTLE Insights

Publication Date: May 2009

Overview



Strong current account surplus; however rising unemployment is a cause for concern

Despite global slowdown, the Russian external trade showed tremendous growth with increasing current account surplus in

2009. In 2008, the current account surplus stood at around 7% of GDP. The country’s current account surplus came down

from around $102 billion in 2008 to around $47 billion in 2009. According to Central Bank of Russia, the current account

surplus increased by 250% to reach $33.9 billion in the first quarter of 2010, up from $9.7 billion in the same quarter in

2009. The rising unemployment level in Russia is currently posing a challenge to the government. The number of

unemployed people rose from a level of 4.6 million in 2007 to more than 6.4 million in 2009, recording an unemployment

rate of 8.4% in 2009.

Despite improvements seen in real wages, high mortality rate still dogs the social system

During 2007–08, increased economic growth in Russia stimulated an increase in real incomes and wages of the working

population. The same trend continued in 2008, with the average real wages and real disposable incomes in the first four

months increasing by 13.1% and 11.8% respectively compared to the same period in 2007. The growth in real wages,

during the 2007–08 surpassed the real GDP and productivity growth. Furthermore, almost all sectors of the economy

reported an increase in real wages of more than 10%. The largest increase was recorded in the public sector, retail trade

and construction sectors, with growth in real wages up by around 17% compared to previous periods. The average monthly

dollar wage increased to around $650 in the first four months of 2008, with a growth rate of 41% over 2007. Although, the

real wages declined by 1.8% in first quarter of 2009, the disposable income grew by 4.5% during the same period.

Furthermore, the average real wages again grew by 3.4% at the end of first quarter of 2010 and real disposable income

grew by over 4%. The average monthly dollar wage increased to around $694 in the first four months of 2010.

High mortality and morbidity among the Russian working population have become a huge challenge to economic and social

development. The death rate in 2009 was an estimated 16 deaths per 1,000. As a result, supply constraints of labor are

expected to become a major impediment to economic growth. Currently, Russia’s demographic crisis is considered more

serious than that of Western Europe. Furthermore, the population has declined by six million since 1992 to an estimated

140 million in 2009. It is also expected that the population will fall by 30% by 2050. The high mortality rate is expected to

exacerbate the problem of a decreasing labor force.

Although Russia is renowned for its advanced space technologies, it is lagging behind in fundamental research

Historically, Russia has been known for creating some of the most advanced space technologies in the world. The Russian

space station, Mir, for example, has played a vital role in promoting international space stations in many space programs.

The space agency is also a revenue generating body for the government, which has become more prominent with Russia

taking up launching activities on a commercial basis. Furthermore, the country has started space tourism. However, the

science and technology system in Russia has more recently been falling short of international standards mainly due to the

structures of the old Soviet system exerting control over scientific streams. The chief problems of the system include

language barriers, a weak network and co-ordination of activities, lack of active presence in international meetings,

discrepancies in intellectual property rights and policies, political obstacles and differences among scientific bodies.

Overview



Russia is increasing its access to international labor; however, the country is dogged with a weak judiciary

After the end of the Soviet rule, a fall in population led to a decline in Russia’s labor efficiency for many years. This led to

the need for foreign workers in various industrial sectors of Russia, which in turn caused the government to ease its

immigration policy. The liberal immigration laws brought in many foreign workers, especially from the EU region; indeed, it

was reported that the total foreigners who entered Russia rose to 14.5 million at the end of 2008. Immigration laws play a

vital role for foreign direct investment (FDI) and, in Russia's case, they are presently adding to its strength. Aside from the

immigration laws, Russia’s judicial system is relatively weak and unpredictable. Corruption is rampant among law

enforcement bodies and judges, and court decisions are often difficult to implement. Many foreign investors have

experienced problems executing judicial rulings and obtaining approval on contractual agreements. This is presently

proving to be a major obstacle for FDI in Russia.

Russia is well equipped with a good environmental management system, although lack of resources is a challenge

Russia’s environmental management systems are well equipped with various levels of controls and streamlined monitoring

systems. A three-tier executive federal governance body—which comprises federal ministries, federal services, and federal

agencies—manages the environmental management system. Presently, the system plays a vital role in co-ordinating

various conservation activities in Russia. However, the biggest challenge of the Russian government is its inability to tackle

huge environmental problems that may arise due to military and other toxic wastes. The federal funds available for the

disposal of solid fuel missiles are not sufficient to conduct any cleaning programs. Furthermore, in Russia there is also a

scarcity of trained local staff to implement environmental regulations.

PESTLE highlights

Political landscape

• In July 2009, President Medvedev and Barack Obama reached an agreement to cut back their countries'

stockpiles of nuclear weapons. Russia also supported the US decision to shelve controversial missile defense

bases in Poland and the Czech Republic.

• In April 2010, Ukraine and Russia signed an inter-governmental protocol on the supply of goods on industrial

cooperation in 2010. The sides also signed protocols on cooperation in the aviation industry and on industrial

policy.

Economic landscape

• Although, the country managed to maintain 6% growth in 2008, the Russian economy contracted by 8% in 2009.

With the prevailing economic deterioration, the government has drawn policies to reduce budget deficit which

was about 6% of GDP in 2009 to around 3% by 2012.

• The insurance market in Russia has grown continuously for the last five years, despite sharp declines in the life

insurance segment’s value since 2003. The Russian insurance market generated a gross premium income of

$36.9 billion in 2008, representing a compound annual growth rate (CAGR) of 18.4% for the period spanning

2004-20–08.

Overview



Social landscape

• Income inequality in Russia has widened in the post-liberalization period. The difference between the 10% richest

and 10% poorest among the population in Moscow was over 42 times in 2008 compared to 38.6 times in 2005.

• Even though the country went through a severe economic crisis during 2009, the government was able to carry

out large-scale anti-crisis measures without any cuts in social spending. The actual social spending increased by

over 27% in 2009 compared to that of 2008.

Technological landscape

• Russia has been historically known for its excellence in space technologies and is one of the most successful

countries with regards to its implementation of many space programs. The government has allocated more than

$11 billion for the Russian Space Agency for the period 2006–15.

• The country's IT market is presently the fastest-growing in the Central and East European (CEE) region. There is

huge potential for IT spending by Russia's traditional industries to make their conventional systems of operations

IT compliant.

Legal landscape

• The new government has set a long list of legal reforms which are expected to bring improvement to the

country’s judicial system.

• Russia has also agreed to various legal assistance programs from many countries to solve its domestic and

international legal issues.

Environmental landscape

• The Russian government is planning to set up an effective security system to prevent pollution and man-made

environmental disasters. The main tasks outlined by the government include implementation of environmental

decisions consistently and completely, and the creation of an effective system for ecological security in the

country.

Overview



Key fundamentals

Table 1: Russia – key fundamentals

2008 2009 2010 2011 2012 2013 2014

GDP, constant prices ($bn) 431.0 396.6 408.5 417.0 426.5 442.4 465.4

GDP growth rate (%) 6.0 -8.0 3.0 2.1 2.3 3.7 5.2

GDP, constant 2000 prices, per capita ($) 3064 2832 2930 3006 3089 3219 3404

Inflation (%) 13.1 10.7 8.9 8.9 7.7 7.4 6.8

Exports, total as % of GDP 28.7 31.4 31.0 29.3 28.2 27.5 26.9

Imports, total as % of GDP 17.8 19.8 20.7 19.4 18.5 18.0 17.8

Mid-year population, (m) 140.7 140.0 139.4 138.7 138.1 137.4 136.7

Unemployment rate (%) 6.3 8.4 8.6 9.0 9.4 9.7 10.0

Doctors per 1,000 people 4.3 4.4 4.4 4.4 4.5 4.5 4.5

Mobile penetration (per 100 people) 133 144 152 157 160 162 163

Source: Datamonitor D A T A M O N I T O R

Table of Contents



TABLE OF CONTENTS

Overview 1

Catalyst 1

Summary 1

Key facts and geographic location 10

Key facts 10

Geographical location 11

PESTLE analysis 12

Summary 12

Political analysis 13

Economic analysis 16

Social analysis 20

Technological analysis 23

Legal analysis 26

Environmental analysis 29

Political landscape 32

Summary 32

Evolution 32

Structure and policies 35

Performance 40

Outlook 42

Economic landscape 43

Summary 43

Evolution 43


Performance 47

Outlook 61

Social landscape 62

Summary 62

Evolution 62


Performance 65

Table of Contents



Outlook 68

Technological landscape 70

Summary 70

Evolution 70


Performance 71

Outlook 75

Legal landscape 77

Summary 77

Evolution 77


Performance 81

Outlook 82

Environmental landscape 83

Summary 83

Evolution 83


Performance 86

Outlook 87

APPENDIX 88

Ask the analyst 88

Datamonitor consulting 88

Disclaimer 88

Table of Contents



TABLE OF FIGURES

Figure 1: Map of Russia 11

Figure 2: Unemployment in Russia, 2002–13 17

Figure 3: Russia’s political events timeline 33

Figure 4: Russia – Key political figures 35

Figure 5: Distribution of seats by political parties in the Duma, 2007 38

Figure 6: Evolution of GDP growth in Russia, 1990–2009 45

Figure 7: GDP and GDP growth rate of Russia, 2002–13 48

Figure 8: Sector specific GDP in Russia, 2009 49

Figure 9: Agricultural output in Russia, 2002–09 50

Figure 10: Industrial output in Russia, 2002–09 51

Figure 11: Services output in Russia, 2002–09 52

Figure 12: Current account balance in Russia, 2001–08 54

Figure 13: Russia’s external trade position, 2002–09 55

Figure 14: FDI inflow in Russia, 2002–08 57

Figure 15: Consumer price index (CPI) and CPI-based inflation in Russia, 2002–13 59

Figure 16: Employment in Russia, 2002–13 61

Figure 17: Major religions in Russia 64

Figure 18: Healthcare expenditure in Russia, 2002–13 66

Figure 19: Education expenditure in Russia, 2002–13 68

Figure 20: Growth of fixed and mobile phones in Russia, 2002–13 72

Figure 21: Internet users in Russia, 2002–13 73

Figure 22: R&D expenditure in Russia, 2000–10 75

Figure 23: Carbon dioxide emissions in Russia, 2002–13 87

Table of Contents



TABLES

Table 1: Russia – key fundamentals 5

Table 2: Russia – key facts 10

Table 3: Analysis of Russia’s political landscape 13

Table 4: Analysis of Russia’s economic landscape 16

Table 5: Analysis of Russia’s social landscape 20

Table 6: Analysis of Russia’s technology landscape 23

Table 7: Analysis of Russia’s legal landscape 26

Table 8: Analysis of Russia’s environmental landscape 29

Table 9: Mid-year population by age (m) in 2009 63

Table 10: Patents received by Russia – 2000–08 71

Table 11: International environmental treaties signed and ratified by Russia 86

Key facts and geographic location



KEY FACTS AND GEOGRAPHIC LOCATION

Key facts

Table 2: Russia – key facts

Country and capital

Full name Russia

Capital city Moscow

Government

Government type Federation

Head of state President Dmitry Anatolyevich Medvedev

Head of government Prime Minister Vladimir Putin

Population 140.04 million

Currency Ruble (RUB)

GDP per capita (PPP) $15,100

Internet domain .ru

Demographic details

Life expectancy 66.03 years (total population)

59.33 years (men)

73.14 years (women)

Ethnic composition (2002 data) Russian 79.8%, Tatar 3.8%, Ukrainian 2%, Bashkir 1.2%,

Chuvash 1.1% and other unspecified 12.1%

Major religions (1995 census) Russian orthodox – 20%

Muslims – 15%

Other Christians – 2%

None – 63%

Country area 17,075,200 sq km

Language Russian

Exports Major exports include petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals and military equipment.

Imports Machinery and equipment, consumer goods, medicines, meat, sugar, and semi-finished metal products.

Source: CIA D A T A M O N I T O R

Key facts and geographic location



Geographical location

Russia is located in Northern Asia, between Europe and the North Pacific Ocean. The country also borders the Arctic

Ocean.

Figure 1: Map of Russia

Source: CIA The World Factbook D A T A M O N I T O R

PESTLE analysis



PESTLE ANALYSIS

Summary

Russia, in its present form, came into existence after the disintegration of the Union of Soviet Socialist Republics (USSR;

also known as the Soviet Union). Russia gradually opened up its economy, and after a seven-year transitional period of

numerous market reforms, witnessed political stability under Prime Minister Vladimir Putin and President Dmitry Medvedev.

The Russian economy grew at a rate of 8% in 2007, but contracted by 8% in 2009. The economic conditions deteriorated in

2009. Government finances and the balance of payments came under pressure along with the fall in oil prices and as a

result the economy went into a recession. In addition, corruption and crime remain two significant impediments to the

smooth functioning of the state.

The Russian population is among the most highly educated in the world. Despite an increase in real wages, a rise in food

prices has drastically affected the poor in Russia. Also, the mortality rate in the country is still very high among the working

population. To mitigate the effects of these problems, the government has plans to implement certain reforms and

streamline funds for social development in the near future.

Russia has been one of the most successful countries in implementing ambitious space programs. However, the country

has not been very successful in registering patents over the years for its products. In addition to its advances in the space

sector, the country is also seen as one of the leading IT destinations of the future.

The Russian judicial system has been very ineffective and weak since the fall of the USSR. However, the country has

introduced many reforms which are expected to bring improvements in the system. Russia has also entered into various

legal assistance programs with many countries around the world, as unfair competition practices are hampering the entry of

foreign direct investment (FDI) into the country.

The environmental management system in Russia lacks resources to tackle the environmental problems of the country.

However, the government is set to introduce an environmental security system to enhance environmental protection and

conservation. The country has also signed various international environmental treaties to participate in environmental

conservation.

PESTLE analysis



Political analysis

Overview

The Russian political system was reinvigorated by the election of Dmitry Medvedev as the new president and Vladimir Putin

as the prime minister. The new government had promised to continue with economic reforms and thereby cohesively

integrate the Russian economy with the rest of the world. However, deteriorating economic conditions have brought fresh

challenges for the present government. Moreover, its relations with its neighbors, especially Georgia have deteriorated.

Moreover, corruption and crime, which haunts all the governmental agencies of Russia, continues to be a serious challenge

to the country.

Table 3: Analysis of Russia’s political landscape

Current strengths Current challenges

▪ Continuity in polices

▪ International integration

▪ Corruption and crime

▪ Terrorism

Future prospects Future risks

▪ Growing international relations

▪ Pressure from bureaucracy


Current strengths

Continuity in policies

Russian politics gained considerable stability after Vladimir Putin became the president in 1999. From that point, both

political and economic reforms undertaken under his leadership have taken the country on a growth path. Putin served as

the president for almost three full terms and implemented effective reforms to bring the country out of economic and

political turmoil. In the presidential elections of May 2008, Dmitry Medvedev was elected as the new president. Medvedev

was previously the chief of staff and also deputy prime minister under Putin’s rule. As such there was considerable support

for Medvedev and belief that the new president would undertake policies very similar to that of Putin’s. This was later

proved when Vladimir Putin was once again appointed as prime minister of the country in June 2008.

Under Mr. Putin's leadership, the Russian economy had boasted an annual growth rate of almost 7%. Overall, the reforms

undertaken by Mr. Putin elicited little opposition and his approval rating rarely fell below 70%. These policies have also

been welcomed by the new president. Since his election as the president, Medvedev has followed similar line of policies

that the previous administration had followed. The president, in April 2010, went in for a greater international integration in

all spheres starting from industry, R&D and environment. The president also initiated an agreement with Japan to step up

cooperation in energy development in the Middle East and Eastern Siberia. The continuity in policies has been main reason

for the country to come back to growth in 2010.

PESTLE analysis



International integration

Russia came out of a strict socialist regime to become a more economically open society during 1991–2009. Throughout

this period, Russia has endeavored to closely integrate itself with the international community, resulting in large

investments pouring into the country. The main goals of the Russian government during this period were to not only bring

about a qualitative economic change in the country but also to transform the social structure of the Russian society, by

giving more support to the rapidly growing middle class. Through this strategy, the government has been instrumental in

shaping Russia’s new long-term economic policy by relying on fully-fledged international integration and comprehensive

modernization of key industries and infrastructures in the country. The Russian government has initiated free market

exchange with many European countries and is on course to open its markets for many more countries around the world.

The country entered into several bilateral agreements with China, Japan, Iran, the US and many other European nations

during the course of 2009 and 2010 in many spheres such as energy, environmental issues, and R&D development. The

country is also in talks with Ukraine for an economic integration program in near future.

Current challenges

Corruption and crime

Russia is ranked as one of the most corrupt nations in the world, and its performance with respect to corruption has

worsened. According to Transparency International (TI), Russia has scored 2.2 out of 10 in 2009 Corruption Perception

Index (CPI), down from 2.3 in 2007, which is its lowest standing in the last eight years. Out of the 180 countries surveyed in

terms of Corruption Perception Index (CPI), Russia was in 146th place in 2009, falling from 143rd place in 2007. Corruption

remains a barrier to foreign investments and negatively affects the country's economic development. Furthermore,

according to a survey carried out by the World Bank, nearly 80% of businesses in Russia are paying some form of bribes to

many state-run agencies.

Increasing criminal activities is another factor restricting governmental effectiveness in the country. According to a survey

conducted by the Council of Europe (CoE), economic crimes committed in Russia include political fraud (13%),

embezzlement of funds (13%), customer fraud (20%) and counterfeiting of money or securities (7%). The council has also

reported that criminal organizations in Russia have largely targeted the fuel and energy sector, as well as consumer goods,

commercial services, transnational trade, financial services, metal industry, and public procurement. The government has

not effectively monitored and controlled these criminal and corrupt practices. These are proving to be significant

impediments for the effective implementation of government policies in Russia.

Terrorism

The terrorist activity has always been a concern in the country and has gained strength during 2009 and 2010. In

November 2009, more than 25 people were killed when a bomb blast caused the derailment of a Moscow-St Petersburg

express train. More than 40 terrorists were suspected to have taken part in the attack and as of March 2010, 10 were

arrested. In March 2010, 39 people were killed and more than 60 were injured in two suicide bomb attacks on the Moscow

Metro. The government blamed Muslim militants from the North Caucasus as the cause for the attack. The country has

been on high alert on terrorist activity since then. This is currently posing severe threats to national security in the country.

PESTLE analysis



Future prospects

Growing international relations

Russia has a strong presence in the international political arena, especially after its induction to the G7, an international

association of various countries which was rechristened as the G8 after Russia’s induction. Russia also hosted the BRIC

(Brazil, Russia, India and China) summit in Yekaterinburg in May 2008, convening a high-profile gathering of four nations

with vast resources but differing interests. The BRIC summit is expected to unite these major economic growth centers to

increase their role in international affairs. Furthermore, the country also held talks with Turkey in May 2008 to improve its

bilateral relations with the country. The main areas of focus included a number of regional and international problems,

including the situation around the Conventional Forces in Europe Treaty (CFE), relations between Russia and NATO and

security issues in the Black Sea region. Russia has also emerged as the representative voice of the BRIC nations, as

witnessed during the G20 meeting in April, 2009. All these initiatives are expected to enhance Russia’s position in the

international arena. In a historic event for the reduction of the nuclear stockpile, both the US and Russia signed a new

strategic arms agreement in April 2010. This is an outline agreement to cut back their countries' stockpiles of nuclear

weapons by more than 30%. This agreement is a welcome sign for both the countries.

Future risks

Pressure from bureaucracy

Since the end of Soviet rule, Russia’s bureaucratic structures and state administration has been under the control of the

ruling party. There is no clear division of functions and responsibilities among various governmental institutions, which

slows down co-ordination among government agencies. As corruption is widespread in state agencies, unofficial payments

for licenses and state procurement contracts are common. The number of corrupt employees in public administration is

also a continued problem and has decreased the efficiency of governance in the country.

PESTLE analysis



Economic analysis

Overview

Russia liberalized its economy in the 1990s and reaped huge benefits. The economy’s successful run since 1999 came to

an end in 2008 with the mounting economic crisis. During 1999–2007, the country had one of the highest growth rates,

touching around 8% in 2007 but fell back to 6% in 2008. The global economic slowdown gripped the Russian economy too,

and the economy went into recession with a negative rate of 8% in 2009. Large scale government expenditure and the

devaluation of the ruble have posed fresh challenges to government finances and the balance of payments. The growth

rate however is expected to recover to positive terms in 2010. The Russian economy continues to suffer setbacks in the

form of low oil prices, a lower inflow of capital and tighter credit conditions coupled with bad corporate debt.

Table 4: Analysis of Russia’s economic landscape


▪ Successful economic reforms

▪ Strong current account surplus

▪ Unemployment

▪ Dependence on foreign money


▪ Comfortable foreign exchange reserves

▪ Growing foreign investments

▪ Decreasing budget surplus

▪ Adverse balance of payments


Current strengths

Successful economic reforms

Russia's adoption of institutional developments and market reforms in 1998 has been beneficial for the country, allowing it

to recover from a crisis situation. The Russian economy has been growing by 6–7% per year during 2000–07 and the GDP

surpassed the pre-crisis level of 1991. However, due to global economic crisis, the country went into a recession in 2009.

However, the economy revived quickly during the first quarter of 2010 and posted a growth rate of over 3%. Diversifying the

structure of the economy and improving the market's institutional environment are the two main reforms that the country is

currently implementing. Mutual relations between government agencies and business organizations are becoming more

transparent, the efficiency of state regulation is being raised and human capital assets are being developed through

responsible social policies. The reforms implemented by the government have led to closer integration with the world

economy, with an ever-increasing economic growth for nearly nine years.

Strong current account surplus

Russia has maintained a current account surplus position since 2000. Improved competitiveness and higher oil prices

facilitated a dramatic turnaround in the current account, from a deficit of around 0.5% of GDP in 1998 to a surplus of 12% of

PESTLE analysis



GDP in 1999. In 2008, the current account surplus stood at around 7% of GDP. The country’s current account surplus

came down from around $102 billion in 2008 to around $47 billion in 2009. According to Central Bank of Russia, the current

account surplus increased by 250% to $33.9 billion in the first quarter of 2010, up from $9.7 billion in the same quarter in

2009. A strong and consistent current account surplus implies a very strong international trade in the country.

Current challenges

Unemployment

The rising unemployment level in Russia is currently posing a challenge to the government. The number of unemployed

people rose from 4.6 million in 2007 to more than 6.4 million in 2009, recording an unemployment rate of 8.4% in 2009.

During global economic crisis, unemployment reached a maximum of 7.1 million people in February 2009. A year later, in

March 2010, unemployment totaled 6.4 million. Although, the government has initiated measures to reduce unemployment,

the rate at which it is growing is a cause for concern. It is expected that the unemployment rate would go beyond 9.7% by

2013. The government’s intent to join hands with other Asian nations to conduct exploration in Middle East nations, instead

of Russia, may also cause a hit to domestic employment in the country.

Figure 2: Unemployment in Russia, 2002–13

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PESTLE analysis



Dependence on foreign money

The Russian economy historically has been dependent on two external factors. One being the price of oil and the other is

the status of international financial markets. The Russian banking sector has been one of the most fragmented banking

sectors of the world with many localized banks in place. As a result there has been low trust, poor supervision and relatively

small share of foreign banks. During 1999–2009, a consistent share of banking sector growth has been due to high

borrowing from abroad. It was reported that around a third (37%) of the $140 billion foreign debt of the banking sector

matures after mid-2011, for which the sector has to ready funds. Furthermore, the interbank market, in particular, is highly

dependent on foreign money. All these factors apparently make the financial sector open to risk, because of which sector

ran into crisis during 2008–09 as the supply of foreign refinancing dried up and the interbank Russian Ruble interest rates

doubled in a matter of months. Furthermore, the collapse in the world market price of oil destroyed market confidence in the

Ruble. The government along with the central bank has to clearly formulate policies to restrict the dependency on foreign

funds of the economy.

Future prospects

Comfortable foreign exchange reserves

Russia’s foreign exchange reserves on December 31, 2009 stood at $439 billion. Although the country's foreign exchange

reserves fell from $575 billion in July 2008, Russia is better placed in terms of external reserves than many other countries

that are fighting the economic crisis. The Central Bank of Russia (CBR) has intervened in the market to stabilize the value

of the ruble. In November 2008, faced with a rapidly falling trade surplus, the CBR changed its ruble policy by introducing

“mini devaluations” against the basket, of around 1% per step. It gained speed in following weeks and by December 2008,

it managed three devaluations per week and four by mid-January 2009. The total depreciation to the basket since

November 2008 reached around 34% by February 2009. This has helped in arresting the flight of the ruble.

Growing foreign investments

Despite the dire economic situation, the foreign investments in to the country have not fallen. The FDIs into Russia grew

from $55 billion in 2007 to more than $70 billion in 2008. Furthermore, Japan’s investments in the Russian economy

doubled to $8.3 billion in 2009 in spite of the difficulties of the crisis period. This was mainly due to effective government

support to revive economy out of recession which has gained foreign trust. Furthermore, according to the Economic

Development Ministry, the net capital inflow amounted to $10 billion in the first quarter of 2010 against a net capital outflow

of $8.3 billion in Q4 2009 which gives good indication that the capital markets are picking up in the country.

Future risks

Decreasing budget surplus

The budgetary balance in Russia has been decreasing in the past few years due to increased social expenditure. The

budget balance decreased from around 7.5% of GDP in 2006 to around 5.5% of GDP in 2007, and despite the economic

slowdown, the government managed a surplus of 4.1% of GDP in 2008. However, the slowdown has exerted pressure on

government finances. With large scale government expenditure along with a fall in oil prices, the deficit reached 5.9% of

GDP in 2009, which will be the first deficit in a decade amounting to $79.6 billion. An increasing deficit is largely due to

PESTLE analysis



increased unemployment, pension and healthcare expenditures. It is expected that the decrease in tax revenue will further

put pressure on the budget balance.

Adverse balance of payments

Russia has failed to develop itself into a well diversified economy. It is dependent on imports for most of its consumer and

capital needs. At the same time, it suffered a setback because of its excessive dependence on oil for its export income.

Though Russia has continued to post a current account surplus, its magnitude has declined. In 2008, the current account

balance stood at around 7% of GDP. The country’s central bank had expected a deficit in 2008, but due to the gradual

devaluation of the ruble, which depreciated about 34% against the dollar-euro bi-currency basket, it posted positive figures.

Although the measure was successful in lowering imports, lower oil prices will also reduce export revenues. The country’s

current account surplus came down from around $102 billion in 2008 to around $47 billion in 2009. Although, it went up in

first quarter of 2010 to $33 billion from $9 billion last quarter 2009, the trend is not expected to be consistent. The scenario

will have an adverse impact on the balance of payments.

PESTLE analysis



Social analysis

Overview

The social welfare system in Russia went through turmoil after the fall of the USSR. A weak healthcare system is one of the

biggest challenges faced by Russia currently. Though the system is well decentralized in the country, it is inefficient, with

under-qualified doctors and corrupt officials undermining the quality of treatment. Russia faces a severe demographic

challenge resulting from low birth rates, poor medical care, and a rising AIDS problem. The human capital quality of Russia

also compares unfavorably with other nations at the same level of development.

Moreover, rising unemployment and poverty are still some of the challenges. Besides tackling the economic crisis, the

government also needs to implement urgent measures to meet the challenges emerging from low birth rates and a

shrinking working age population.

Table 5: Analysis of Russia’s social landscape


▪ Improvement in real income and wage levels

▪ Educated population

▪ High AIDS rate

▪ High mortality rate


▪ Revamp of social security benefits

▪ National welfare fund

▪ Tax benefits to healthcare and education

▪ Widening income inequality and rising poverty

▪ Increasing spread of the AIDS epidemic


Current strengths

Improvement in real income and wage levels

During 2000–08, increased economic growth in Russia stimulated an increase in real incomes and wages of the working

population. The same trend continued in 2008, with the average real wages and real disposable incomes in the first four

months increasing by 13.1% and 11.8% respectively compared to the same period in 2007. The growth in real wages,

during the 2007–08 surpassed the real GDP and productivity growth. Almost all sectors of the economy reported an

increase in real wages of more than 10%. The largest increase was recorded in the public sector, retail trade and

construction sectors, with growth in real wages up by around 17% compared to previous periods. The average monthly

dollar wage increased to around $650 in the first four months of 2008, with a growth rate of 41% over 2007. Although, the

real wages declined by 1.8% in first quarter of 2009, the disposable income grew by 4.5% during the same period.

Furthermore, the average real wages again grew by 3.4% at the end of first quarter of 2010 and real disposable income

grew by over 4%. The average monthly dollar wage increased to around $694 in the first four months of 2010.

PESTLE analysis



Educated population

Russia has one of the most highly educated populations in the world. The country has more than 70,000 primary and

secondary schools and more than 82,000 pre-schools. One of the strongest facets of the Russian education system is that

a majority of the schools are in rural areas compared to urban areas, making education accessible to all areas of the

country. Furthermore, the literacy rate in Russia is one of the highest in the world, at 99.4% for the total population. The

high literacy rate signifies that there is a large educated workforce in the economy.

Current challenges

High AIDS rate

Russian society reflects unfavorable trends of both the developed and developing worlds. The country is challenged with an

ageing population, coupled with a poor healthcare system and rapidly deteriorating AIDS situation. The AIDS rate is

growing in Russia, with country registering 49,000 HIV cases in 2007, and 55,000 in 2008. More than 500,000 Russians

have contracted the infection, according to the health department. It is estimated that there have been more than 60,000

registered AIDS cases in 2009. It is reported that the AIDS rate is 0.3% of adult population in Western Europe, and it was

more than 1% in Russia. It is estimated that this could increase in coming years as the government is not taking necessary

steps to control the disease.

High mortality rate

High mortality and morbidity among the Russian working population have become a huge challenge to economic and social

development. The death rate in 2009 was an estimated 16 deaths per 1,000. As a result, supply constraints of labor are

expected to become a major impediment to economic growth. Currently, Russia’s demographic crisis is considered more

serious than that of Western Europe. Furthermore, the population has declined by six million since 1992 to an estimated

140 million in 2009. It is also expected that the population will fall by 30% by 2050. The high mortality rate, then, not only

shows the low level of healthcare services in the country but also poses the problem of a decreasing labor force.

Future prospects

Revamp of social security benefits

In May 2008, the Russian government announced an increase in social security benefits. To this end, the government has

increased pension payments by 15% since August 2008. Furthermore, child tax exemptions for individuals will be increased

from $26 to $35 and the revenue accrued would be allocated to education, healthcare and housing programs. The

government will also boost financial support for the disabled and World War II veterans, and also provide them with housing

and other basic amenities. The government reported that it would continue with this strategy until 2011. These positive

signs and the government's continued focus will, in the long-term, further enhance social development in Russia.

Tax benefits to healthcare and education

In January 2010, the Russian government announced that it will consider tax breaks for private enterprises in the education

and healthcare sectors and expects to benefit from an eastward shift in investment. It is expected that the due to increased

debt and the tax burden in developed countries, the foreign investment flows would be increasingly towards eastern

PESTLE analysis



countries, which would be beneficial to Russia. With the view of attracting more investment into the social sector, the

government intends a plan of a full profit-tax exemption for private businesses linked to human capital, such as healthcare

and education. This would not only increase the social infrastructure in the form of new investments but also will provide

more access to healthcare and educational facilities.

National welfare fund

The Russian government reported a national welfare fund of around $33 billion in April 2008. The national welfare fund is

being judiciously invested into foreign currency bonds, sovereign bonds of chosen developed countries, foreign banks, and

credit originations. It is reported that revenue generated from these sources would be used to develop the social

infrastructure of the country. Between January and March 2008, the government reported earnings of $290m which has

been put to use for social development. As of January 1st, 2010, the National Welfare Fund reached RUB2.77 trillion, the

equivalent of $91.56 billion. The national welfare fund represents long-term motivated planning by the Russian government

to bring social change in the country.

Future risks

Widening income inequality and rising poverty

Income inequality in Russia has widened in the post-liberalization period. According to the Russian Statistics Service, the

Gini coefficient was 0.42 at the end of 2008, compared to 0.29 when the Soviet Union collapsed. In addition, income

inequality has been sharper in the cities of Russia. For instance, the difference between the 10% richest and 10% poorest

among the population in Moscow was 42 times in 2008 (compared to 41.7 times in 2006 and 38.6 times in 2005). Along

with rising income inequality, poverty is also on a rise in Russia. The living conditions of Russians are set to deteriorate with

the economic slump. According to the Federal State Statistics Agency (Rosstat), 19.7 million citizens were below the

poverty line as of third quarter of 2009, which is 14% of the population. However, unofficial sources claim that more than a

third of the Russian population is living in poverty. Russia also faces a severe housing shortage, with about 7% sharing

living space with other households and one in two people having less than 10 square meters (108 square feet) per capita.

The prolonged existence of such conditions is expected to give rise to a social crisis.

Increasing spread of the AIDS epidemic

The emergence of an AIDS epidemic is a real possibility in the near future. Some predictions suggest that up to 5% of the

population could be infected within the five year period of 2007–12. Despite an increase in investment to combat the

disease, the desired result has not yet been achieved. According to the estimates released by the Russian federal AIDS

center, Russia registered 49,000 HIV cases in 2007 and 55,000 in 2008. Moreover, the figure is expected to have reached

over 60,000 by the end of 2009. This amounts to an over 12% increase compared to 2007 and 2008, and has come despite

the government’s increased expenditure of around RUB400 million ($13.7 million in 2009) to fight the disease.

Given the current weaknesses of the health infrastructure and the recent sharp increases in the usage of intravenous

drugs, there could be a potentially disastrous escalation of infection rates. If the experience of Sub-Saharan Africa is any

kind of indicator, the economic impact of AIDS on Russia could be devastating.

PESTLE analysis



Technological analysis

Overview

Russia has historically been known for its excellence in space technologies and is one of the most successful countries in

terms of its implementation of many space programs. However, the country lacks expertise in fundamental research.

Although Russia is part of the G8, the country does not have enough patents registered in its name. Furthermore, the

science and technology system in Russia is weak, with a lack of proper resources and funding. Nevertheless, the country is

beginning to position itself as the next destination for IT sector investments.

Table 6: Analysis of Russia’s technology landscape


▪ Advanced space technologies

▪ Poor performance on patents

▪ Weak science and technology systems


▪ Increasing presence of IT sector

▪ Increasing number of skilled workers

▪ Military technologies helping the farming sector

▪ Piracy and poor infrastructure


Current strengths

Advanced space technologies

Russia has historically been known for creating some of the most advanced space technologies in the world. For example,

the Russian space station, Mir, is playing a vital role in helping international space programs. The government had

allocated more than $11 billion for the Russian space agency for the period 2006–15, and has always provided a regular

flow of funds for the development of advanced space technologies. It is also a revenue-generating body for the

government. This has become more prominent in recent years, with Russia taking up commercial launching activities and

starting a space tourism program.

Furthermore, in April 2010, the government announced that it is investing RUB1.5 billion rubles (around $50 million) to flag

off a unique satellite system to monitor climatic changes and survey energy resources in the Arctic region. The Arctica

satellite constellation will monitor the weather and environment of the North Pole, pinpoint hydrocarbon deposits on the

Arctic shelf, provide telecommunications over the hard-to-access areas and ensure safe air traffic and commercial shipping

in the region. Along with several international treaties with the US, Japan, India and China, Russia plays a key role in

developing space technologies.

PESTLE analysis



Current challenges

Poor performance on patents

For many years, Russia has been performing badly in terms of registering patents for the technologies it develops. The

figures were as low as 204 patents in 2008; this is particularly significant when compared to the US, which registered over

93,691 patents for the same period. Russia’s share in tradable international patents has also remained low. This is largely

due to efforts being concentrated completely on space and military technologies. The country's poor performance in terms

of patents has been a worrying factor for the government's science agencies.

Weak science and technology systems

The science and technology (S&T) system in Russia has been falling short of international standards mainly due to the

structures of the old Soviet system exerting control over scientific streams. The chief problems of the system include

language barriers, weak co-ordination of activities, a lack of active presence in international meetings, discrepancies in

intellectual property rights and policies, political obstacles and differences among scientific bodies. Adding to these

reasons, corruptive practices further deteriorate the system from harmonious functioning.

Future prospects

Increasing presence of IT sector

Although Russia has historically been a significant producer of oil, the country is now going through a diversification

process. The country's IT market is presently the fastest-growing in the Central and Eastern Europe region. There is huge

potential for IT spending by Russia's traditional industries to make their conventional systems of operations IT compliant.

Furthermore, Russia is witnessing a great increase in the sales of computers due to the government investments in several

IT-based programs in the country. The Russian software market generated total revenues of $3.8 billion in 2009,

representing a compound annual growth rate (CAGR) of 20.9% for the period spanning 2005–09. In comparison, the

French and German markets grew with CAGRs of 7.2% and 5.2% respectively. These factors provide strong incentives for

international vendors to invest in Russia. It is expected that the total size of the Russian IT market will increase to around

$18 billion by 2012.

Increasing number of skilled workers

Russia is slowly emerging as one of the countries with the highest number of skilled workers in S&T areas. According to

government sources, the US had around 35 million skilled workers out of 300 million people in 2007. Comparably, Russia

has around 30 million skilled workers out of 140 million population, signifying a better ratio. It is expected that this number

will rise to 45 million by 2020. This provides a strong base for future technological development and R&D in the country.

Military technologies helping the farming sector

The Russian military and air force have created a cloud-dispersal aircraft in 2008, which is considered to be one of the

most advanced technologies capable of artificially producing rain. Under this, a special aircraft will carry liquid nitrogen and

silver compounds (dry powder cement) and spray it over certain parts of the clouded sky. When this combination touches a

cloud, it will accumulate particles of the cloud, which then form into rain or snowflakes. This unique technology is soon

PESTLE analysis



going to be commercialized and is considered to be of great importance for both domestic and other international drought-

prone areas.

Future risks

Piracy and poor infrastructure

Russia is considered to have one of the highest rates of piracy. Russia reportedly had piracy rates of 68% in business

software in 2008. According to the International Intellectual Property Alliance (IIPA), it was reported that business software

losses due to piracy amounted to more than $2.3 billion in 2008. Furthermore, Russia continued to be on the priority watch

list of IIPA, which indicates that there is rampant piracy in the country. This is one of the worrying factors that prevent many

foreign investors from starting any exclusive R&D centers in Russia. Another factor impeding investment is that although

there has been economic growth, there have not been any significant efforts to build the scientific infrastructure of the

country. With the government streamlining funds more towards social and military development, there are no sign of any

efforts towards the future up-gradation of the scientific infrastructure and patent laws in Russia.

PESTLE analysis



Legal analysis

Overview

The Russian judicial system has suffered from corrupt officials and practices, which have made the system unreliable. In

addition, unfair competition practices are hampering the entry of FDI into Russia. However, the country has set a long list of

legal reforms during 2008, which are expected to improve the country’s judicial system. Russia has also agreed to various

legal assistance programs from many countries to solve its domestic and international legal issues.

Table 7: Analysis of Russia’s legal landscape


▪ Conducive FDI policies

▪ Easy immigration policy

▪ Weak judicial system

▪ Unfair competitive practices


▪ Judicial reforms

▪ International co-operation for legal assistance

▪ Slowdown of structural reforms


Current strengths

Conducive FDI policies

The Russian government has put in place policies which favor foreign direct investment (FDI). The 1991 Investment Code

guarantees foreign investors rights equal to those of Russian investors, while the 1999 Law on Foreign Investment also

follows this principle of equal treatment. Moreover, to lure foreign investors, both federal and regional governments are

establishing special economic zones and high-technology parks, and special tourist regions to encourage foreign

investment. Local laws are also being amended to suit the needs of foreign investors. FDI inflows for 2004 were $28.75

billion, but reached $70 billion in 2008. The jump in FDI in Russia before the economic crisis set in is reflective of the

impact of such policies.

Easy immigration policy

After the end of Soviet rule, Russia’s labor efficiency decreased with a corresponding fall in population for many years. This

led to the availability and provision of employment opportunities for foreign workers in various industrial sectors of Russia.

The liberal immigration laws brought in many foreign workers, especially from the EU. It was reported that the number of

legal foreign workers in Russia reached eight million at the end of March 2008, an increase of 20% from the previous year.

The immigration laws play a vital role for FDI and in Russia they are presently adding to its strength.

PESTLE analysis



Current challenges

Weak judicial system

Russia’s judicial system is still relatively weak and unpredictable. Corruption is rampant among law-enforcement bodies

and judges, and court decisions are often difficult to implement. Many foreign investors have experienced problems

executing judicial rulings and obtaining approval on contractual agreements. There are also extended court sessions and

judicial delays for many cases, exacerbating the situation. Furthermore, the judicial system is also under-funded, under-

staffed and extremely slow in implementing decisions. This makes judicial processes in Russia highly inefficient.

Unfair competitive practices

After the Soviet era, Russia created competition laws and bodies based on the laws prevailing in western countries. In

practice, however, Russian competition policy often differs from the norms familiar to foreign firms in the western world.

Russian authorities tend not to follow a consistent approach to competition. This is mainly due to the influence and corrupt

practices of large monopolies which wield power among the authorities. As a result, smaller companies with less influence

face tough competition laws. The selective application of these laws often results in the restriction of competition.

Furthermore, foreign investors have, on a number of occasions, experienced discrimination in obtaining licenses from local

authorities. In some situations, local interest groups have influenced authorities. Foreign investors have been forced to pay

several fees by local governments and have been offered less favorable terms to develop their projects. Also, many

criminal organizations in Russia have gained access to sensitive information from companies and used it against them,

leading to the failure of products. These unfair practices have become a barrier to investment in Russia.

Future prospects

Judicial reforms

The present government, headed by Dmitry Medvedev, is keen on implementing judicial reforms in the country. The

president held a special meeting in July 2008 to procedurally implement a phased reform of the judicial system. As part of

this, the president, along with the judicial heads and ministry of justice, reached a consensus on the implementation of a

new law. The new law stringently addresses issues related to damages borne by the citizens and compensations regarding

the violations of their rights. The president has also considered an immediate course of action to implement a special

training and education program for all of the judges to discourage them from indulging in corrupt practices. Furthermore, in

December 2009, the EU allocated E3 million for measures intended to boost the efficiency of the enforcement of court

rulings in Russia. The implementation of these reforms is expected to bring in positive changes in the Russian judicial

system.

International co-operation for legal assistance

Russia is extending its relationships with the international community to gain legal assistance in various civil and criminal

cases. In one such move, the country entered into a legal assistance program with Japan in mid-2008. According to the

Russian ministry of justice, the agreement has already been co-ordinated at the level of judicial bodies and is passing co-

ordinating procedures in the legal institutions of the countries. Furthermore, the country is also entering into other similar

PESTLE analysis



legal assistance treaties with China, India and Sri Lanka. These programs are expected to bring in more positive changes

to the judicial system in Russia.

Future risks

Slowdown of structural reforms following economic crisis

Although the investment climate in Russia has improved following liberalization, the slow pace of structural reforms has

continued to irk foreign investors. The Russian governance system has been accused of a lack of transparency. Since the

Russian government has begun to intervene to support various sectors, there are apprehensions that the functioning of

government entities will lose transparency even further. Moreover, no adequate steps are being taken to increase clarity

and consistency in the Russian tax laws and administration. If the legal regime continues to remain unreliable, it will

dissuade investors from entering Russia.

PESTLE analysis



Environmental analysis

Overview

Although an environmental management system exists in Russia, a lack of resources to tackle environmental problems is

preventing Russia from effectively implementing environmental protective measures. However, the government is planning

to introduce an environmental security system to address this problem. The country has also agreed upon various

international environmental agreements to take up conservation activities.

Table 8: Analysis of Russia’s environmental landscape


▪ Environmental management systems

▪ Spillages causing environmental hazards

▪ Lack of resources to tackle environmental problems


▪ Environmental security system

▪ International co-operation

▪ Increased investment in global environmental facility

▪ Deteriorating water quality

▪ Difficulties with environmental monitoring


Current strengths

Environmental management systems

Russia’s environmental management systems are well equipped with various levels of controls and streamlined monitoring

systems. The systems are headed by a three-tier executive federal governance body comprising federal ministries

(charged with developing state policies), federal services (supervision and control functions), and federal agencies

(resource development and service provision). The three-tier system enables effective policy making, implementation and

supervision. This system is presently playing a vital role in co-ordinating various conservation activities in Russia.

Current challenges

Spillages causing environmental hazards

Russia is one of the most important contributors of oil to world markets and transports most of its produce through

seaways. There have been many cases in the past where spillages from sea containers have resulted in the pollution of

sea waters. In November 2007, a Russian oil container carrying about 4,000 tons of fuel oil was wrecked in a storm,

causing a massive spillage into the Black Sea. Furthermore, four ships sank to the bottom, including two vessels each

carrying 2,000 tons of sulfur. The devastation in the wake of the storm was staggering. Endangered species such as the

Dalmatian pelican and the great black-headed gull were seen coated in oil, as the region is home to thousands of migratory

birds that nest along the waterways during winter. Fish caught in the Kerch Straight were deemed unsafe to eat, which

PESTLE analysis



threatened the livelihoods of locals. These kinds of incidents are leading to degradation of the marine environment around

the Russian coast. In February 2009, up to 300 tonnes of oil was spilled into the sea in the west Cork coast. However, the

government has not taken any proactive decisions to prevent such spillages and the possibility of such instances re-

occurring is posing a serious environmental challenge to Russia.

Lack of resources to tackle environmental problems

The biggest environmental problem facing the Russian government is its inability to tackle huge environmental issues that

may arise due to military and other toxic wastes. The federal funds available for the disposal of solid fuel missiles are not

sufficient for conducting any cleaning programs. There is also some concern that the current pollution charges may be

abolished and replaced by an ecological tax which will go to general revenue support, resulting in a decrease in funds for

environmental protection. Furthermore, there is also a scarcity of trained local staff in the country to implement

environmental regulations.

Future prospects

Environmental security system

The Russian government is planning to set up an effective security system to prevent pollution and man-made

environmental disasters. The main tasks outlined by the government include the implementation of environmental decisions

consistently and completely, and the creation of an effective system for ecological security in the country. The system is

expected to effectively deal with man-made pollution and provide solutions to new environmental problems and challenges.

Strict measures will also be taken for the disposal of waste accumulated over years of economic and military activities. The

government is simultaneously going to introduce an exclusive sector for clean technology and is set to draw measures to

minimize environmental consequences resulting from oil pipeline and offshore hydrocarbon projects.

International co-operation

Russia is extending and participating in various international co-operation agreements related to different aspects of the

economy. In June 2008, the country agreed to co-operate with China on a variety of environmental activities. Under the

new agreement both Russia and China have made great progress in environmental co-operation and have pledged to

boost their co-operation in the coming years. This co-operation is mainly designed to boost cleaning-up activities in areas

which are affected by toxic waste in both countries. The Russian government has entered into similar agreements with

Indonesia, Japan and the Czech Republic to develop various technologies designed to improve environmental protection

and conservation. In February 2010, the country also joined hands with the Iranian government to conduct research on the

Caspian Sea. These environmental pacts will further the cause of environmental protection in Russia.

Increased investment in global environmental facility

The Global Environmental Facility (GEF), established in 1991, helps developing countries to finance projects and programs

to protect the global environment. Russia attaches great importance to GEF’s activities and has co-operated with it since

1992. Although the country is a participant in many activities conducted by GEFI, it has never financially supported the

organization. However, in the beginning of 2008, Russia invested about $270m in GEF. This will bring adequate resources

PESTLE analysis



to the organization in the coming years to successfully run 24 projects dealing with issues like biological diversity, climate

change, international waters and ozone depletion taken up by various governments.

Future risks

Deteriorating water quality

The quality of water in Russia has been deteriorating for many years now. The deterioration has been especially noticeable

in water protection zones close to cities. In these areas, the quality of drinking water is especially poor. The last reported

government public health data indicated that 20% of drinking water samples from piped sources did not meet chemical

quality standards and 9% did not meet bacteriological standards. For rural non-piped sources, the levels were even higher,

with 31% and 28% falling below chemical and bacteriological standards. This has led to regular intestinal infections

affecting around 3,000 people every year in the country. It is expected that the water quality is going to further deteriorate in

Russia in the coming years.

Difficulties with environmental monitoring

In Russia, Hydromet, a federal body accountable for the collection of data on different environmental conditions, and the

General Department of Natural Resources and Environment Protection (GDNR) are responsible for environmental

management systems. However, there is no consensus between the GDNR and Hydromet for the circulation of information

on a routine basis. Furthermore, the information collected by the GDNR itself is not fully shared with the sub-national

regions and Hydromet. For example, Hydromet receives an annual environmental performance report from the GDNR but

no details on performance at the enterprise level. This has led to an inefficient system of monitoring, with insufficient

amounts of the accurate data compared to the amount required for effective reporting. There have not been any reforms to

co-ordinate the activities of the two organizations, which is leading to difficulties in monitoring the environment.

Political landscape



POLITICAL LANDSCAPE

Summary

Russia entered the 20th century in a quasi-feudal condition: its economy was in disarray and its government corrupt, ruled

by an ineffective authoritarian monarchy. Entering into World War I made matters even worse for the country. With the

support of communist agitators like Lenin and Trotsky, Russia seized the power from the monarchy in 1917. The country

then withdrew from the war and commenced a radical transformation of the social and economic order. During seventy

years of communist rule which followed, the country went through a rapid period of industrialization and achieved victory in

World War II at a terrible human cost. Towards the end of the century it became increasingly apparent that the country's

economy could not match up to the completive capitalist economies of the West, and eventually the state edifice collapsed,

bringing down the Soviet system in 1991 and plunging Russia into a seven year economic crisis (1991–98).

Former President Vladimir Putin, who achieved victory in the 2000 elections on the back of his brutal but politically popular

suppression of the separatist movement in Chechnya, overcame a number of potential crises and pitfalls throughout his

presidential career. In 2004, he was re-elected as the president of Russia with a significant majority, garnering three

quarters of the total votes cast. After successfully completing three terms as president, Putin handed over the office to

Dmitry Medvedev in May 2008. He won the presidential election with a popular vote of more than 70%. Soon after, Vladimir

Putin was appointed as the prime minister of Russia. The first few months of Dmitry Medvedev’s presidency was dominated

by the Russia-Georgia war, as Russian support increased for the Georgian breakaway region of Abkhazia. Russia

subsequently recognized the territories of South Ossetia and Abkhazia, leading to further protests from Georgia. The war

has adversely affected Russia’ relations with the west. Russia also engaged itself in another standoff after it cut the gas

supplies to Ukraine, disrupting supplies to southeastern Europe too. The aggressive stance maintained by Russia in its

foreign relations has not gone down well with its neighbors in the west. However, with President Obama assuming power in

the US, the two nations have agreed to co-operate in areas of mutual interest.

The economic challenges that the country faces have assumed paramount significance, as the investment grade for Russia

has been lowered.

Evolution

Pre-1991

During the 19th century, Russia was ruled by autocratic rulers. Social and economic modification programs implemented

during the 1860s and 1900s failed to tackle Russia’s vital problems. In 1914, Russia became a participant in World War I

due to its rivalry with Austria, resulting in a widening of the economic gap between Russia and Western Europe. This,

combined with the stress of the war effort, allowed the radical Bolshevik Party, led by Vladimir I. Lenin, to seize power from

the provisional government which took over after the failure of monarchy. At the end of a fierce, four- year civil war, Russia

entered into a 70 -year period of one-party rule and came to be known as the Soviet Union. Initially, the union embraced

Ukraine, Byelorussia, and three Transcaucasia republics, with the ruling party Communist Party of the Soviet Union

(CPSU) at the helm.

Political landscape



Figure 3: Russia’s political events timeline


1991–2000

In 1991, Russia became independent after the collapse of the Soviet Union and was renamed the Russian Federation.

Boris Yeltsin was elected as the first president of newly christened country. During his nine year tenure in office (1991–

2000), Yeltsin oversaw a disorganized makeover that ended the domination of communism but brought irregular reforms in

the economic, political, and social spheres. Although the constitution of 1993 made the executive the dominant branch of

government, Yeltsin contended the legislative branch over many issues. Economic reforms were destabilized by corruption

and confusion as Russia supposedly moved towards a free-market system. Furthermore, in 1998, the Russian ruble

collapsed and the government gave a notice of intention of default on foreign debts. This resulted in the president making a

hasty decision to sack the then prime minister. This was followed by the sacking of two more prime ministers during March–

August, 1998. In December 1998, Vladimir Putin was appointed as the prime minister and eventually became the president

after Yeltsin’s resignation in 1999.

Political landscape



2000–04

International ties with the West, which began in the 1990s, soured to some extent over issues such as the expansion of the

North Atlantic Treaty Organization, Russia’s ongoing conflicts with the Republic of Chechnya, and opposition to the US led

war against Iraq in 2003. A new concentration of executive power began with the presidency of Vladimir Putin (elected in

2000), who sought to restore Russia’s regional power while maintaining relations with the West. Putin was reelected

overwhelmingly in 2004 as well. Although the country was developing fast economically, political relationships with

Chechnya were deteriorating quickly and the suicide attacks on the government agencies were prevalent.

2005 onwards

During the first six years of Putin’s presidency, political opposition became greatly fragmented, media freedom decreased

drastically, and the government was able to shift the center of economic influence from a group of autonomous

entrepreneurs to state-controlled enterprises and allies. Although the government’s relationship with the west became

increasingly strained for some time, it was reinvigorated in 2006 when Putin hosted a meeting of the G8 nations. During

these years, the government also signed treaties with Germany and China for gas supply. However, since that time

relations have continued to worsen. In 2007, Russia signed a law suspending the country's participation in the 1990

Conventional Armed Forces in Europe (CFE) treaty that limits the deployment of heavy military equipment across Europe.

In 2008, Putin stepped down and Dmitri Medvedev was elected as the new president. The first few months of his

presidency found him engaged in a military conflict with Georgia and a standoff with Ukraine over gas supplies. In July

2009, President Medvedev and Barack Obama reached an outline agreement to cut back their countries' stockpiles of

nuclear weapons. Russia also supported the US decision to shelve controversial missile defense bases in Poland and the

Czech Republic. The new strategic arms agreement was signed between the US and Russia in April 2010.

Political landscape



Structure and policies

Key political figures

President: Dmitry Medvedev

Prime Minister: Vladimir Putin

Figure 4: Russia – Key political figures

Dmitri Medvedev was elected President of Russia on March 2, 2008. He was earlier the Chief of Staff under Vladimir Putin until 2005, when he became the first deputy prime minister of the Russian government. His main focus is set to protect civil and economic freedom. Furthermore, he intends to fight against the laws which undermine and hamper modern development.

Vladimir Putin was Russia’s president for more than eight years from December 1999 until May 2008. Due to constitutionally mandated term limits, Putin could not run for a third term. To his credit, he has brought the Russian economy into the growth path. After choosing Dmitri Medvedev as the presidential candidate, Putin was nominated by the later to be the prime minister. Putin is currently holding office as the prime minister.






Structure of government

Russia is a democratic federation of 89 sub-national jurisdictions, divided into republics, oblasts (provinces), autonomous

oblasts, autonomous regions, and territories. At the national level, the constitution of 1993 describes the three branches of

government as the executive, legislative, and judiciary. In the Russian political system, the president has superseding

powers as head of the armed forces and the Security Council. These powers include the authority to appoint a broad

mixture of government officials without effective oversight or verification. The houses of the bicameral legislative branch

have a weak opposition because of their constitutional arrangement and the non-existence of opposition parties. The

judiciary, a sanctioned branch of government under the Soviet system, has shifted gradually as an independent authority.

On the whole, the power is well centralized in Russia. Former president Vladimir Putin has utilized this structure to increase

the power of his office and control the government. In May 2008, Dmitri Medvedev took over the office of the president.

Legislative branch of government

The Federal Assembly of Russia comprises two houses: the Federation Council (178 members) and the State Duma (450

members). Members serve the respective houses for four -year terms. Among the responsibilities allotted between the two

houses, the State Duma has an authoritative role of primary deliberation of all legislation. Although the Federation Council

has the authority to appraise and force compromise on legislation, in reality its role has principally been as a counseling

Political landscape



and reviewing body. In the 1990s, the Federation Council was fabricated in such a way that it contained the heads of

government and the legislative leaders of the 89 sub-national jurisdictions of Russia. In 2000, Vladimir Putin, the then

president, increased his control on the Federation Council by replacing ex-officio membership with a process of

appointment by the president. The Duma can vote for no-confidence on an existing government, but the president has the

powers to ignore the vote and dissolve the Duma, in case a second vote is taken within three months. Furthermore,

amendments in the constitution require two -thirds of the vote in the Duma. The elections were last held in December 2007,

in which United Russia won 315 seats, the Communist Party of Russian Federation (CPRF) won 57 seats, the Liberal

Democratic Party of Russia (LDPR) won 40 seats, and Just Russia (JR) won 38 seats.

Executive branch of government

In Russia, the president is the head of state with a maximum of two four-year terms. However, in 2006, Vladimir Putin (the

then president of Russia) gathered substantial public support to amend the constitution. This allowed Putin to seek a third

term in the presidential office. In Russia, the president appoints the prime minister, who is head of government and the

Central Bank of Russia, and the chairman of the Constitutional Court, the highest judicial body. All the nominations require

approval by the State Duma. However, the president may dissolve the Duma if it fails three times to confirm a nominee for

the prime ministerial post. A number of other high level presidential nominations, however, require no approval from the

legislative branch. The president also issues decrees that go into effect without the parliament’s approval. The last held

presidential elections were in March, 2008. Dmitri Medvedev won the presidential race with more than 70% vote, and since

May 2008, he has held the position of president of Russia. In November 2008, the Russian parliament voted in favor of a

bill to extend the next president's term of office from four to six years.

Administrative divisions and local governments

Russia is segregated into 89 sub-national jurisdictions and each jurisdiction has two spokespersons in the Federation

Council. However, the jurisdictions differ broadly in size, composition, and nomenclature. They comprise 21 republics, 49

oblasts (provinces), six territories, 10 autonomous regions, one autonomous oblast, and two cities (Moscow and St.

Petersburg) with separate oblast grades. The independent regions and oblasts are elements of larger sub-national

jurisdictions. The chief executive of all 89 jurisdictions is the governor who was previously elected through popular vote. In

December 2004, however, the president took over the right to appoint the governor. There are several regional governors

and city mayors in Russia.

Structure of legislature

Key political parties

United Russia (UR)

United Russia is one of the largest political parties in Russia and is currently the ruling party of the country. UR was formed

in 2001, as the result of a merger between two anti-communist parties: Fatherland-All Russia and the pro-government Unity

Party of Russia. UR gained most of its momentum due to its popular leader, Vladimir Putin. The party follows a

conservative democratic stand point with policies focusing mainly on improving the economy and living conditions, freedom

to elect and controlling mass media. The party is very centralized in its structure and is sometimes referred to as ‘the

Political landscape



presidential party’ by the press. UR has won the general elections continuously since 2000 and won the 2007 elections

comprehensively by garnering 315 seats in the State Duma.

Communist Party of Russian Federation (CPRF)

The CPRF has it roots in the traditional Communist Party of the Soviet Union (CPSU) and the Bolshevik Party. It claims to

follow pure Russian patriotism and officially follows the doctrines of Marxism-Leninism. The party was formed in 1993 by

Gennady Zyuganov. Though it had a slow start in the 1993 elections with only 12.4% of the votes, slowly it grew to 22% in

1995, and 24% in 1999. However, the party won only 13% and around 11% of the votes in the 2003 and 2007

parliamentary elections.

Liberal Democratic Party of Russia (LDPR)

The LDPR was founded in 1989 by Vladimir Zhirinovsky, intended as a party which focuses particularly on democratic and

centrist ideologies. The LDPR considers itself to be in opposition to the communist party. The LDPR has never been in

power and has had a minimal share of votes in all the elections. In the 1993 elections the party had 23% of the votes. In

1995 and 1999, this decreased to 11% and 6%. Although in 2003 it gained some additional votes (12%), in 2007 the vote

share fell to 8.8%.

Political landscape



Composition of government

Currently, UR holds the most number of seats (315), followed by the CPRF (57), the LDPR (40), and Just Russia (JR) (38).

Figure 5: Distribution of seats by political parties in the Duma, 2007

UR64%

CPRF12%

LDPR8%

JR8%

Others8%


Key policies

Economic

Russia went through a tough period during the 1990s, with continuous negative growth for seven years. There were no

sufficient reforms in place and, as a result, the country's economy suffered. After Vladimir Putin took over as the president

in 1999, the economy began to recover and has been continuously making efforts to integrate itself into the world economy.

Under many reforms that were adopted, the tax system has been streamlined to enhance compliance and reduce chances

for corruption. Deregulation of business licensing and registration arrangements has been another important focus for

recent reforms. Again, this is expected to reduce the scope for bribery and corruption, and should also enhance tax

compliance by making it less costly for firms to enter the ‘formal’ economy. Property rights have been strengthened through

changes in land ownership rules.

Political landscape



The need to diversify the economy and reduce the dependence on the energy sector has been explicitly recognized, and is

reflected in a number of measures taken by the authorities recently. These measures include changes in tax rules and tax

breaks to promote innovation-related activities and the creation of special economic zones and technology parks to boost

the manufacturing and IT sectors, respectively. To bolster exports, subsidized credits for exporters have been proposed.

Since the later part of 2008, the Russian stock market collapsed as the Russian economy was hit by the world financial

crisis. In October 2008, the Russian parliament approved a $68 billion package to help banks hit by the global credit

crunch. The government moved to devalue the ruble, to avoid a run on the ruble and bank deposits. The country managed

to maintain 6% growth in 2008, however, the real GDP contracted by 8% in 2009. With the prevailing economic

deterioration, the government has initiated policies to reduce budget deficit from 6% of GDP in 2009 to around 3% by 2012.

Social

Most health indicators in Russia suggest a worrying decline in health outcomes during the 1990s. Due to the long and

continued economic crisis over 1991–98, there was an increase in poverty and alcohol and drugs-related problems, and a

virtual collapse of the public health system. This has translated into falling labor market participation rates and increased

social costs, which further hampered growth and development. On the other hand, despite a dramatic decline in education

expenditure during the 1990s, Russia’s large stock of human capital and its tradition of strength in applied scientific

research are considerable assets and the government is making efforts to improve the education and health systems.

Foreign

Following decades of confrontation with the West, Russia’s conversion to capitalism has seen its relationship with

Washington markedly improve in recent years. This has been reflected in the extension of the G7 grouping to include

Russia (and its subsequent renaming to G8), and the May 2002 partnership agreement between Russia and NATO. The

improving relationship has been helped by strong Russian support for the US ‘war on terrorism’ in the wake of the

September 11 attacks. Russia’s support for the US has reflected in part its own experience of fighting militant Islamists in

Afghanistan and more recently to the breakaway Russian republic of Chechnya. Russia has been keen to foster stronger

ties with the EU, which it sees as a bulwark against a US-dominated world. The signing of an agreement with Germany to

build a gas pipeline under the Baltic Sea between the two countries in September 2005 further consolidated the ties

between Russia and its western neighbors. However, many of the former Warsaw Pact countries queuing up to join the EU

remain deeply hostile towards Russia’s own expansionist tendencies and strengthened strategic ties. Relations with China

have also been strained.

Russia has continued to support separatist regimes in Georgia and Moldova. In 2008, Russia maintained its aggressive

stand by engaging in a military conflict with Georgia and subsequently recognized the territories of South Ossetia and

Abkhazia. The hostilities continued for more than a week. Although the two sides signed a French-brokered peace

agreement and Russia withdrew most of its combat troops, it still maintains forces around Abkhazia and South Ossetia.

Furthermore, in another instance of Russia’s aggressive foreign policy, in January 2009, Russia stopped gas supplies to

Ukraine. Subsequently, supplies to southeastern Europe were also disrupted for several weeks. Russian relations with the

west have not been cordial due to such standoffs.

Political landscape



However, in its bid to normalize relations with the west and the US, Russia halted its plans to deploy short-range missile in

Kaliningrad enclave. This action was in response to the Russian government’s assessment of change in the US's attitude

under President Barack Obama. The beginning of 2009 was marked with both sides coming closer to co-operate in areas

of mutual interest. Russia has also announced the end of its "counter-terrorism operation" against separatist rebels in

Chechnya.

Defense

Russia has a constant military reform agenda which includes streamlining all units and modernizing equipment. The

Russian government has begun serious efforts to modernize its military. The focus has shifted toward practical training, and

the government is introducing bills to improve the organization of the military. The government has increased its budget

spending but that is not enough for its over-sized military. It is a legacy which has been maintained since the Cold War

days and there have been few changes in the defense set-up.

Troop discontent and low funding have hindered expansion of this program beyond individual units. Reforms would also

reorganize the military districts and the status of the main branches. The Chechnya disagreement, which decreased in

intensity in 2006, dented self-esteem throughout the military and exposed Russia's inability to adapt existing doctrine to

non-conventional combat. Furthermore, Russia has many international customers for the purchase of its military

equipment. Among all the countries, China and India have been the top customers for Russia’s military exports. In 2005,

the military exports reached a new high of $6.1 billion. In 2005, Russia and China conducted a joint military exercises on

the coast of China’s Shandong Province, and in 2006 plans were agreed on continued sales of advanced arms to China.

India had earlier agreed to extend military co-operation with Russian forces after conducting large-scale bilateral naval

exercises in 2003. In 2005 and 2006, Russian forces took part in various joint exercises with the military forces of Armenia,

Canada, India, Kyrgyzstan, Sweden, Turkey, and the US. In early 2006, joint naval and antiterrorism exercises were

conducted in the Ionian Sea to weigh up the inter-operability of the North Atlantic Treaty Organization (NATO) and Russian

systems.

In May 2007, Russia test fired a long-distance missile. This, according to former President Putin, marked a new arms race,

as the US was planning to expand its missile defenses into Eastern Europe. Furthermore, Russia revived Soviet-era

Atlantic navy exercises in neutral waters in the Bay of Biscay off the coast of France. This is indicative of Russia's

demonstration of its new military might. President Putin took the territorial expansion policy to newer heights as Russia

mounted an Arctic expedition and planted the Russian flag on the seabed at the North Pole.

In July 2009, President Medvedev and Barack Obama reached an agreement to cut back their countries' stockpiles of

nuclear weapons. Russia also supported the US decision to shelve controversial missile defense bases in Poland and the

Czech Republic. The new strategic arms agreement was signed between the US and Russia in April 2010.

Performance

Governance indicators

The World Bank report on governance uses voice and accountability, political stability and absence of violence,

government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 212 countries and

territories over the period 1996–2008. The study has been carried out by Daniel Kaufmann and Massimo Mastruzzi of the

Political landscape



World Bank Institute and Aart Kraay of the World Bank Development Economics Research Group. For any country, a

percentile score of 0 puts it at the lowest rank and 100 correspond to the highest rank.

Russia ranked in the 21.6 percentile on the voice and accountability index in 2008. Voice and accountability measures the

extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression,

freedom of association, and the availability of free media. Russia ranks very low due to its closed and controlled attitude

towards the press. Among the BRIC countries Russia, ranks below its counterparts like Brazil and India, which are in the

higher percentile of 50–75. However, Russia is still ahead of China in this particular category, with China in a lower

percentile rank of 5.8 in 2008.

Russia ranked in the 23.9 percentile on political stability and absence of violence in 2008. Political stability and absence of

violence measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional

or violent means, including domestic violence and terrorism. Russia is ranked higher than India, which has a percentile rank

of 16.7. However, Russia is behind Brazil and China, which are in the 25–50 percentile ranks.

Russia ranked in the 42.9 percentile on government effectiveness in 2008. Government effectiveness measures the quality

of public services, the quality of the civil services and the degree of its independence from political pressures, the quality of

policy formulation and implementation, and the credibility of the government's commitment to such policies. Russia’s rank

on this indicator has been impressive in comparison to other negative ranks which it received. The government led by

former President Putin broadly pursued consistent economic policies leading to stability in policy formulation and

implementation. This was mostly followed by the Medvedev government in the subsequent years. In this indicator, it ranks

in a lower percentile in comparison to other BRIC countries which are in the 50–75 percentiles.

Russia ranked in the 31.4 percentile on regulatory quality in 2008. Regulatory quality measures the ability of the

government to formulate and implement sound policies and regulations that permit and promote private sector

development. A low ranking indicates incompetence of policies and regulations for the private sector. The regulation over

the private sector is still a matter of concern in the country, with many restrictions and procedures for the private sector in

place. Furthermore, there is no comparable support for other public companies. Russia is still far behind Brazil in this

indicator which has implemented fair policies and is in the 58.0 percentile rank. However, the other BRIC countries except

for Brazil are in the same percentile as Russia.

Russia ranked in the 19.6 percentile on rule of law in 2008. Rule of law measures the extent to which agents have

confidence in and abide by the rules of society. The quality of contract enforcement, the police, the courts, and the

likelihood of crime and violence are also assessed. In Russia, the issue of human rights has been highly contentious. This

situation has been exacerbated by the government's increased usage of judicial custody in recent times. As a result, the

rule of law is somewhat ineffective in the country. Russia lies far behind other BRIC countries that are in higher percentiles

and have better implementation of rules.

The country ranked in the 15.5 percentile on control of corruption in 2008. Control of corruption measures the extent to

which public power is exercised for private gain, including both petty and grand forms of corruption, as well as the "capture"

of state by elites and private interests. Corruption remains one of Russia’s enduring weaknesses and the country is totally

unsuccessful in controlling corruption in comparison to other BRIC countries.

Political landscape



Outlook

Russia is on course to further integrate itself with the world in future. The country's prospects became even brighter with the

election of Dmitri Medvedev as the new president in 2008. President Medvedev was successful in reaching an agreement

in July 2009 with the US to cut back military grade nuclear weapons in both countries. While supporting the US decision to

shelve controversial missile defense bases in Poland and the Czech Republic, the country also was successful in signing a

new a new strategic arms agreement with the US in April 2010. The new agreement enforces plans for both the countries

to cut arsenals of deployed nuclear warheads by 30%.

The government has set goals to completely change the outlook of Russia by westernizing the country along the lines of

Europe. Russia’s long-term economic policy relies on the comprehensive modernization of key industries and

infrastructure. The successful run of the economy spanning for nearly a decade came to an end with the economic crisis,

and fixing the economic recession has become the first priority of the government. The government’s decision to devalue

the ruble in December 2008 provided respite to the economy; however, the fallout has meant a lower investment grade for

the economy. The present government has to work through these challenges by improving the investment climate of the

country. Furthermore, with the deepening economic crisis, the government faces the challenge of rising unemployment and

poverty. Although, the country managed to maintain 6% growth in 2008, the economy contracted by 8% in 2009. With the

prevailing economic challenges in the form of inefficient public spending, the government has initiated policies to reduce

budget deficit which was about 6% of GDP in 2009 to around 3% by 2012.

Despite the social and economic developments, Russian foreign policies, especially its assertive approach with its

neighbors, has not found favor with the western world. Moreover, Russia has shown scant regard for the peace deal with

Georgia brokered by the French president. Russia walked out of the Geneva discussion on Georgia held in May 2009 in

support of South Ossetia and Abkhaz, and its continued support for separatist forces in Georgia and Moldova is likely

create further instability in the region.

In April 2010, Ukraine and Russia signed an inter-governmental protocol on the supply of goods on industrial cooperation in

2010. The sides also signed protocols on cooperation in the aviation industry and on industrial policy. The industrial

ministries from both the countries are also keen on further development of cooperation in general and farm engineering, as

well as in the chemical and steelmaking industries. These discussions and deliberations are making the country more

industrial friendly in terms of international trade.

Economic landscape



ECONOMIC LANDSCAPE

Summary

The 1990s are sometimes seen as 'Russia’s lost decade'. Industrial production halved as wages fell sharply and the social

safety net collapsed. Although reform efforts which aimed to replicate western-style capitalism were initiated, the programs

were poorly sequenced and inadequate attention was paid to institutional reforms and the peculiarities of post-communist

societies. For instance, privatization of state assets went ahead before the establishment of legal systems to enforce

property rights. As a result, economic liberalization descended into asset-stripping and thievery on a massive scale. Rather

than creating a broad-based property-owning middle class, the reform program led to the rise of the ‘oligarchs’: business

magnates who are at the center of vast (and often corrupt) monopolistic business empires.

During 1998–2008, the government has shown an increased willingness to challenge the political and economic clout of the

oligarchs by instituting legal and institutional reforms and improving tax collection. Further economic liberalization is on the

cards, particularly as Russia moves ever closer to World Trade Organization (WTO) membership after 12 years of

negotiations. The economy’s successful run which began in 1999 came to an end in 2008 as a result of the mounting

economic crisis. During 1999–2007, the country had one of the highest growth rates, touching around 8% in 2007, but fell

back to 6% in 2008. The global economic slowdown gripped the Russian economy, which entered recession in 2009.

Evolution

Soviet era (1922–91)

The Russian economy was administered by the erstwhile Soviet Union for more than 62 years. The economy was

completely centralized and the state had control over almost all means of production, consumption and investment. The

Communist Party designed economic policy centrally for all of the soviet nations, and, until 1987, the economic system

itself ran in the same way as when it was established by the founders of Soviet Union. There were changes during 1953

and 1987, but the system remained relatively unchanged throughout the period. During the Soviet rule the State Planning

Committee formulated output targets for specific planning periods. All economic activities were centrally planned and

implemented at various lower levels.

1991–2009

During the 1990s, the Russian economy went through a long period of depression. Following the collapse of the Soviet

Union in 1991, economic growth declined sharply. Industrial production more than halved between 1991 and 1998, while

total labor force declined by 15%. Misguided policy advice from the IMF and western countries led to privatization and

deregulation instead of prioritizing institutional and legal reforms for achieving macroeconomic stability. As a result, output

and investment levels collapsed, the ruble quickly lost value and the social safety net, once one of the world’s most

generous, totally diminished. Meanwhile, opportunities for corruption and petty bureaucracy—already prevalent during the

Soviet era—expanded under the economy with a skewed set of mixed principles of anarchism and capitalism reigning

during the immediate post-communism years.

The privatization programs taken up by the government transferred the control of the market to economic forces from the

state. This nominal transfer without fundamental macroeconomic or policy changes resulted in the transformation of

Economic landscape



inefficient state monopolies into inefficient private sector monopolies, completely dependent on political support to maintain

their profitable positions. A new elite—the ‘oligarchs’—consisting of powerful monopolists and politically connected

business leaders, appeared to be above the law and beyond the reach of the taxman.

Meanwhile, ordinary Russians struggled under increasingly harsh economic and social conditions. Investment dollars which

poured into Russia during the emerging markets boom of the 1990s suddenly looked risky following the East Asian financial

and economic crisis in 1997. Western investors and international institutions became increasingly jittery, triggering a major

financial crisis in 1998. The Russian authorities defaulted on $40 billion of ruble-denominated international debt, though

maintaining payments on international bonds. However, since 2006, its external debt, especially government debt, has

been under manageable limits.

The GDP growth was at a negative 2.8% in 1990, immediately after the economic changes took place. Following a decline

of 1.9% in 1998, GDP growth bounced back to above 5.7% in 1999 and 9% in 2000. Thereafter the growth rate showed a

decline, falling back to 4.6% in 2001 and 4.3% in 2002. However, growth accelerated to around 7% in 2003 and 2004,

driven largely by buoyant oil prices following the US invasion of Iraq, and, to a lesser extent, by a pick-up in investment

flows in 2004. In 2005, growth was mainly driven by the continuous expansion of domestic demand and income. Prospects

of the strengthening global oil prices fueled investor confidence and investment surged. However the contingent

appreciation of the ruble resulted in a GDP growth of 6.3% in 2006. In 2007, the growth rose to 8.1% but fell back to 6% in

2008. During 1999–2007, the country had one of the highest growth rates, touching around 8% in 2007.

The global economic slowdown gripped the Russian economy and since then the economy has been on a downward trend.

In 2008, the economy recorded a much lower growth rate of 6%. The country’s fiscal and current account surpluses have

also come under pressure following the meltdown. At the same time, the economic crisis has also exposed the vulnerability

of the Russian system, which is dependent on oil exports with inadequate development of the industrial sector. In 2009, the

economy went into recession recording a contraction of 8%.

Economic landscape



Figure 6: Evolution of GDP growth in Russia, 1990–2009

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2008 2009

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Financial system

Overview

Since 1991, Russia has made efforts to stabilize its economy through many macroeconomic stabilization measures.

Although there were many policies implemented, the Russian economy was largely affected by the Asian Financial Crisis in

1998. As a result, the country devalued the ruble and stopped payment on its government debt, creating a bigger financial

crisis within the country. Though the country has shifted from being a market based economy, the financial system portrays

a socialistic picture. The government still has a significant amount of control on the banking industry and currency

movements.

Economic landscape



Financial authorities/regulators

Bank of Russia

The Bank of Russia was established in 1990, based on the Russian Republic Bank of the State Bank of USSR. Until

December 1991, before it was renamed as the Bank of Russia, the bank was known as the State Bank of USSR. The Bank

of Russia carries out its functions, which were established by the Constitution of the Russian Federation and the Law on

the Central Bank of the Russian Federation (Bank of Russia), independently from the federal, regional and local

government structures. The Bank of Russia formulates and implements monetary policies in the country. Its main

objectives are to maintain financial stability and create conditions conducive to sustainable economic growth. The Bank of

Russia is also responsible for the rate of exchange and is the regulatory authority of the foreign exchange market.

Russian trading system stock exchange (RTS)

The RTS was established in 1995 as the first regulated stock market in Russia. The RTS index is the main benchmark for

the Russian securities industry and is based on the exchange’s 50 most liquid and capitalized shares. The RTS stock

exchange trades the full range of financial instruments, from cash equities to commodity futures. The RTS has four

divisions catering to different segments:

• RTS Classic Market – the only stock market in Russia where trading can take place in rubles or any other

foreign currency. The most liquid stocks are traded using order-driven technology and are available for direct

market access.

• RTS T+0 Market – a segment where trading is done exclusively by retail investors with full preliminary deposit of

assets and ruble settlement.

• RTS Board – a quote driven market for unlisted stocks and bonds.

• FORTS – a futures and options market with ruble settlement.

The net profit of the RTS doubled in the year to RUB128.8 million ($4.41 million) in 2009 from RUB64.1 million ($2.2

million) in 2008.

Insurance

The insurance market in Russia has grown continuously for the last five years, despite sharp declines in the life insurance

segment’s value since 2003. The Russian insurance market generated a gross premium income of $36.9 billion in 2008,

representing a compound annual growth rate (CAGR) of 18.4% for the period spanning 2004–08. In comparison, the

French and German markets grew with CAGRs of 3.5% and 2.1% respectively, over the same period, to reach respective

values of $266.6 billion and $244.6 billion in 2008. Non-life insurance sales proved the most lucrative for the Russian

market in 2008, generating a gross premium income of $36.2 billion, equivalent to 98% of the market's overall value. In

comparison, sales of life insurance generated a gross premium income of $728.9 million in 2008, equating to 2% of the

market's aggregate income. The performance of the market is forecast to decelerate, with an anticipated CAGR of 14.2%

for the five-year period 2008–13, which is expected to drive the market to a value of $71.6 billion by the end of 2013.

Economic landscape



Comparatively, the French and German markets will grow with CAGRs of 0.1% and 0.3% respectively, over the same

period, to reach respective values of $267.9 billion and $248.4 billion in 2013.

SK Sogaz-Zhizn holds a 19.9% share of the Russian life insurance market. Russkiy Standart Strakhovanie has a further

16.8% share. In the non-life insurance segment, Rossgosstrah and Ingosstrakh Insurance Company are the leading

players with a share of 5.2% and 3.9%, respectively.

Key policies

The Russian economy went through a severe phase of recession during 2009-10, with economy contracting by 8%. Prime

Minister Vladimir Putin announced that the country’s recession is over, promised a strong budget and healthcare reforms

and pressed ahead with a hike in social contributions in an address to parliament in mid-April 2010.The prime minister

proposed that state money should be spent more wisely rather than increase the tax burden on the fragile economy and

proposed fiscal reforms aimed at halving the budget deficit to 3% of GDP by 2012.

Performance

GDP and growth rate

During 1992–96, the first five years after the soviet rule, Russia’s GDP went through a negative run due to the sudden

transition in economic policies. The GDP fell at a rate of 14.2% in 1992 and this negative trend continued until 1998.

Another factor which caused this downtrend was the economic crisis in 1997–98. Immediately after the crisis, however, the

GDP began to expand with a 5.7% growth rate in 1999, which continued until 2006. The major factors in this rise were

rapidly expanding oil and gas sales, government tax reforms, and improved investor confidence. During 1999–2007, the

country had one of the highest growth rates, touching around 8% in 2007. However, the global economic slowdown gripped

the Russian economy too and since then the economy has been on a downward trend. In 2008, the economy recorded a

much lower growth rate of 6%. In 2009, the country was severely hit by the global economic crisis and the economy

contracted by 8%. However, it is expected that the country would record a growth of 3% by 2010.

Economic landscape



Figure 7: GDP and GDP growth rate of Russia, 2002–13

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-8.0

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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GDP GDP growth rate


GDP composition by sector

The services sector contributes nearly 58.4% to GDP in Russia. This is followed by the industrial sector, which contributes

36.8% to GDP. A minuscule share of around 4.8% is contributed by the agricultural sector.

Economic landscape



Figure 8: Sector specific GDP in Russia, 2009

Agriculture, 4.8%

Industry, 36.8%

Services , 58.4%


Agriculture

Russia’s agricultural output is restricted by climatic and soil factors. Moreover, only 32% of the country’s land area is used

for agriculture. Furthermore, the farming resources were exhausted by policies like intensive farming, overuse of chemicals,

and unsuitable crop choice. Failure to effectively convert inefficient collective farms to private ownership after soviet rule

has further hampered production.

Grains remain the largest crop, occupying more than 50% of cultivated land. Other key crops are sugar beets, sunflower

seed, and vegetables. The main livestock outputs are cow’s milk, beef and veal, eggs, and pork. During 2000–08, the

agricultural output (based on current prices) grew at an annual average rate of around 18%. Though the share contributed

by agriculture to GDP is low, the rate at which the output had grown in Russia during 2001–08 is impressive. However,

agricultural output fell during 2009 to RUB 1.8 trillion ($61 billion) from around RUB 2.1 trillion ($71 billion) in 2008. The

agricultural output declined by more than 9% in 2009.

Economic landscape



Figure 9: Agricultural output in Russia, 2002–09

-15.0

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Agricultural output Growth rate

Source: Datamonitor

Note: Sectoral breakup given in local currency due to exchange rate fluctuations D A T A M O N I T O R

Industry

After 1991 Russia’s industrial sector relied heavily on defense and heavy manufacturing industries, despite an obvious

requirement for diversification. The manufacturing and industrial infrastructure was decaying after the soviet rule. The rising

industrial avenues were energy-intensive industries, a wide range of chemical, metallurgical, and machine-building

products, communications and transportation equipment, and shipping. Due to the absence of subsidies and captive

markets of the Soviet era, the industrial sector in the 1990s was not internationally competitive. After a period which saw a

fall in production, the Russian industrial sector picked up pace after 1999. The industrial output (based on current prices)

recorded an annual average growth rate of around 22% during 2001–08. In 2009, the industrial output decreased by 6%.

Economic landscape



Figure 10: Industrial output in Russia, 2002–09

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0.0

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14,000.0

16,000.0

2002 2003 2004 2005 2006 2007 2008 2009

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wth

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billio

n

Year

Industrial output Growth rate

Source: Datamonitor

Note: Sectoral breakup given in local currency due to exchange rate fluctuations D A T A M O N I T O R

Services

Russia’s services sector has expanded rapidly since the Soviet era. The sector contributed around 58.4% of GDP in 2009.

Financial and retail services have expanded especially fast during 2000–07. Some of the important services sectors in

Russia are retail, advertising, marketing and sales, and tourism. Financial services growth had picked up in recent years,

yet it lags behind those of other countries that are at similar economic levels. Services sector output recorded an average

growth of around 22% during 2001–08.The services sector output declined by around 4% in 2009 in comparison to 2008.

Economic landscape



Figure 11: Services output in Russia, 2002–09

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Services output Growth rate

Source: Datamonitor

Note: Sectoral breakup given in local currency due to exchange rate fluctuations

D A T A M O N I T O R

Fiscal situation

The Russian economy recorded a growing budgetary surplus during 2001–07. The tax system underwent a major

overhaul in 2000–01, resulting in improvements in tax collection. In 2007, Russia’s budgetary surplus reached 5.5% of

GDP. Despite the economic slowdown, the government managed a surplus of 4.1% of GDP in 2008. However, the

economic slowdown has put pressure on government finances. In 2009, Russia registered a federal budget deficit of

RUB2.33 trillion ($79.6 billion), around 5.9% of GDP. The Russian Finance Ministry has reviewed the budget revenues for

2010 and made a new prognosis for next year. It predicted that in 2010 revenues are expected to reach RUB92.9 billion

($3.2 billion), which is higher than 2009, despite higher oil prices and an improved forecast of economic growth. In 2010,

the treasury is expected to incur more loses due to strengthening the ruble than it receives because of rising oil prices. In

general, the budget will miss out on RUB173 billion of income. According to the government, the 2011 budget has a

planned income of RUB7.5 trillion ($256.9 billion) and expenditure of RUB9.4 trillion ($321 billion).

Economic landscape



Current account

The current account balance in Russia has maintained a surplus position since 2000. Improved competitiveness and higher

oil prices facilitated a dramatic turnaround in the current account, from a deficit of around 0.5% of GDP in 1998 to a surplus

of 12% of GDP in 1999. This surplus increased further during 2000 to 18% of GDP. The marked improvement in fortunes

facilitated the stabilization of the ruble in international markets. Although export growth remained strong, a bounce back in

import demand subsequently eroded the current account surplus to 8.5% of GDP in 2002 and 8.2% in 2003. However,

increase in oil prices (to more than $30 per barrel for Russian oil) in 2004 saw the current account surplus widen to more

than 10% of GDP. Accelerated export growth and rising oil prices boosted net export earnings and the current account

surged to a record high of 11% of GDP in 2005. The current account surplus was more than $76 billion in 2007, accounting

for 6.2% of GDP. Though Russia has continued to post a current account surplus, its magnitude has declined. In 2008, the

current account surplus stood at around 7% of GDP. The country’s current account surplus came down from around $102

billion in 2008 to around $47 billion in 2009. According to Central Bank of Russia, the current account surplus grew by

250% to $33.9 billion in the first quarter of 2010, up from $9.7 billion in the same quarter in 2009.

Economic landscape



Figure 12: Current account balance in Russia, 2001–08

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Foreign trade

After a period of economic transition during 1991–98, Russia’s export position improved after the ruble was devalued in

1998. From 2000 onwards, the country started to record positive trade surplus, taking advantage of the devalued currency.

Exports as a percentage of GDP grew from a value of 18.3% in 1994 to 44.2% in 2000 and stood at around 32% in 2007.

Exports increased from $103 billion in 2000 to nearly $471 billion in 2008. Similarly, imports increased from $34 billion in

2000 to $291 billion in 2008.However, due to severe recession, both exports and imports fell during 2009 to $369 billion

and $233 billion, respectively.

Since the collapse of communism, Russia’s trade with the West has grown significantly, while its trade links with the former

Eastern Bloc countries and other parts of the former Soviet Union have become less significant in relative terms. The EU

has emerged as the largest trading partner of Russia, accounting for more than 50% of total trade. The EU is followed by

the Commonwealth of Independent States (CIS) countries, which constitute around 14% of the Russian trade. On the

export side, the Netherlands was the biggest export destination in 2008, accounting for 12.2% of total Russian exports;

Germany and Italy account for another 6.9% and 9%, respectively. Among the CIS countries, Ukraine is the biggest export

destination and receives around 5% of total Russian exports. China (4.5%) and Poland (4.3%) account for the remaining

Economic landscape



exports. In terms of imports, China accounts for 12.9% of total Russian imports, followed by Germany which accounts for

12.6%. Among the CIS countries, Ukraine (6%) and Italy (4.1%) are the most important markets. China (7.4%), Japan

(6.9%), and the US (5.1%) are the other key markets.

Figure 13: Russia’s external trade position, 2002–09

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External debt

In 1991, the former Soviet Union’s outstanding debt of $67.5 billion was passed completely on to Russia. By 1997,

additional borrowing had doubled that figure, and Russia’s external lenders postponed the debt several times between

1995 and 2001. Since 2001, the international pressure for repayment has intensified because of Russia’s favorable trade

balance and increasing foreign exchange reserves. Russia prepaid its entire Soviet-era Paris Club debt of $22 billion in late

2006. The total foreign external debt stood at $540 billion in October 2008, but declined to $453 billion by the end of March

2009, of which government debt was minimal at $28 billion. Banks' and other corporations' debts have added heavily to the

total debt. The total external debt by the end of 2009 amounted to around $369 billion.

Economic landscape



International investment position

Foreign investments

The level of foreign investment in Russia has remained low throughout the post-Soviet era mainly due to an unfavorable tax

system, corruption, the lack of production sharing agreements in the fuel sector, and overall economic uncertainty. During

1991–2001, more than one-third of the total foreign investment was from the US. A significant development in the FDI

arena was a $6.7 billion direct investment by British Petroleum in the Russian petroleum industry. In 2006, a new legislation

on FDI was passed, under which foreign firms can obtain only minority ownership of any energy project deemed “strategic.”

However, laws restricting foreign banks from opening branches in Russia were not reformed. As a result these restrictions

still remained a significant hindrance to Russia’s accession to the World Trade Organization.

The FDI inflows for 2004 were $28.75 billion, with consumer goods and services and construction receiving the largest

shares among the economic sectors. In 2006 the inflow of FDI rose to $30.8 billion, with the largest investments coming

from Luxembourg, Cyprus, the Netherlands, Germany, the UK, the US, and France. The most lucrative sectors for FDI are

the extraction industries which accounted for more than 50% of total FDI in 2007. The other attractive sectors are

manufacturing, retail industry and real estate services. Total FDI inflow rose to $70.3 billion in 2008.

Economic landscape



Figure 14: FDI inflow in Russia, 2002–08

3.38

7.96

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Foreign exchange position

The foreign exchange position in Russia has been steadily growing since 1998. This was mainly due to devaluation of the

Russian ruble and subsequent increase in exports and trade balance. The foreign exchange reserves increased from being

around $76.9 billion in 2003 to more than $314 billion in 2006. At the end of December 2007, the reserves were more than

$475 billion. Furthermore, in July 2008, they rose by more than $100 billion, reaching $575 billion. However, deteriorating

economic conditions leading to the flight of capital from the country has led to a fall in foreign exchange reserves. On May

1, 2009, the official reserves stood at $383 billion. As of December 31, 2009, the total foreign exchange reserves including

gold amounted to $439 billion.

Economic landscape



Credit rating

Standard & Poor's retained a stable outlook on Russia in April 2010. The reason cited for this was government efforts to

rescue the country's financial markets and the financial system. Furthermore, in April 2010, S&P retained its long-term and

short-term credit foreign currency obligations ratings of BBB+/A-2 from BBB/A-3 in 2009. The long-term sovereign credit

rating on national currency obligations was decreased from A-3 to BBB. The estimate of the risk of translation and the

conversion of foreign currency for Russian non-sovereign borrowers was decreased from BBB+ to BBB. The short-term

national currency obligations rating remained unchanged (A-2). According to the ratings agency, the downgrade is due to

the risks arisen from a sharp reduction of the international reserves and investment flows, which resulted in the rise of costs

and problems with raising funds required to meet the needs for external financing.

Monetary situation

Inflation

The level of inflation was very high in Russia during the years 2002 and 2003, with rates touching 15% and 13%,

respectively. With prudent monetary policy measures taken by the CBR, inflation was decreased to around 9% in 2006 and

2007. However, inflation shot up again in 2008 and reached 13.1%. However, it decreased to 10.7% in 2009 and it is

expected to come down to 8.9% by 2010.

Economic landscape



Figure 15: Consumer price index (CPI) and CPI-based inflation in Russia, 2002–13

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Money supply and interest rate

The CBR cut its key lending rate by 0.25percentage points to 8.25% per annum with effect from March 29, 2010, following

a slowdown in consumer price growth. The CBR last cut its refinancing rate by 0.5 points to 12% in May 2009.

In March 2010, the money supply (M2) increased by 2.8% from the previous month, according to the Bank of Russia. Cash

money in circulation (the M0 aggregate) decreased from RUB 4.38 trillion to RUB 3.98 trillion during January–March 2010,

while non-cash funds increased from RUB 11.66trillion to RUB 12.1 trillion.

(The money supply in national definition, the M2, is defined as total cash in circulation (outside banks) and balances in the

domestic currency on accounts of resident non-financial organizations, financial organizations (except for credit ones) and

individuals. It doesn't include deposits in foreign currency).

Banking sector

There has been a rapid increase in banking and financial sector services in Russia during 2000–08. By the end of 2008,

there were around 1,000 banks in Russia, however, the top 200 banks control 90% of the banking assets. Although total

bank assets in Russia have recently shown an annual growth of close to 30%, they represent just 45% of GDP in 2008.

Economic landscape



The proportion of the market held by the top 10 banks has remained more or less constant for several years, with the big

state-owned banks (Sberbank, VTB and Gazprombank) having dominant positions. Foreign bank penetration in Russia has

been low, but is increasing. The share of foreign-owned banks in the total assets of the Russian banking sector increased

from 8% in 2002 to almost 20% in 2008. The increasing number of M&A deals in the banking sector is not driven by the

arrival of foreign players.

There has also been consolidation among local institutions, either through mergers (such as Uralsib) or acquisitions

(Vneshtorgbank’s acquisition of Guta Bank). Many leading banks have been evaluating their entry into the Russian market,

which is dominated by Sberbank and a few strong regional banks (such as AKBars and Chelindbank). At the end of 2009,

the Bank of Russia reported the number of banks to be 1,058. However, only the 50–70 biggest banks are important to the

functioning of the sector as a whole. The remaining 1,000 are mostly small or very small. A new law governing the minimal

amount of capital banks must hold was formulated on January 1, 2010. This legislation requires banks to have capital of at

least RUB 90 million ($3 million) and this would be raised to RUB 180 million from 2012. After enforcing the new regulation,

it was seen that there were only 22 banks with capital lower than the minimal requirement. Even after going through severe

financial crisis, it was reported that more than 57% of banking assets were state owned in the country.

Employment

Russia has a well-educated and skilled labor force spread across different sectors of the economy. In 2008 around 58.1%

of workers were employed in the services sector, 31.9% in industry, and 10% in agriculture. The employment scenario in

Russia has been on a sluggish trend throughout 2000–08. The total employed people reached 71 million in 2008 from 65

million in 2001. The highest amount of growth was seen in 2007, when the employment grew by 3.2%. In 2009, the number

of employed came down to 69 million.

Economic landscape



Figure 16: Employment in Russia, 2002–13

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Outlook

The Russian economy went through a severe recession during 2009, with GDP contracting by 8%. However it was seen

that the GDP grew by 4.5% in first quarter of 2010, compared to a 7.9% contraction during the same period in 2009. During

November 2009–March 2010, since the oil prices have hovered between $60–80 a barrel, the Russian ruble has tended to

strengthen slightly. Fuelled by increasing liquidity in the domestic banking system and foreign capital inflows, the Russian

stock exchange indices have more than doubled from their lows at the end of February 2008. The net profit of the RTS

doubled to RUB128.8 million ($4.41 million) in 2009 from RUB64.1 million ($2.2 million) in 2008. The improving financial

markets along with improving GDP growth is a healthy sign for speedy recovery for the economy.

The country's excessive dependence on oil as an export commodity has also exposed the structural weakness of the

economy. Moreover, the infrastructural weaknesses and low competitiveness of the Russian economy has led to

insufficiently developed small and medium-sized businesses. However, inflation will not pose a major problem for the

Russian economy as it is forecast to come down to around 8.9% by 2010 and may further come down to 7% by 2013.

Unemployment will certainly be a problem in the country as it rose to more than 8.4% in 2009 and it is expected to cross

9% by the end of 2011.

Social landscape



SOCIAL LANDSCAPE

Summary

The social welfare system in Russia went through turmoil after the disintegration of the USSR. During the period of

transition after its downfall, a number of policies were changed. As a result of this, the social system of the country was

neglected. A weak healthcare system is one of the biggest challenges faced by Russia currently. Though the system is

decentralized in the country, it has been ill functioning, with under-qualified doctors and corrupt officials undermining the

quality of treatment. Furthermore, Russia faces a severe demographic challenge resulting from low birth rates, poor

medical care, and an increasing AIDS situation. The human capital quality of Russia also compares unfavorably with other

nations at the same level of development. However, the government is making efforts to revamp the social welfare system

with a set agenda for the coming years.

Evolution

Social welfare was also neglected in Russia during Soviet rule. During the 1990s, the economic shift pushed many

Russians into poverty. This was the result of incompatibility between the state supported social support programs and the

needs of a new economic system. After a period of settlement, from 1998 many enterprises started to provide an extensive

social safety net for their workers, including maternity leave, child allowances, housing, paid vacations, and medical care.

Furthermore, pensions for workers were funded by employers through a single social tax and direct assessment on self-

employed workers. However, many workers were required to delay their retirement as the post-Soviet pension system was

not adequate to provide for retirees. Furthermore, there was a declining ratio of employed workers to pensioners, which

decreased the system’s capability. In 2002, Russia introduced a new pension system in which a share of the statutory

pension payments of employers was invested into pension funds whose earnings are earmarked for the pensions of

workers (who were born after 1967).


Demographic composition

Age and gender-wise composition

Russia is the seventh most populous country in the world with a population of 140.0 million as of July 2009, and there are

about 106 males for 100 females in the country. The total life expectancy is 66.03 years, with males living for 59.33 years

and females living for 73.14years. The Russian population has been on a decreasing trend since the 1990s and the

country’s aging population is beginning to increase. The fertility rate stood at 1.41 in 2009.

Social landscape



Table 9: Mid-year population by age (m) in 2009

Mid-year population by age Female Male

0–4 3.7 3.9

5–9 3.3 3.4

10–14 3.2 3.3

15–19 4.2 4.4

20–24 6.0 6.2

25–29 5.7 5.7

30–34 5.3 5.2

35–39 4.9 4.8

40–44 4.8 4.5

45–49 6.1 5.5

50–54 6.2 5.2

55–59 5.5 4.2

60–64 3.5 2.4

65–69 3.5 2.0

70–74 3.8 1.9

75–79 2.8 1.1

80+ 3.2 0.8


Urban/rural composition and migration

Around 73% of Russians live in cities and towns, while the remaining 27% live in rural areas. Around one million residents

of Russia come from other countries. The migration rate in Russia has been decreasing since 2004. The net migration rate

came down by 7.5% in 2005 to 1.07 per 1,000 people. In 2009, net migration rate stood at 0.28 per 1,000 people, much

lower than 1.03 in 2006.

Religious composition

The official state religion in the country is Russian Orthodoxy which is followed by 20% of the population. The Islamic

population is slowly increasing in Russia with about 15% of the population being Muslims. A small group—around 2% of the

population—belongs to Christianity. The majority of the population (63%) is atheist.

Social landscape



Figure 17: Major religions in Russia

Russian Orthodox20%

Muslims15%

Atheists63%

Other Christians2%


Education

Overview

Russia traditionally has high numbers of educated populace. According to the 2002 census, the literacy rate in Russia was

99.4%. The Russian constitution guarantees the right to education with free preschool, elementary and vocational

education.

System of education

Under the Russian educational system, nine years of basic general education is compulsory, spanning from ages 6–15.

The first three years constitute primary education and from then on it is secondary education. After secondary school,

students have an option to pursue a two year degree at a tradesmen school. This kind of degree is linked to obtaining a

blue collar job in the country. Conventionally, after the students obtain a certificate of complete secondary education, they

can enter a university. The duration of degrees vary from four to six years. The Russian educational system confers both

Bachelors (graduate) and Masters (post-graduate) degrees. The syllabus is generally standardized by the state across the

universities and only 20% of it is structured by the universities. The PhD programs come under long post-graduate

programs and they span between 2–4 years.

Social landscape



Healthcare

Healthcare services

In Russia, healthcare services are free in principle, but adequate treatment depends on affordability. Even after the Soviet

era, the healthcare system in Russia remained completely decentralized and this reduced the quality of healthcare services

provided in the country. As a result there is an increasing trend of people turning towards the private sector for better

treatment. The healthcare services are provided through various channels in Russia. Among these channels, 30% of the

population receive primary healthcare services through work related clinics and hospitals. Another channel is for

government servants like police, railway employees, university staff, and high level government officials, who receive

healthcare services through specialized health care centers. There are also polyclinics in various parts of the country,

where all other sections of society can visit for healthcare services.

Social welfare

Social welfare policies

Social security and welfare programs supply modest support for the most susceptible sections of Russia's population.

Various sections of society which benefit from the welfare programs are pensioners, senior citizens, infants and children,

pregnant mothers, families with more than one child, and people with disabilities. The Ministry of Social Protection is the

regulatory authority handling welfare programs in Russia. The Ministry focuses more on the needs of people who are

retired or disabled. There are four components of the budget that fund welfare activities and social welfare benefits at the

federal level: these are the social insurance fund, the pension fund, the employment fund, and the fund for social support.

Currently, the government’s antipoverty measures have been destabilized by continuing inflation. In 2006, the Ministry of

Economics undertook a fundamental overhaul of Russia’s state welfare system. This was mainly due to welfare agencies

following a local agenda rather than a nationalized policy, and thus suffering from inadequate funding and corruption.

Furthermore, the fund for social support, which sustains a number of social assistance programs, has also suffered from

corruption scandals. With a motive to stem Russia’s demographic crisis, the government has doubled child support

payments to $55 per month and offered a one-time payment of $9,200 per year to women who had a second child. Even

though the country went through a severe economic crisis during 2009, the government was able to carry out large-scale

anti-crisis measures without any cuts in social spending. The actual social spending increased by over 27% in 2009

compared to that of 2008.

Performance

Healthcare

The Russian healthcare system is one of the most decentralized forms of healthcare systems. However, this has resulted in

a major decline in the quality of treatment provided at various hospitals in the country. The death rate in Russia is as high

as 16.06 deaths per 1,000 people. The infant mortality rate is similarly high, with almost 10.81 deaths per 1,000 people.

The main reasons for the high death rates are the prevalence of non-communicable diseases like heart attacks and cancer,

and traffic accidents. Indeed, the rate of deaths occurring due to traffic accidents is nearly twice that of Western Europe.

Moreover, high consumption of tobacco and alcohol has been recognized as important factors behind the low life

Social landscape



expectancy of Russian males. The low quality of air and water in many urban areas, and increased smoking and alcohol

intake, aggravate the already existing poor health. Furthermore, in the early 2000s, decreased healthcare and housing

standards amplified communicable diseases such as tuberculosis, diphtheria, and cholera. Among children, meager

nutritional supplies have led to a prevalence of anemia, stomach ulcers, endocrine disorders, and iodine deficiency.

In 2006, Russia’s Federal AIDS Center confirmed 1.5 million cases of human immunodeficiency virus (HIV), 341,000 of

which were officially registered. As an effort to take appropriate measures against AIDS, the government allocated an

estimated $115m to HIV and AIDS programs. The government also put healthcare as one of the top five priorities of its

policy. The sector has begun to receive increased attention from the government, resulting in an increase in healthcare

expenditure as percentage of GDP since 2005. There are further plans to increase expenditure on public health by nearly

1.5 times during 2009–13, during which time the government targets a healthcare spend of over 4% of GDP. In 2009, the

government spent around 4.15% of GDP as a part of healthcare expenditure and it is expected that it might be over 4.7% of

GDP by 2013.

Figure 18: Healthcare expenditure in Russia, 2002–13

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Social landscape



Income distribution

Standard of living

After the fall of Soviet Union, there was a transitional period during which the government established various policies to

create a new economic system. During this time, the country was faced with high corruption and crony capitalism. As a

result, a natural divide between an affluent high class of rich people and low labor class was formed in Russia. The Gini

coefficient (a measure of income disparity, with 0 meaning complete equity and 1 meaning extreme inequity) more than

doubled during the first six years of the transition period (1993–99). According to the Russian Statistics Service, the Gini

coefficient was 0.42 at the end of 2008. This shows that although the income is less evenly distributed than in some of the

European countries, it is more equitable compared to the US or China. Russia's Gini coefficient was 0.29 when the Soviet

Union collapsed. Income inequality has been sharper in the cities of Russia. Along with rising income inequality, poverty is

also on the rise in Russia. The living conditions of Russians are set to deteriorate with the economic slump. According to

the Federal State Statistics Agency (Rosstat), 19.7 million citizens (14% of the population) were below the poverty line as of

third quarter 2009. However, unofficial sources state that more than a third of Russian population is living in poverty. Russia

also faces a severe housing shortage, with about 7% sharing living space with other households and one in two persons

having less than 10 square meters (108 square feet) per capita.

Education

Literacy rate

According to the 2002 census, Russia’s literacy rate has reached a new high of 99.4%, which is one of the highest in the

world. The literacy rate was 99.7% for males and 99.2% for females. Despite the grave economic crisis during 2009, the

government was still able to maintain a good level of spending on the educational sector. The education expenditure for

2009 was around 5% of GDP compared to 3.6% of GDP allocated in 2008.

Social landscape



Figure 19: Education expenditure in Russia, 2002–13

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Outlook

The healthcare systems in Russia are highly decentralized and spread across the country. This is uncommon compared to

any other country’s healthcare system. Although the decentralization has increased access to healthcare services in

Russia, the quality of treatment and maintenance of different hospitals has been very poor and substandard. The

insufficient government efforts caused health levels in the country to deteriorate further. In December 2007, the Ministry of

Health and Social Development announced that it has set a long-term agenda until 2017, to wholly develop healthcare

systems in Russia under a well structured phase-wise development plan. Despite the economic crisis during 2009, the

government was successful in allocating $48.9 billion towards healthcare expenditure amounting to 4.15% of GDP. It is

expected that the healthcare expenditure would rise to 4.7% of GDP by 2013.

The Russian government increased the social security benefits and welfare payments in May 2008. The government has

raised all the pension levels by 15% from August 2008. The government has also agreed to increase child tax exemptions

from the existing $26 to around $35; the additional tax money was allotted for education, healthcare and housing programs.

This move enabled the government to maintain a 5% of GDP spending for education in 2009. It was also seen that despite

various pressures, the social spending did not come down in 2009. The social expenditure rose by over 27% in 2009 in

comparison to 2008. In March 2010, it was seen that remuneration to workers in the public service increased by 8.5% since

Social landscape



August 2009. These increasing efforts to improve the social development policy bode well for Russia’s social structure in

the coming years. Nevertheless, with high levels of corruption prevailing in the country, the implementation of policy still

remains questionable. In addition, the challenge of rising unemployment and poverty still haunt the Russian government.

Besides tackling the unemployment and poverty issues, the government also needs to implement urgent measures to meet

the challenges emerging from the country's low birth rates and shrinking working age population.




TECHNOLOGICAL LANDSCAPE

Summary

Russia is renowned for its advanced defense technologies and military equipments. Over a period of time the country has

also become one of the leaders in space research and development. Russia has to its credit many successful space

missions, and Russia’s space station Mir plays a vital role in co-ordinating with the International Space Station on many

space missions. Although, the country is unable to play a part in fundamental research in science and technology, it has

been successful in gradually moving over to IT sector development and related services.

Evolution

Russia is historically known to be one of the technologically advanced countries in space research. The Russian Federal

Space Agency (RKA), formerly known as the Soviet Space Program, is the primary scientific body driving space research in

the country. The RKA was established after the dissolution of Soviet rule in 1992. However, the RKA still uses the

technology and launch sites that belonged to the erstwhile Soviet space program. The RKA has been part of many space

missions in the past, and also has co-operation agreements with the International Space Station. The International Space

Station receives significant technical support from the Russian space station ‘Mir” which was launched in 1986. During the

1990s, the RKA took a new direction to enter into commercial satellite launches and space tourism.

Russia, as well as being advanced in space research, is also a country with high engineering skills. Although in the past the

country spent most of its time and funds in building military equipment, with the establishment of the International Science

and Technology Centre (ISTC) in 1992, it has entered into various other modes of research.


Intellectual property

The country is among the G8 group; however, it received a very low number of patents. During 2000–08, the highest

number of patents was received in the year 2001, with 239 patents. After 2002, there was a decrease in number of patents

received, with the least being 154 received in 2005. In 2008, the country received 204 patents. The Federal Service for

Intellectual Property, Patents and Trademarks (Rospatent) is a government body which exercises the functions of control

and supervision of legal protection and use of intellectual property in Russia. Furthermore, the government—together with

the patent office—has taken up a project called strategy for science and innovation in the Russian Federation until 2010, for

the creation of a balanced sector based R&D and effective innovation system. This strategy is expected to bring in more

funds and infrastructure into science and technology fields in Russia.




Table 10: Patents received by Russia – 2000–08

Year Patents received

2000 185

2001 239

2002 203

2003 203

2004 173

2005 154

2006 176

2007 193

2008 204


Research and development

Technology agreements/pacts

Many of Russia's international agreements and pacts are held in space research and related areas. The country has

several space pacts with the US and also the European Space Agency in the development of international space station.

These mutual co-operations have been running from 1993. In 2007, Russia and the US collaborated to form a new pact for

a space program to find water on the surface of moon and Mars. This will be done through the help of the Russian space

instrument, the lunar exploration neutron detector (LEND). Russia has also inked technological pacts with many Asian

countries like India, China, Japan and South Korea. These pacts mainly cover the exchange of defense technologies, but

with India the technology pacts extend to different areas of information technology.

Performance

Opportunity sectors

Telecommunications, broadband and internet

After the dissolution of the Soviet Union, the Russian telecommunication network went through a major shift. This shift

happened with liberalization in the licensing regime and the resultant plethora of licenses given to hundreds of companies

to provide services. Important developments took place during the late 1990s which included increased access to digital

lines in urban areas and infrastructural improvements in all parts of the country. With widespread foreign investment, there

was considerable growth between 2003 and 2005, increasing the ratio of land lines per 1,000 inhabitants from 24.3 to 29.5.

During this time there were about 60 regional capitals which offered modern digital systems. However, in 2004 around

54,000 rural communities lacked telephone service totally. Furthermore, the fixed line service is still not provided

completely, especially in the rural areas of the country.

Due to increased delay and slow installation of conventional lines, use of mobile phones has increased significantly since

2000 in the country. Between 2002 and 2003, the number of mobile phone subscribers doubled to 36 million and by 2005 it

had reached 120 million; mobile phones accounted for almost 43% of the total telecommunications market. By 2005 around




60% of Russians had started using mobile phones. The growth of mobile phones came down from around 62% in 2005 to

around 8% in 2009. It is expected that the mobile phone market would soon reach saturation by 2013.

Russia has been facing difficulties with the telecommunications and broadband infrastructure. The insufficiency of hardware

and the high rates of services have been major obstacles for any infrastructural development in the broadband sector.

However, after a period of revitalization of the sector during 2000–06, there was rapid growth in internet use in the country.

In 2009, the number of users was more than 37.7 million: growth has been particularly remarkable in urban centers,

especially Moscow, Irkutsk, Krasnodar, Nizhniy Novgorod, Novosibirsk, Vladivostok, and Yekaterinburg. The government

has also supplied 10,000 public terminals in most regions to avail the usage of broadband.

Figure 20: Growth of fixed and mobile phones in Russia, 2002–13

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Figure 21: Internet users in Russia, 2002–13

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IT sector

Russia has a comparative advantage in IT with its previous identity as one of the super powers. For one, Russia has a

large technological research infrastructure. The Russian technological institutions and universities have produced

advanced military equipment for many years. Currently there is an ongoing transformation of the defense industry into

consumer applications and the infusion of western technology through joint ventures with other countries. If this is done by

production of technologically advanced utilities, then the country would soon find more avenues to develop more IT base

products. In 2005, the Russian government made IT a national policy priority, with an agenda to establish a series of IT

oriented ‘techno-parks’. Furthermore, the government approved laws to provide tax and other incentives for companies

specializing in IT.

The Ministry of IT and Communications launched a new ‘computer for every home’ program in February 2007. This

program, developed jointly with Russian Post, Intel and Microsoft, is intended to facilitate wider PC ownership among

inhabitants of small cities, and those in the rural areas. The wider objective is the growth of a ‘computer culture’. With

average monthly earnings at around the $400 level, inhabitants of the remote regions will be able to order computers at a

set price of around $300–350, at least 10% below the lowest market prices.




The Russian software market generated total revenues of $3.8 billion in 2009, representing a compound annual growth rate

(CAGR) of 20.9% for the period spanning 2005–09. In comparison, the French and German markets grew with CAGRs of

7.2% and 5.2% respectively, over the same period, to reach respective values of $15.3 billion and $22.6 billion in 2009.

General business productivity and home use applications sales proved the most lucrative for the Russian software market

in 2009, generating total revenues of $895.2 million, equivalent to 23.6% of the market's overall value. In comparison, sales

of network and database management generated revenues of $813.8 million in 2009, equating to 21.5% of the market's

aggregate revenues.

Pharmaceuticals

The Russian pharmaceuticals market generated total revenues of $8,182.6 million in 2009, representing a compound

annual growth rate (CAGR) of 18.6% for the period spanning 2005–09. In comparison, the French and German markets

grew with CAGRs of 3.2% and 3.1% respectively, over the same period, to reach respective values of $37,306.2 million

and $37,139.2 million in 2009.

Alimentary/metabolism sales proved the most lucrative for the Russian pharmaceuticals market in 2009, generating total

revenues of $1,569.1 million, equivalent to 19.2% of the market's overall value. In comparison, central nervous system

sales generated revenues of $1,091.8 million in 2009, equating to 13.3% of the market's aggregate revenues.

Research and development

R&D expenditure

The R&D expenditure in Russia has been considerably lower than many industrialized nations around the world. The

percentage share of R&D expenditure in GDP has consistently been around 1% in Russia. In comparison, other BRIC

countries like India and China allocate much higher percentage shares than Russia. Russia has made progress in

formulating innovation policy and creating an innovation governance system in 2008. To regain its former position in global

science and technology, the government has adopted a strategy to foster science and industry linkages. The R&D

expenditure in 2009 amounted to $12.6 billion (1.07% of GDP). This was much lower compared to $17 billion allotted in

2008.




Figure 22: R&D expenditure in Russia, 2000–10

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Outlook

Russia has been on the forefront in global technologies related to space research. Space research and technology in

Russia has a wide reach in this area, with R&D in areas like high energy astrophysics, planetary exploration, space plasma

physics, and space weather. Apart from advanced research capabilities, Russia in the past has been instrumental in many

successful space missions. During the late nineties it also entered into commercial satellite launch missions. The country

has scheduled many space missions for the future. In 2010 and 2011 the country is also set to consecutively launch a fleet

of three earth-orbiting astronomy observatory satellites. Furthermore, the country is set to begin a mission to Venus in

2015.

Apart from being well versed in space technology, the country is gradually enhancing its capabilities in information

technology and related areas. The Russian government is currently placing an increasing emphasis on IT as a device of

reform in various economic sectors. The government is planning to invest $350 billion during 2008–13 into IT for enhancing

the functioning of the education, healthcare, defense and power sectors. Furthermore, the country launched a series of IT-

oriented ‘techno-parks' in 2009, and laws were passed to provide tax and other incentives for companies specializing in IT.

As a part of this initiative, the government announced in mid April 2010, that it would welcome the participation of

companies from the US in projects linked to its future research and development center in the Moscow Region city of




Skolkovo. The future research and development center will focus on the energy, IT, telecommunications, biotechnology,

and nuclear industries. The construction of the center may take three to seven years according to the government.

Furthermore, in December 2009, Prime Minister Vladimir Putin also ordered for forming of a unified plan for research into

and development of armored vehicles of the future. The unified plan of R&D includes areas such as power plants,

armaments, aviation technologies and ammunition.

Legal landscape



LEGAL LANDSCAPE

Summary

The Russian legal system has a civil law system and is influenced by traditional European laws. Various codes like the civil

code, tax code, customs code, civil and corporate legislation and labor code govern all major spheres of business activity.

The judicial system in the Russian Federation is split into three branches. They comprise of the courts of general

jurisdiction (of which the federal Supreme Court is the court of last resort), the 'arbitrazhniy' or commercial court system

with the High Court of Arbitration as the supreme body, and the Constitutional Court. The judicial system is also divided into

a federal system and a system of local courts of the various 'subjects' of the Russian Federation.

Evolution

The judicial system of Russia was first established as a part of government reforms in 1864. The judicial system was based

on both British and French laws of judiciary, and was distinguished from administrative functions of the state. There was

also a democratic element of having a jury system. This system was established based on two courts: the justices of peace

and the other ordinary tribunals (these were adopted from the English and the French models respectively). This system

was reformed under the law of the Soviet Union, after the country joined the union in 1917. The legal system was

developed under the traditional Western Civil law, with many laws originating from Russian legal tradition and Byzantine

secular law. The Constitutional law was first passed in 1924 and later on amended in 1936 and 1977. In 1993, after the

erstwhile Soviet Union broke up, Russia adopted a new constitution. From then on judiciary became a part of legislative

administration in Russia. The 1993 constitution provides for some degree of judicial reform by establishing an independent

judiciary and specifying that justices may only be removed or their powers curtailed or terminated in accordance with the

law. The Ministry of Justice was established in the same year making it the regulatory body administering Russian judicial

system. The ministry's responsibilities include the establishment of courts and the appointment of judges at levels below the

federal district courts.


Judicial system

Structure of the system

The Russian judiciary comprises the Supreme Court, the Constitutional Court and the High Court of Arbitration. Under

these branches there are several districts, regional and federal level courts. However, Supreme Court is the highest court

of authority for all civil, criminal and administrative cases in Russia. The judges for three branches are nominated by the

president and appointed by the Federal Council. The judges for these three courts are allowed to serve for life. The

president directly appoints judges of federal district courts. The Ministry of Justice is accountable for appointing judges to

regional and city courts. However, selections of judges below the national level are still made by the chief executives of

sub-national jurisdictions.

Legal landscape



Constitutional Court

The Russian constitution of 1993 authorizes the Constitutional Court to arbitrate disputes between the executive and

legislative branches. This also includes arbitration of disputes between Moscow and the regional and local governments.

The court is also empowered to rule on infringements of constitutional rights, to inspect and scrutinize appeals from various

government bodies, and to participate in any impeachment proceedings against the president. The court has many regional

and district level branches under the name of charter courts.

Supreme Court

The Supreme Court of Russia is the highest court of authority for all the criminal, civil and administrative cases. It is also

the court of last resort for all the cases heard in lower courts at district and regional levels. Apart from judicial powers in

state administration, the court also has the right to challenge individual acts passed under the Federal Assembly, including

presidential decrees and the policies passed by the government. The court is also authorized to hear criminal cases against

members of the Federal Council of Russia and State Duma.

High Court of Arbitration

The High Court of Arbitration is the highest court for the resolution of economic and business disputes. The branches of

these courts are called courts of arbitration and circuit courts of arbitration at regional level. Whenever there is a dispute

between business entities, the case is taken for trial by the courts of arbitration. There are 82 courts of arbitration in Russia,

staffed by almost 2,000 judges addressing about 300,000 disputes annually.

Trials and legislations

Under the provisions of the constitutional laws of 1994, trial by jury may be allowed in specific kinds of cases, including

those linking to a death penalty. This reform supersedes in part the older system of trial by judges and "people's

assessors", laypeople who usually complied with the judges' verdicts. In reality, trial by jury has made negligible

development in the conservative court system of Russia. In 1995, jury trials were accessible only in nine out of the 89 sub-

national jurisdictions, although other jurisdictions sought permission to introduce them. Currently, the jury trial is only

available in cases with serious crimes.

Legislation affecting business

Industrial acts, legislations and regulations

Russia is principally occupied by large industrial enterprises, with a small number of small and medium-sized enterprises

(SMEs). SMEs account only for 10–15% of the Russian GDP, compared to developed market economies where more than

50% of shares is represented by SMEs. Historically, Russia has mostly concentrated on developing large scale industries.

However, the government is slowly easing regulations for SMEs by reducing tax and regulatory barriers to small

enterprises. This was done by introducing a simplified tax regime for small companies in 2003.

Foreign licensing in Russia has become widespread in a number of sectors in Russia, including retail and media. Domestic

companies with local knowledge can now expand outlets or brands that offer consistent cash flow for foreign companies.

Legal landscape



This approach has reduced the uncertainty among foreign companies. However, the drawbacks lie largely in the

underdeveloped legal environment of Russia: the enforcement of ownership rights is still weak, and forged and pirated

goods are widespread throughout the market. As a result, many foreign companies have put a ceiling on their licensing

agreements with Russian subsidiaries, providing them only with the rights to distribute their parents’ products or pay

royalties to use the trademark in domestic production. In line with its thrust for WTO accession, the government has

changed its focus to improve the judicial system and to develop stringent laws on copyright, trademarks and patents that

comply with the WTO’s Trade-Related Aspects of Intellectual Property (TRIPS) agreement. Furthermore, the Competition

Law limits mergers between companies where there is a possibility of a monopoly.

Establishing operations as a foreign enterprise

A foreign company looking at setting up operations in Russia can choose among the following options:

Joint stock company (JSC)

JSCs in Russia are of two forms: open JSCs and closed JSCs. The first refers to a company whose shares are openly

traded and freely transferable. They can also place their shares in predetermined circle of investors. A closed JSC refers to

a company where shares may be distributed to a limited circle of investors but most importantly to the founders. The

minimum capital is 1,000 times the minimum monthly wage ($47) for an open JSC and 100 times minimum wage for a

closed JSC. A minimum of 50% of the shares to be distributed must be paid for within three months after the initial

registration. Until 50% of the shares distributed are paid for, the company may not carry out any transactions other than

those connected with founding the company. A mandatory 5% legal reserve is to be maintained by the JSCs.

Representative office or branch

Under Russian company law, representative offices and branches are not considered to be legal entities. A representative

office or a branch may carry out business activities on behalf of this entity. Both forms must be registered with the tax

authorities and accredited before commencing operations. The State Registration Chamber under the Ministry of Justice

must recognize representative offices of foreign companies.

Limited liability company (LLC)

The wholly owned subsidiaries of foreign investors are called LLCs in Russia. An LLC is not allowed to have more than 50

members to have rights and obligations, which may either be established by a charter of the company or granted by a

decision of the shareholders’ meeting. An LLC does not issue shares. Instead, the charter capital is divided into

contributions, which are not considered securities. As a result, the LLCs need not be registered with the Federal Service for

Financial Markets. The liability of participants is generally limited to the amount of their original contributions.

Tax regulations

Corporate profit in Russia is charged at a tax rate of 20%. The tax on company profits is made up of two rates: federal tax,

at a rate of 2.5%; and a regional tax of 17.5% (with a possible incentive reduction of up to 4%). This is significantly lower

Legal landscape



than that in most other neighboring countries. However, social tax, levies and other taxes, along with the administrative

procedures (such as registration requirements and tax audits), increase the pressure on companies in Russia.

Taxable income in Russia is either sales income or non-sales income. Sales income is commonly the income from a

corporation’s main business activities, while non-sales income is income from all other sources like dividends, interest,

royalties, rents, foreign exchange gains, compensation for losses and certain contributions and reserves.

Individual income tax

In Russia, individual income tax is charged according to the residential status of a person. Individuals who spend a

minimum of 183 days in Russia in the calendar year, regardless of their citizenship, are deemed to be liable for taxation.

Tax residents are taxed on most types of their worldwide income. Non-residents for tax purposes are individuals who spend

less than 183 days in Russia in the calendar year. Non-residents are taxed only on Russian-source income. Tax residents

are taxed at a flat rate of 13% on worldwide income, which is one of the lowest individual tax rates in the world. However,

different tax rates apply to certain types of income received by Russian tax residents (9% for dividends, 35% on imputed

interest on beneficial loans, etc). Non-residents are taxed at a flat rate of 30% on income sourced from Russia.

Withholding tax

Russian-source income of a foreign enterprise may be subjected to withholding tax at source. Withholding is possible up to

20% on interest on government securities, 10% on income from international freight, 15% on dividends, 20% on royalties

and income from leasing activities.

Other local taxes

Besides these national taxes, there are a few other local taxes that are imposed on businesses. Examples of such local

taxes include unified social tax (UST), property tax, mineral extraction tax, and transport tax.

Labor law

In Russia, the Russian labor code is the main legislation governing workplace issues. A wide-ranging new code was

approved in 2001 and was implemented in January 2002. Russian labor laws apply to all enterprises and all employees,

regardless of their origin. Employers who fall short of compliance with the labor code are subjected to civil, administrative,

disciplinary and even criminal liabilities. An important feature of the Russian labor law is its prescribed nature, and it is

important for employers to have all necessary documents in order.

The standard working week is of 40 hours. For children younger than 16 years, the maximum working week is 24 hours; for

teenagers aged 16–18 years and for workers engaged in dangerous work, 36 hours per week. Students and schoolchildren

younger than 18 years are not permitted to work more than 18 hours a week during the school or university year. Overtime

cannot exceed more than 120 hours per year. The first two hours of overtime must be paid at a rate at least one and one-

half times the normal rate; additional overtime hours must be paid at least double the normal rate.

Termination of employment is stringently governed by law. Extensive documentation is required to dismiss an employee.

Some of the reasons for a possible termination include liquidation of the employer; employee health problems; absenteeism

Legal landscape



and stealing, and embezzlement or willful destruction of property. An employee may appeal against a dismissal in court

within one month of receiving the dismissal notice.

Social security charges

In Russia, the social security charges are provided in the form of insurance and medical reimbursements (termed as sick

pay). The employees are entitled to sick pay if they provide the employers with a medical certificate. If the employee has

been sick for more than a month, he has to provide a certificate from the commission of clinical experts. Furthermore,

employees can receive sick pay for more than 10 months, after which they are eligible to avail disability benefits from the

social security fund. Disability benefits, unemployment benefits and the state pension are paid out of social insurance and

pension funds, which are in turn refunded via the UST, a payroll tax levied on all employers.

VAT and customs duty

In Russia, VAT is payable by all corporate businesses, including representative offices and branch offices of foreign

companies. The transactions subject to VAT are sales of goods, work and services carried out in Russia, construction and

installation work for an enterprise’s own use, and imports. The different rates of VAT include 18% on domestic sales, 10%

on certain food stuffs, children’s goods, and scarce medicines. In general, VAT must be paid to the tax authorities on a

monthly basis, and penalties are imposed for late filing or payment.

Furthermore, import duties are charged on the basis of the type of goods imported and their origin. Duties as a rule are

expressed as a percentage of the value of the goods imported. Currently there are rates applicable from 5% to 25%. Export

duties are levied on goods and raw materials such as crude oil and natural gas. The rates are ordinarily established in US

dollars per unit or as percentage of value.

Performance

Effectiveness of the legal system

Russia is in the midst of economic and legislative reforms. In 1990, the government brought a statutory framework

introducing modern standards of legislation. The legal structure developed at a rapid pace during the 1990s, with

noteworthy reforms being attempted in almost every sphere of law. The process of consolidating and rationalizing the legal

framework of Russia's market economy remains ongoing, with major changes anticipated in a number of key areas.

Russia's judicial system is administered by the Ministry of Justice. It performs responsibilities like managing the court

system, supervising court activity and monitoring various prisons. The General Prosecutor's Office (Procuratura), which has

several branches in cities and provinces, carries out functions related to law enforcement. This office is headed by the

Ministry of Internal Affairs and Federal Security Service. The General Prosecutor's Office supervises the law enforcement

agencies, investigates crime and prosecutes offenders. The Ministry of Internal Affairs also manages all police agencies.

The Federal Security Service is responsible for counterintelligence and also investigates organized crime and terrorism.

Legal indicators

Russia has been ranked in the 143rd position in the Wall Street Journal’s Index of Economic Freedom 2010 and it ranks

120th in the doing business indicators of the World Bank for 2010. Russia’s index score of 50.3 is less than the world

Legal landscape



average of 60.3, indicating a restrictive environment for business. Russia ranks highly only in fiscal freedom, but does not

score as highly in terms of property rights, freedom from corruption, freedom from government intervention and investment

freedom. In ‘Doing Business 2010’, Russia was ranked in the 106th position in the Starting a Business index, down 18

places from the 2009 rank of 88. In the Employing Workers index, the country was ranked in the 109th place and in

Protecting Investors, down by five places to 93. In Dealing with Construction Permits, the country was ranked 182nd and the

country was 45th in Registering Property, compared to its 44th rank in 2007. According to Doing Business 2010, nine

different stages are needed to start a business in Russia. Moreover, it takes 30 days and 2.7% of per capita gross national

income to start a business in the country. In contrast, the OECD average is 5.7 stages, 13 days, and 44.7% of per capita

GNI.

Russia’s performance with respect to corruption has also worsened. According to Transparency International (TI), Russia

has scored 2.2out of 10 in terms of corruption perception index (CPI) in 2009, down from 2.3 in 2007, which is the lowest

standing in the last eight years. Out of the 180 countries surveyed in the 2009 in terms of the CPI, Russia was in 146th

place (down from 143rd place in 2007).

Outlook

The legal regulations in Russia have been changing ever since the end of the Soviet rule. Although the country has

assigned laws and law governing bodies, they have been ineffective in enforcing law in the country. The main problems

affecting the Russian judiciary and legal bodies are lack of funds, lack of staff, and non-implementation of reforms. The

current government is determined to reduce the red tape that fuelled widespread corruption. The federal law on the

prevention of corruption was adopted in 2008 and the federal laws outlining the procedures for conducting anti-corruption

tests were passed in 2009. In May and September 2009, the Russian president issued decrees outlining the procedures for

releasing, checking and publishing information on the property situation of public officials and their family members. Despite

the new rules, the country has not been successful in decreasing the corruptive practices in the country during 2009. It was

reported by the Russian Prosecutor’s office, that the number of corruption cases opened in 2009 was 4,821 which is 43%

more than in 2008. Also, over 263,000 breaches of the law on corruption were identified and 36,000 people were brought to

civil liability which was again over 58% more than in 2008.

As part of legal reforms, President Dmitri Medvedev drafted, in April 2010, a national anti-corruption strategy to minimize

corruption. Among the proposed measures to combat corruption is the harmonization of Russia's financial reporting

standards with that of Europe and the US. Furthermore anti-corruption steps also include an obligation of the Russian

presidential administration officials to publish their income and property statements in the near future. Increased public

attention will be given to information about income and property that are now being submitted by all public servants and

officials. In 2010, income and property statements will also be submitted by the administration officials and are due to be

published by the end of the year. Increased tightening on the legal front is expected to bring in greater transparency in

governance and reduce corruption in the country.




ENVIRONMENTAL LANDSCAPE

Summary

Russia has been suffering from the problems of environmental pollution for quite some time. In the 1990s, Russia suffered

from a deep socioeconomic crisis that lead to a decrease in industrial output by 50% with no sign of any upsurge, even in

1996. Contrary to the expectations and forecasts of many scientists and economists, however, the drastic drop in

production has not been accompanied by corresponding reductions in pollution and contamination, and the environmental

situation in the country has not showed any signs of improvement. Russia has also become the third largest emitter of

carbon dioxide in the world, following China and the US. Although the government is taking many measures in terms of

environmental protection, Russia’s nuclear reactors and nuclear wastes pose major threat to the surrounding regions.

Evolution

The Soviet and Russian environmental conservation history has been by and large gloomy. Seven decades of Soviet rule

left decreased landscapes and marine ecological units, a scorched inland sea, contaminated rivers, and toxic urban air as

reminders of the hunt for industrialization at any cost. Furthermore, Russia and the other Soviet republics reacted to the

consequences of the Cold War by raising a defense-oriented, production-fixated economy in the middle of environmental

destruction. As a result of large military production there were many disasters in Russia leading not only to environmental

damage but also to an increased human death toll due to accidents during production. One such accident was the

Chernobyl disaster, which is considered to be the largest nuclear accident ever. This brought in substantial changes in the

public's outlook towards environmental conservation in Russia. After the disaster, the public were occupied in exceptional

discussions on the dangers that the country’s environmental policies posed to public health, citing polluted water supplies,

violation of public health regulations, and air pollution. Russians were also unaware of fundamental issues such as loss of

biodiversity, deforestation, and acid rains. In 1989, a national poll positioned environmental pollution fifth among citizens'

key concerns, but only one-third of respondents articulated their willingness to forfeit economic advantages to improve the

environmental situation. Nevertheless, a sizeable green interest group arose in the late 1980s. However, due to the

deteriorating economic situation and uncertainty in markets, issues related to environmental conservation were

compromised, particularly in instances where the closing of a polluting plant threatened the livelihood of a town or city. In

1993, Russia's total investment in environmental preservation was about $2.3 billion, less than 4% of the national budget

group entitled "industrial construction," in which environmental expenditures were included. In 1995, the State Duma

approved a law requiring environmental impact assessments for a wide range of construction and development projects,

large-scale industrial development, large usage of natural resources, manufacturing of new technology and materials, and

alterations of existing commercial facilities.


Environmental regulations

Overview

The Ministry of Natural Resources of the Russian Federation is the regulatory authority for performing the role connected to

state policy formulation, revitalization, and management of natural resources. The ministry also is responsible for

administration of the subsoil stock and forestry; the use and preservation of water resources; the use, conservation, and




fortification of the stock of wooded forests; and reproduction. Furthermore, the operation and safety of multipurpose

reservoirs and water-resources systems, protection of other hydraulic structures; the use of wildlife resources and their

habitat are all maintained and procedurally streamlined by the ministry.

Policy

Environmental regulations have been taken seriously only since 1991 in Russia. Since then, several laws were passed

such as the Law on Environmental Protection (1991), the Law on Environmental Impact Assessment (1995), the Law on

Conventional Shelf of the Russian Federation, the Law on use of Atomic Energy and the Law on Protection and Use of

Fauna. Furthermore, the country also ratified many international conventions during this period. The government policy on

environment focuses on the following areas:

• Strengthening the legal and regulatory framework.

• Fostering international co-operation and integration in environmental conservation.

• Building an effective compliance and enforcement system.

• Encouraging public participation in environmental activities.

• Directing investment towards environmental management and control.

• Incorporating advanced technologies to set standards for pollution control.

• Strengthening environmental monitoring systems.

Environmental actions

Climate change and energy efficiency

The Russian government, along with various European organizations, is making efforts to implement policies protecting the

country from the ill-effects of climate change. As part of this initiative the Russian Regional Environmental Centre (RREC)

has taken up a project to implement an awareness program among the public and policy makers on climate change and the

Kyoto protocol. An information exchange network would be crafted under the project to assist collaboration on

implementation of the Kyoto mechanisms, and expansion and implementation of the climate policies. Furthermore, the

government, along with private partnerships, is also implementing other initiatives like the promotion of energy efficiency

and GHG emission reduction in glass manufacturing sector, energy security programs, and building institutional capacity to

develop and implement climate change policies.

Environmental protection and health

The government has implemented several policies in the country to encourage environmental protection and health. The

Department for Environment, Food and Rural Affairs (DEFRA) along with the Department for International Development

(DFID) of the UK, has implemented projects such as municipal water and wastewater management project (MWWP). This

is a five year program (2006–11) aiming at improving managerial and operational standards at water and wastewater

utilities plants. The main objective of this project is to improve water and wastewater services in 14 cities with a population




of about 300,000 to 1,100,000. Furthermore, during 2002–05, the government had already completed projects related to

establishing corporate priorities in the field of environmental protection and health, conservation and development of the

surface water resources in several regions of Russia, and several other projects on air contamination and sustainability of

lakes spread across Russia.

Biodiversity

As one of the largest countries in the world, Russia boasts rich natural resources, flora, fauna and ecosystems. The country

has also rich traditions in the field of biodiversity conversation. A system of protected areas has been functioning for about

100 years, and there have been some noteworthy achievements in the ecological efficiency of agriculture in the country.

Russian basic sciences (forestry, agrarian, hunting, fishery) have created conditions for sustainable use of biodiversity, its

identification, evaluation and monitoring of its status. The World Conservation Union division of Russia is currently running

two projects under the biodiversity protection. Forest governance and reduction of illegal logging is one of the projects

aimed at improving legislation and interagency relations in Russia. The objective of the project is to provide support toward

correcting defects in the legal framework related to forests and markets. Furthermore, it aims to regulate the poor co-

ordination of state and public control over the consumption of forest products. This disagreement between state and public

in this regard is a current problem for the government.

Participation in global efforts/agreements/pacts

European Neighborhood Policy (ENP)

Under the EU-Russia strategic partnership, the environment is also an important component among several other issues.

There are also other countries of former soviet rule that are part of the ENP. They include Belarus, Ukraine, Moldova, and

Armenia. The countries are important partners in global, European regional and sub-regional environmental issues, such as

climate change, sustainable development, and other pollution issues in Baltic and Arctic regions. Furthermore, the EU and

Russia also have a special agreement on the Northern Dimension which tackles the explicit challenges and opportunities

arising in North-west Russia, the Baltic Sea and the Arctic Sea region. The Northern Dimension Environmental Partnership

(NDEP) is a partnership of the European Commission, several EU Member States, Russia, Norway and international

funding institutions (EBRD, EIB, NIB, World Bank) to catalyze and leverage environmental investments with a focus on

North-west Russia. This agreement aims to reinforce the exchange of ideas between the EU and its member states and the

northern countries including Russia, Norway and Iceland. The policy framework for the NDEP 2007 was approved in the

EU-Russia Summit in 2006. The European Commission has contributed more than $47m towards non-nuclear projects

under the NDEP Support Fund. NDPE grants have leveraged over $992m IFI loans and $1.9 billion investments.

Copenhagen conference on climate change

The United Nations Framework Convention on Climate Change (UNFCCC) sets an overall framework for intergovernmental

efforts to tackle the challenge posed by climate change. It recognizes that the climate system is a shared resource whose

stability can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases. The convention

has a universal membership, with 192 countries having ratified the convention. Russia only pledged to make a 10% to 15%

reduction below 1990 levels by 2020 as part of a commitment to the Kyoto Protocol, but said that it would reduce emissions

by 20% to 25% as part of an agreement on long-term cooperative action. No deal could be clinched in Copenhagen,

however, talks on a binding international climate change pact continue in 2010.




Table 11: International environmental treaties signed and ratified by Russia

International treaty Year of ratification

Vienna Convention for the protection of the Ozone Layer, 1988 1988

Montreal Protocol on Substances that deplete the Ozone Layer 1988

Framework Convention on Climate Change 1995

Convention on Biological Diversity 1995

UN Law of the Sea 1997

UN Convention to Combat Desertification in Countries which Experience Serious Drought and/or Desertification, Particularly in Africa 2003

Kyoto Protocol to the Framework Convention on Climate Change (year of ratification/signature) 2004

Cartagena Protocol on Biosafety -


Performance

Environmental impact

Environmental pollution has had a substantial negative impact on Russia's economy. It is leading to health-related

budgetary pressure, decreased labor productivity, reduced tourism and investment, and also decreased yield of natural

resources. Russia has been largely affected because of the Soviet-era industrial, energy, and agricultural policies. These

policies disregarded environmental protection and as a result many sectors of Russia are deemed environmentally

dangerous. Most of the industrial centers have poor air and water quality. The Caspian and Black seas, the Sea of Azov,

the Volga River, and Lake Baikal are areas significantly affected by pollution in Russia. Air pollution is largely caused by

industrial clusters in the Kola Peninsula, central Siberia, and the Urals. Furthermore, swiftly increasing vehicles using

unleaded gas aggravate air pollution. Soil erosion is increasing in Russia due to harmful agricultural activities, overgrazing

and unrestricted harvesting. This is also resulting in the reduction of forest cover. On the other hand, increased disposal of

unsafe radioactive materials is polluting coastal water, rivers, and terrestrial areas in Russia. Russia’s operational nuclear

reactors are considered highly unsafe and some reactors are not scheduled for shutdown until after 2010.In 2009, Russia's

carbon dioxide emissions rose by 1.9%. However, it is expected that the country will reduce its CO2 emission rate to

around 0.9% by 2013.




Figure 23: Carbon dioxide emissions in Russia, 2002–13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1,400

1,450

1,500

1,550

1,600

1,650

1,700

1,750

1,800

1,850

1,900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Pe

rce

nta

ge

(%)

Millio

n m

etr

ic to

ns

Year

Volume Growth rate


Outlook

The Russian government is currently initiating various environmental agreements around the world to step up the

environmental conservation efforts in the country and also contribute to the global efforts on various environmental issues.

The Russian President, Dmitri Medvedev, has elevated the environment to one of the prime issues in government policy

making. In July 2009, the Russian government announced that it would join the International Convention on Oil Pollution

Preparedness, Response and Co-operation (OPRC Convention). This was followed by government’s decision in February

2010 to introduce a program to combat pollution in Baltic Sea. Furthermore, the country also joined hands with the Iranian

government to conduct research on the Caspian Sea. Caspian Sea being the world’s largest lake is one of the most

polluted lakes in the world and both the governments are hoping to initiate measures to curb further deterioration.

The Ministry of Natural Resources in Russia has completed an environmental code for the country. This environmental

code is packaged with different measures implementing environmental protection at various levels. The code will promote

the reduction of harmful impact on environment and upgrading production techniques on the basis of best available

technologies. The project also contains a proposal to combine all nature preservation functions in a single federal body.

Furthermore, the government is also developing a “climate doctrine” aiming to introduce energy-saving technologies and to

improve the energy efficiency of the entire economy. With many environmental programs arranged for the future, Russia is

expecting to maintain its environmental targets going forward.

APPENDIX



APPENDIX

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