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1998-99The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 0960-627X

Comparative economic indicators, 1997

0 10 20 30 40 50

RussiaPoland

Czech RepublicUkraine

HungaryRomania

KazakhstanSlovakiaCroatia

SloveniaYugoslaviaUzbekistan

BelarusBulgaria

LithuaniaLatvia

EstoniaMacedonia

GeorgiaAzerbaijan

TurkmenistanAlbania

MoldovaKyrgyz Republic

ArmeniaTajikistan

Gross domestic product$ bn

Sources: EIU estimates; national sources.

462462462462462462462462462462462137137137137

0 1,000 2,000 3,000 4,000 5,000

SloveniaCzech Republic

HungaryCroatia

SlovakiaPolandRussia

EstoniaLithuania

MacedoniaLatvia

RomaniaYugoslavia

KazakhstanBelarus

BulgariaUkraineGeorgiaAlbania

UzbekistanTurkmenistan

MoldovaAzerbaijan

ArmeniaKyrgyz Republic

Tajikistan

Gross domestic product per head$


9,0539,0539,0539,0539,0539,0539,0539,0539,0539,0539,053

0 20 40 60 80 100

BulgariaRomaniaTajikistan

TurkmenistanBelarus

UzbekistanAlbania

Kyrgyz RepublicYugoslavia

HungaryKazakhstan

PolandUkraine

RussiaArmeniaMoldova

EstoniaSlovenia

LithuaniaLatvia

Czech RepublicGeorgiaSlovakiaCroatia

AzerbaijanMacedonia

Consumer prices% change, year on year


1,0831,0831,0831,0831,0831,0831,0831,0831,0831,0831,083155155155

1,083155

1,0831,083155

-20 -15 -10 -5 0 5 10 15

GeorgiaBelarusEstonia

YugoslaviaKyrgyz Republic

PolandSlovakiaCroatia

UzbekistanAzerbaijan

HungaryLatvia

LithuaniaSloveniaArmenia

KazakhstanTajikistan

MacedoniaMoldova

Czech RepublicRussia

UkraineRomaniaBulgariaAlbania

Turkmenistan

Gross domestic product% change, year on year


EIU Country Profile 1998-99 © The Economist Intelligence Unit Limited 1998

March 25th 1998 Contents

5 Basic data

4 Political background4 Historical background6 Constitution and institutions7 Political forces

10 International relations and defence

12 The economy12 Economic structure13 Economic policy17 Economic performance19 Regional trends

22 Resources22 Population22 Education23 Health

23 Economic infrastructure23 Transport and communications25 Energy provision27 Financial services30 Other services

30 Production30 Industry31 Mining32 Agriculture, forestry and fishing34 Construction

34 The external sector34 Merchandise trade36 Invisibles and the current account37 Capital flows and foreign debt39 Foreign reserves and the exchange rate

40 Appendices40 Sources of information41 Reference tables41 Federal and consolidated budgets41 Money supply42 Gross domestic product42 Gross domestic product by expenditure42 Prices and earnings42 Population43 Employment by sector

1

© The Economist Intelligence Unit Limited 1998 EIU Country Profile 1998-99

43 Unemployment43 Transport statistics44 National energy statistics44 Banking statistics44 Industrial production45 Agricultural production45 Livestock numbers45 Housing completions46 Key exports46 Key imports47 Main trading partners, 199648 Main trading partners of the former Soviet Union48 Balance of payments49 External debt49 Foreign reserves50 Exchange rates

2


Russia

Basic data

Total area 17,075,400 sq km

Population 147.5m (mid-1997 estimate)

Main towns Population (’000, January 1996)

Moscow (capital) 8,664St Petersburg 4,801Nizhny Novgorod 1,376Novosibirsk 1,368Yekaterinburg 1,278

Weather in Moscow(altitude 156 metres)

Hottest month, July, 13-23°C (average daily minimum and maximum); coldestmonth, January, -16 to -9°C; driest month, March, 36 mm average rainfall;wettest month, July, 88 mm average rainfall

Languages Russian and local languages

Weights and measures Metric system since 1927 (Western calendar since 1917)

Currency 1 rouble (Rb)=100 kopeks. Market exchange rate on March 6th 1998:Rb6.079:$1. The rouble was redenominated on January 1st 1998 at one newrouble=1,000 old roubles

Time 3 hours ahead of GMT in Moscow and St Petersburg; 10 hours ahead of GMT inVladivostok

Fiscal year Calendar year

Public holidays January 1st, 2nd, 7th and 8th; March 8th; May 1st, 2nd and 9th; June 12th;November 7th; December 12th

Russia: Basic data 3


Political background

A cabinet reshuffle in March 1997 strengthened the hand of ministers commit-ted to structural change and economic stabilisation, marking the return to fullauthority of the president, Boris Yeltsin, after prolonged illness following hisre-election in June 1996. The new government also confirmed its relative inde-pendence from the Communist/Nationalist-dominated parliament. However,Mr Yeltsin dismissed the government in March 1998, citing its inability to clearstate wage arrears and excessive alignment to private financial interests. Thedesire to sideline a powerful potential rival, the former prime minister ViktorChernomyrdin, also seemed to be one of the president’s motives, and theinexperience of his chosen replacement, Sergei Kiriyenko, led to a protractedstand-off with the Communist-dominated parliament. A technocratically ledgovernment is expected to emerge, but more conservative industrial interestswill also be represented, and the president will continue to dominate policy-making as long as his health permits.

Historical background

A top-down Westernisingtradition

The relative backwardness of the vast Russian state which had developed in thecenturies following the end of Tatar domination became evident only in the late17th and early 18th centuries. Tsar Peter I, recognising that his realm was fallingbehind its Western neighbours in technical development, military capabilitiesand social organisation, embarked on its “Westernisation” by autocratic andoften barbaric means. His approach to modernisation—the imposition fromabove of radical and often disruptive change—set a pattern which Russian rulershave followed at intervals for three centuries. In the aftermath of the Crimeanwar, which exposed military and economic weaknesses ignored after successfulcampaigns against Napoleon in 1812-14, Tsar Alexander II inaugurated a rangeof domestic reforms intended to put right the weaknesses that it had exposed.The most significant was the abolition of serfdom in 1861, but the regime alsoundertook reforms of finance, education, the legal system, the military and localgovernment. However, Alexander’s early reform had lost momentum by the endof the 1860s, and his assassination in March 1881 ushered in a period of politicalreaction. The refusal of the last Romanov Tsars to complement economic devel-opment initiatives with political liberalisation or decentralisation created socialtensions which hastened the old regime’s collapse in 1917.

The Soviet Unionrecreated the Tsarist

empire—

Eight months of confusion and instability following the overthrow of theRomanovs in March 1917 culminated in the seizure of power in the capital,Petrograd, by the Bolsheviks, a radical communist splinter of the Russian SocialDemocratic Labour Party. Over the next five years the Bolsheviks consolidatedtheir claim to rule all of Russia, losing Finland, Poland and the Baltic provincesbut reassembling the rest of the former empire. Russia assumed federal form in1922 as the Union of Soviet Socialist Republics (the USSR or Soviet Union),although in reality power was highly centralised in Moscow.

4 Russia: Historical background


—and underwent rapidindustrialisation—

Under Joseph Stalin, the Georgian-born dictator who succeeded VladimirLenin as leader of the Communist Party in 1924, the country’s immense natu-ral and human resources were harnessed to a sustained industrialisation driveunder the highly centralised institutions of the planned economy. Agriculturewas forcibly collectivised. The human costs of Stalinist industrialisation wereenormous. Its achievements included a rapid expansion of basic industrialoutput, the defeat of Nazi Germany and the emergence of the Soviet Union asthe world’s second “superpower”.

—but failed to sustain analternative development

model

The Soviet system failed to keep pace with Western rivals in either livingstandards or geopolitical strength. Central planning, despite numerous at-tempts to decentralise decision-making and introduce limited price signals,discouraged innovation and productivity growth while encouraging publiccorruption and private informal-marketeering. Economic and political decaytook hold in the 1970s, exacerbating social and nationalist tensions which ledto the Soviet Union’s disintegration in late 1991. Russia emerged as one of the15 newly independent former Soviet republics, and Boris Yeltsin became itsfirst elected president in June 1991.

Important recent events

March 1985: Mikhail Gorbachev becomes Communist Party leader and initiates aprogramme of reforms, eventually to usher in the disintegration of the Soviet Union.August 1991: A failed coup attempt by Communist hardliners in Moscow speeds upthe Union’s collapse. Russia and other Soviet republics become independent states.January 1992: The government launches radical market-oriented reforms and astabilisation programme.December 1992: Viktor Chernomyrdin is appointed prime minister.April 1993: President Boris Yeltsin wins a referendum in support of reform.December 1993: In Russia’s first fully free parliamentary elections the Nationalistsand Communists perform much better than expected, to produce a highlyfragmented State Duma. A new constitution is approved by nationwide referendum.December 1994: The government launches a military campaign to subdueseparatists in the ethnic republic of Chechnya.December 1995: Parliamentary elections give the Communists and their allies alarge plurality in the State Duma.June-July 1996: Mr Yeltsin is re-elected president in two rounds of voting.October 1996: Aleksandr Lebed, a rival to Mr Yeltsin, is sacked as Security Councilchief after negotiating a ceasefire in Chechnya.November 1996: Mr Yeltsin undergoes major heart surgery. March 1997: Mr Yeltsin’s government reshuffle puts prominent liberals, AnatolyChubais and Boris Nemtsov, into key positions as first deputy prime ministers.November 1997: The rouble comes under intense pressure, with Mr Chubais underattack for alleged corruption and several Asian currencies collapsing. It holds, andMr Chubais remains in government, but his authority is damaged. Mikhail Zadornovreplaces him as finance minister.March 1998: Mr Yeltsin dismisses the government and appoints Sergei Kiriyenko, areforming industrialist and aide to Mr Nemtsov, as prime minister. Some seniorfigures are assured of reappointment, but Mr Chubais leaves the cabinet. Althoughsidelined, Mr Chernomyrdin announces that he will run for president in 2000.

Russia: Historical background 5


President Yeltsin wins thepolitical initiative—

Mr Yeltsin’s role in the break-up of the Soviet Union, and his economic reformplans, provoked opposition from the Communist old guard in the Congress ofPeople’s Deputies (CPD), which enjoyed supreme law-making power under theold constitution. To resolve the issue Mr Yeltsin announced direct presidentialrule, and the dissolution of the CPD (and its executive arm, the Supreme Soviet) onSeptember 21st 1993. Opposition supporters staged their last stand on October 3rd,which Mr Yeltsin forcibly suppressed. This was followed by adoption of a newconstitution and the election of a new parliament in December 1993.

—but an uncertainsuccession clouds hisreform achievements

The new constitution enshrined strong presidential powers, with the new parlia-ment acting as little more than a safety-valve. This was fortunate for Mr Yeltsinand his reformist ministers, since the December 1995 parliamentary electionsproduced an opposition-dominated State Duma, in which the Communists andtheir allies command a near-majority. Six months later, however, Mr Yeltsinwon re-election in a second-round run-off against the Communist leader,Gennady Zyuganov, helped by money and media support from the country’semerging business elite. Since then he has been a more consistent sponsor ofeconomic reform, but temperament and health have inclined him towardsspells of inactivity, interspersed by flurries of intense policymaking involve-ment. Mr Yeltsin’s success in structuring the regime around his person, runningalmost a parallel administration to the government, raises the risk of instabilityand policy paralysis when he leaves office, especially if this were to happenbefore the next scheduled election.

Constitution and institutions

A strong executive The president wields sweeping executive powers under the 1993 constitution,heading the armed forces and Security Council and having wide powers ofappointment. Apart from the positions of prime minister, Central Bank gover-nor and Constitutional Court chair, few senior presidential appointmentsrequire parliamentary confirmation. The president may dissolve the StateDuma (lower parliamentary house) if it repeatedly rejects his choice of primeminister, or passes two no-confidence motions in the government within threemonths. The president may also issue decrees without Duma support.

The president serves a four-year term and is limited to two consecutive terms.Mr Yeltsin, re-elected in July 1996, is therefore, in principle, barred from run-ning in the next election in June 2000. The Constitutional Court is preparingto rule on this, since his initial election under the Soviet-era constitution maymake it legally possible for him to run again; his physical constitution appearsto count against it.

A weak legislature Parliament’s lower house, the 450-member State Duma, can only really chal-lenge the president when able to muster a two-thirds majority. The fractiouschamber has rarely been able to achieve this. The powers of the upper house,the 178-member Federation Council, are also fairly weak, although the exofficio presence of elected regional governors and heads of regional assembliesassures it of political influence. The Federation Council has frequently backed

6 Russia: Constitution and institutions


the executive against the lower house, limiting Mr Yeltsin’s reliance on hispresidential veto.

Despite their power to act independently, the president and government havetended to proceed with the consent of parliament where possible, for legiti-macy and to spread the blame for unpopular measures. Nevertheless, the bar-gaining in such situations is conditioned by both sides’ awareness that theexecutive can act on its own if parliamentary deputies prove unco-operative.

The judiciary The independence of the judiciary was severely compromised under com-munism, and its authority is still comparatively weak. At its apex is theConstitutional Court, comprising 19 judges, whose functions include passingjudgment on cases regarding compliance with federal laws, the constitution,statutes and state treaties. It settles disputes over the respective competence ofdifferent state bodies. The Supreme Court is the highest authority on civil,criminal and administrative law. Most business disputes are heard before arbi-tration courts headed by a Supreme Arbitration Court. Judges of these courts,and the prosecutor-general (who appoints other prosecutors), are also nomi-nated by the president, subject to the approval of the Federation Council.

The most importantministries

The Ministry of Finance has emerged in recent years as the power base ofeconomic reformers and the driving force behind Russia’s stabilisation pro-gramme. However, it has strong political counterweights in the three “powerministries”—interior, defence and the Federal Security Service. The Ministry ofForeign Affairs, powerful during the Soviet period, has lost ground as Russia’smilitary strength and global influence diminish. It frequently clashes with theMinistry of Fuel and Energy, which oversees the country’s most importantexport sector.

Assertive regions Power struggles in Moscow and the weakening of central institutions havefacilitated a significant devolution of power to Russia’s provinces, republicsand territories. Regional authorities are key swing players in federal-levelstruggles, a position they frequently use to extract concessions from the centre.Many regions have negotiated special bilateral agreements on fiscal relationsand other key issues with the centre.

Political forces

Parties tend to be weakand poorly

institutionalised

As in most other former communist countries, the party political scene inRussia is highly volatile and fragmented. Some 250 parties registered for the1995 parliamentary elections, and 43 were included on the ballot. Of these,only four crossed the 5% threshold for obtaining seats in the party-list voting,in which their combined total vote was just 50.5%. Most parties are very small,often organised around one prominent personality. Only the Communists canboast a substantial nationwide organisation.

Russia: Political forces 7


Main political figures

Boris Yeltsin: President of the Russian Federation since June1991, ousting former ally, Mikhail Gorbachev. Re-electedpresident in July 1996, bringing prominent reformers into hisadministration.

Viktor Chernomyrdin: Former chairman of the gasmonopoly, Gazprom, and minister of fuel and energy. Primeminister from December 1992, when he succeeded theeconomic liberaliser, Yegor Gaidar, until March 1998, whenMr Yeltsin dismissed the entire government. Although acandidate for the presidency in 2000, Mr Chernomyrdin’sprospects have been weakened by his loss of thepremiership. His rumoured personal wealth, acquired frompast business associations, may also reduce his chances ofelection.

Sergei Kiriyenko: A banker and oil company executivewhose association in Nizhny Novgorod with the region’sthen governor, Boris Nemtsov, helped him enter thegovernment in May 1997 as an energy minister.Unexpectedly appointed prime minister followingMr Chernomyrdin’s dismissal in March 1998. Youth, politicalinexperience and the suspicion that Mr Yeltsin is the powerbehind his throne weigh against his longevity in the post,but any early success in breaking the deadlock over stalledtax and land reform measures, or reducing wage arrears,could reinforce his hold on it.

Aleksandr Lebed: Former commander of Russia’s 14thArmy, brought to prominence by controversialanti-secessionist action in Moldova. Allied with Mr Yeltsinafter the first-round presidential vote in June 1996, which ledto a brief stint as secretary of the Security Council. Without astrong party base from which to pursue his presidentialambitions, Mr Lebed declared his candidacy for thegovernorship of Krasnoyarsk Territory in February 1998.

Anatoly Chubais: Architect of Russia’s privatisationprogramme as head of the Committee for the Privatisation ofState Property in 1992-94, and the only member of YegorGaidar’s original pro-reform government to stay in senioroffice. First deputy prime minister for the economy andfinance from October 1994 until forced to resign in January1996, but bounced back as chief of the presidentialadministration after masterminding Mr Yeltsin’s re-electioncampaign. Became first deputy prime minister and finance

minister in March 1997, but lost the finance post after afinancial scandal in November.

Mikhail Zadornov: Widely respected economist andformer chairman of the Duma’s budget committee,appointed finance minister in November 1997.

Sergei Dubinin: Central Bank governor since November1995, successfully asserting the bank’s independence, andpresiding over a sharp reduction in inflation as well asRussia’s return to international markets following its debtrescheduling. A respected reformer, and possible candidatefor prime minister if Mr Chernomyrdin becomes president.

Grigory Yavlinsky: Economist, former deputy primeminister and Gorbachev adviser who leads the pragmaticpro-reform Yabloko faction in the Duma. Performeddisappointingly in the 1996 presidential election, but still incontention for a senior post when the government isreshaped in April 1998. Increased big business support couldallow him to campaign more effectively in 2000.

Gennady Zyuganov: Heads the CPRF, which under hisleadership has veered from socialism towards nationalismand accepted democratisation. Relatively colourless figure,sidelined by Mr Yeltsin’s publicity machine in the 1996presidential contest, but with considerable political andorganisational skills and still rated Russia’s most popularpolitician in early 1998 opinion polls.

Yevgeny Primakov: Minister of foreign affairs. Anadvocate of a more assertive foreign policy, with specialinterest in the Middle East, he has skilfully balanced the needfor US goodwill (and economic assistance from US-backedagencies) against Moscow’s desire to maintain anindependent stance internationally, especially over the “nearabroad”.

Boris Nemtsov: Successful reformist governor of NizhnyNovgorod, called into the federal government as first deputyprime minister in l997. As a declared opponent of financial-industrial influence, he found political influence hard toestablish, losing the powerful natural-monopoly brief for themore thankless task of phasing out housing subsidies; but isexpected to return after being dismissed with the rest of thegovernment in April 1998.

8 Russia: Political forces


The Communist Party The Communist Party of the Russian Federation (CPRF), successor to theSoviet-era Communist Party, was launched in February 1993. With over500,000 members and 20,000 primary organisations, it is easily the largest andbest-organised party in Russia. However, the CPRF has become an ideologicallyincoherent coalition of social democrats, Stalinists and nationalists, with verydifferent views on accounting for the past and planning for the future. TheCommunists have done little to dissociate themselves from the old order orregroup around social democracy. Despite this, in 1995 the CPRF won 22% ofthe total vote in the party-list system (compared with 12.4% in 1993) andelected 157 deputies in total.

The Agrarian Party ofRussia

The Agrarian Party of Russia (APR) is a left-leaning ally of the CPRF. Its supportis drawn mainly from representatives of former Soviet-style collective farms. Inthe 1993 elections the party won 33 seats in the State Duma, but in 1995 thiswas reduced to 20.

The Liberal DemocraticParty

Ultra-nationalist Vladimir Zhirinovsky’s misleadingly named Liberal DemocraticParty of Russia (LDPR) stunned Russia and the world when it won the largest shareof the party-list vote in December 1993, with nearly 23% of the total. However,the party is very much a “one-man band” built around Mr Zhirinovsky. Only oneprovincial governor (in Pskov) and a handful of Duma deputies have beenelected under its colours in single-member districts. In the 1995 elections itsparty-list vote fell to under 12%, winning it just 51 seats, and its Duma factionoften supports the government on key issues.

Our Home is Russia Our Home is Russia (OHR) was established in April 1995 by the then primeminister, Viktor Chernomyrdin. Mr Yeltsin’s tacit support helped its initialdevelopment, but Mr Chernomyrdin’s dismissal was a serious blow to its effec-tiveness. The idea was to create a “centrist” political movement appealing togovernment officials, industrialists and banking representatives. OHR’s 10% ofthe parliamentary vote in 1995, although below aspirations, made it one ofonly four parties to pass the 5% threshold, winning a total of 55 seats in thenew Duma.

Yabloko A liberal party created in 1993 by Grigory Yavlinsky, the ambitious formereconomic adviser to the Soviet president, Mikhail Gorbachev. Although gener-ally reformist in outlook, Yabloko often criticises the government and is lesswilling to make compromises than the left opposition. Yabloko polled justunder 7% of the party-list vote in the 1995 parliamentary elections, winning 45Duma seats.

Business groupings Broad-based business organisations and trade unions have been slow to developand wield relatively little influence. However, a number of business empireshave emerged on a scale that enables them, individually or in ad hoc coalitions,to exercise significant influence at national level. These financial-industrialgroups (FIGs) are generally dominated by large banks, and/or energy companies,and have reinforced their political influence by acquiring media interests (seeEconomic infrastructure: Financial services). The most important include the

Russia: Political forces 9


LogoVAZ, Oneksim, Most and Menatep-Rosprom groupings, and the empiressurrounding the gas monopoly, Gazprom, and the oil company, Lukoil.

Parliamentary election results: party-list voting and single-member districts (SMD)

1993 1995 Party List voting (%) List seats SMD seats List voting (%) List seats SMD seats

Russia’s Choice 15.5 40 30 3.9 0 9

Liberal Democrats (LDPR) 22.9 59 5 11.2 50 1

Communist Party (CPRF) 12.4 32 16 22.3 99 58

Agrarian Party (APR) 8.0 21 12 3.8 0 20

Yabloko 7.9 20 3 6.9 31 14

Our Home is Russia (OHR) n/a n/a n/a 10.1 45 10

Women of Russia 8.1 21 2 4.6 0 3

Party of Russian Unity and Accord 6.8 18 1 0.4 0 1

Democratic Party of Russia 5.5 14 1 n/a 0 0

Others 16.2 0 8 34.0 0 31

Independents n/a 0 141 n/a 0 78

Postponed n/a n/a 6 n/a 0 n/a

Note. Figures for party-list voting may not tally to 100 owing to spoiled ballots and ballots cast “against all”.

Source: Electoral Commission.

Presidential election results, 1996

First round (Jun 16th) Second round (Jul 3rd)Candidate % of votes % of votes

Boris Yeltsin (Independent) 35.3 53.8

Gennady Zyuganov (CPRF) 32.0 40.3

Aleksandr Lebed (Independent) 14.5 –

Grigory Yavlinsky (Yabloko) 7.3 –

Vladimir Zhirinovsky (LDPR) 5.7 –

Others 2.2 –

Against all 1.5 4.8

Note. Figures may not tally to 100 owing to spoiled ballots.

Source: Electoral Commission.

International relations and defence

Balancing competitionand co-operation with

the West

After the collapse of the Soviet Union, Russia moved steadily away from itsinitial strongly pro-Western foreign policy towards one combining elements ofco-operation with the West (especially on economic issues) with a reassertionof Russia’s status as a great power with distinctive geopolitical interests. Therehave been recurring tensions over enlargement of NATO and Western policiestowards Iran, Iraq and Serbia. Nevertheless, Russia has avoided serious argu-ment with the US while seeking to diversify its links in Asia and Europe, andcourting traditional friends in the Middle East. Now that the first battle overNATO enlargement is resolved (with only Poland, Hungary and the CzechRepublic invited to join in the first instance), economics has become a strongerinfluence on Russia’s foreign policy. Trade and investment are high on the

10 Russia: International relations and defence


agenda in most of its bilateral relations, and the country is especially anxiousto secure the free-trade advantages offered by membership of the World TradeOrganisation (WTO).

Relations with the formerSoviet republics

Russia continues to take a special interest in the territories of former SovietUnion, but fears of renewed imperialist tendencies have not been realised. TheCommonwealth of Independent States (CIS) has achieved some technical andtrade reintegration among former Soviet republics (excluding the Baltic states),but failed in its early ambitions for defence and foreign policy co-operation anda general customs union. This reflects Russia’s reluctance to assume the costs ofintegration, and CIS partners’ concern to defend their newly won sovereignty.Relations with the Baltic states and Ukraine (the least integrationist CIS state)have at times been tense, although improvement is evident as the Russiangovernment comes to realise that its previously heavy-handed approach wascounterproductive.

Rapprochement underway with China and Japan

Russia and China have made heavy political and economical investments inimproving their bilateral ties. However, their relationship is largely intended toprovide additional leverage over the US, and its long-term outlook is uncertain.Economic ties have been disappointingly slow to develop, and many in Moscowacknowledge that past conflicts could be renewed as Russia recovers eco-nomically and China grows more powerful and assertive. Economically, Russiamay have at least as much to gain by improving its relations with Japan, whichhas recently signalled a willingness to explore commercial links independentlyof long-standing territorial disputes (centred on the Russian-held South Kurileislands).

Defence forces Although it remains the world’s second major nuclear power, Russia’s militarycapability has shrunk significantly since the Soviet era. Its active armed forcestotalled 1.24m in 1997, compared with 2.70m in June 1992. The continuedburden of defence expenditure makes further reductions inevitable, althoughmilitary reform plans are not entirely consistent with the need to cut costs. Thegovernment’s promise to replace conscription with a smaller, better-equippedand better-trained professional army will require additional funds, but defenceoutlays have recently been running at around 20% below budgeted levels asthe military falls a principal victim to budget cuts and wage payment delays.

Military forces, 1997(’000)

ActiveArmy 420Navy 220Air force 130Air defence forces 170Strategic nuclear forces 149

Total incl others 1,240

Paramilitary 583

Reserves 20,000Source: International Institute for Strategic Studies, The Military Balance, 1998/99.

Russia: International relations and defence 11


The economy

A murky statistical picture The transition from the centrally planned system to one based primarily onmarkets severely disrupted the economy, and the collection of data about it.The imperatives of plan fulfilment tended to ensure that Soviet-era statisticsexaggerated actual output. When enterprises began to switch from net subsidyrecipients to net taxpayers, their incentive switched to understating it. Thepost-Soviet production collapse, although a reality, was therefore milder thanappears in official statistics. Tax avoidance also means that much private-sectoractivity goes unrecorded. Goskomstat (the State Statistics Committee) esti-mates that 25% of production is “informal”, and adjusts GDP figures upwardson this basis; some independent calculations put informal production closer to40% of GDP. Partly as a result of efforts to improve them, statistical series arecreated, altered and discontinued frequently, and methodological changesoften go unexplained.

Economic structure

Main economic indicators, 1997

Real GDP growth (%) 0.4

Unemployment rate (year-end; %) 9.0

Consumer price inflation (year-end; %) 11.0

Consolidated budget deficita (% of GDP) 6.8

Current-account balanceb ($ bn) 3.0

Exchange rate (av; Rb:$) 5,785

a IMF definition. b January-September.

Sources: EIU; IMF.

Rich resources, poorlydeployed

Russia is richly endowed with natural and human resources which are a poten-tial source of great economic strength. However, Soviet central planningskewed economic development in favour of energy- and raw material-intensiveheavy industry and defence-related branches, neglecting consumer goods andagriculture. As well as a skewed allocation of resources between industrialbranches, central planning gave rise to inefficient resource use within mostindustries. Wasteful application of unpriced or underpriced inputs (particularlyenergy) meant that much production was not only insufficiently profitable atmarket prices, but also probably generated negative value added.

In 1996 fuels and energy accounted for 29.8% of industrial output, metallurgyfor 15.8%, and wood, paper and cellulose for 4.3%. Machine-building andmetalworking remained the largest processing industry, accounting for 16.9%of industrial production. Chemicals and petrochemicals generated 7.5% oftotal industrial output in 1996 and food-processing 11.7%. Light industry’sshare was just 1.9%, reflecting domestic producers’ increasing inability to com-pete with foreign consumer goods since the rouble began its real appreciationin 1992.

12 Russia: Economic structure


Agriculture accounted for 6.4% of GDP in 1996, down from 15.4% in 1990.Since this collapse led to rural labour becoming underemployed rather thanunemployed, agriculture still accounted for 14.4% of official employment.Industry accounted for 37.9% of GDP and 24.7% of employment in 1996.Retail trade and services, which have undergone a dramatic transformationsince 1991, contributed 55.7% of GDP and 51.3% of total employment. (SeeReference tables 3 and 4 for historical data on GDP and GDP by sector.)

Comparative economic indicators, 1997

Russia Kazakhstan Hungary Poland Ukraine Uzbekistan

GDP ($ bn) 462.4 22.5 44.2 137.3 49.7 14.5

GDP per head ($) 3,146 1,363 4,358 3,551 981 612

GDP per head ($ at PPP)a 4,068 2,520 7,088 6,288 2,051 1,924

Consumer price inflation (av; %) 14.7 17.0 18.3 15.9 15.9 75.4

Current-account balance ($ bn) 3.0 –0.9 –1.0 –4.8 –1.0 –0.6

Exports of goods ($ bn) 84.0 6.8 19.6 27.1 14.0 3.8

Imports of goods ($ bn) 60.3 7.3 21.4 37.7 16.7 4.0

a Purchasing power parity.

Source: EIU.

Main industrial andagricultural regions

Processing industry is concentrated in the cities of Moscow, St Petersburg,Yekaterinburg and Nizhny Novgorod. These larger cities have managed thetransition relatively well, as size tended to bring with it industrial diversity;smaller industrial centres have fared far worse. The Soviet regime created newindustrial centres such as Tomsk and Novosibirsk, but Siberia and the Far Eastremain largely unindustrialised, having traditionally served as a raw materialsand energy base. The boundless faith of Soviet planners in the benefits of scalemeant that one massive enterprise, or a small group of related enterprises, oftenformed the basis for the entire local economy of a substantial city or region.This, and the absence of unemployment benefit, makes the closure of bankruptenterprises a politically difficult decision.

Economic policy

The dismal post-Sovietinheritance—

Russia’s first post-communist government inherited an economic catastrophe.Real GDP in 1991 fell by around 12%, and the budget deficit (on IMF defini-tions) was around 26% of GDP. Foreign-exchange reserves, at $60m, amountedto around ten hours of import cover. The breakdown of the command eco-nomy meant that inflation had risen to triple digits even though price liberal-isation had yet to be undertaken.

Underlying this collapse were a number of serious structural problems:

• long political commitment to expanding heavy industry with little concernfor its profitability, environmental impact, or opportunity cost of channellingcapital to it;

• the unravelling of Council for Mutual Economic Assistance (CMEA) tradewith captive east European markets, which disrupted many supply chains;

Russia: Economic policy 13


• agriculture was largely unviable without financial assistance the state couldno longer afford, without raising food prices to levels unaffordable for mostcity-dwellers;

• the disciplines of the command economy had broken down without beingreplaced by the disciplines of the market; and

• political currents were also unfavourable for rapid economic reform, withthe old political elite resisting even the moderate reforms of the Gorbachevperiod.

—encouraged an earlyattempt at “shock

therapy”—

Believing that events had effectively foreclosed any gradualist transition to themarket, the government led by Egor Gaidar, appointed in 1992, opted for aprogramme designed to build a market economy as rapidly as possible.Mr Gaidar was unable to adhere to this course, owing to mounting oppositionfrom parliament, the Russian Central Bank (RCB) and enterprise directors, whoemerged as an increasingly vocal lobby. He quickly resigned, and little remainsof Russia’s Choice, the movement he had hoped to build into a durable pro-reform party.

Despite this defeat, four broad lines of policy initiated by Mr Gaidar havecontinued to be followed.

• Liberalisation. Prices had to be freed to enable them to function as indicatorsof relative scarcity, and perform the allocative function which planners hadtried to take over.

• Stabilisation. Re-establishing macroeconomic balance—low and predictableinflation (and a trustworthy currency), positive but affordable real interestrates, a manageable budget deficit and sustainable rising demand—is essentialto creating an environment in which investment can recover.

• Internationalisation. Despite pressure from industrial lobbies wanting pro-tection against imports and restriction of raw materials exports, Russia hasmade steady progress in removing trade barriers and subsidies, and in openingup to international trade and investment.

• Structural reform. The government has continued, albeit at an uneven pace,with privatisation, de-monopolisation, the erosion of barriers to market entryand, more recently, stronger ownership rights to improve corporate governance.

—and Russia has become amarket economy

Most of Russia’s prices are now set in markets, the private sector accounts forthe bulk of output and employment, and there is now a wide range of marketinstitutions (particularly in finance and commercial law). Basic financial markets—in foreign exchange, interbank credit, bonds and shares—are functioning, andgrowing in relation to GDP. Although they remain illiquid, unstable, poorlyregulated and lacking in transparency, financial markets are likely to playa significant role in the next phase of transition. As well as their role in improv-ing trade and capital allocation, the forex and government securities marketshave emerged as instruments for monetary management, improving thechance of achieving and maintaining price stability.

14 Russia: Economic policy


A stable rouble underpinsanti-inflation strategy

The international financial turbulence of late 1997 highlighted the importanceto Russian policymakers of defending the exchange rate. It also led to animportant shift in policy, as the sloping rouble corridor adopted in mid-1995was replaced by a pivot mechanism, under which the currency is allowed tofluctuate within a 15% band either side of a central rate. This has been set atRb6.1:$1 (redenominated roubles=6,100 old roubles) in 1998, and an annualaverage of Rb6.2:$1 in 1998-2000. Many in the government had wanted toscrap the corridor for some time, arguing that its narrowness invited specul-ative capital inflows, whose sudden reversal aggravated the end-1997 stockmarket downturn and currency pressures. The new mechanism answers mostof their complaints, allowing the rouble greater freedom to fluctuate, and soreducing the risk of speculative attack. It also shows greater confidence in thecurrency, and in the government’s anti-inflation policies, which need to meettheir targets if the rouble is not to become overvalued.

Public finances are theeconomy’s main

weakness—

The government’s inability to put its finances in order has been a key source ofuncertainty about the sustainability of stabilisation, and hence an impedimentto investment. A vicious circle of unpaid wages, taxes and debts between state,corporate and household sectors, set in motion by the government’s need tocut spending to match revenue shortfalls, has also delayed the productionrecovery and further reduced investment incentives. Tax shortfalls have alsoforced the government to issue domestic debt at high yields, restricting privatecompanies’ access to credit, and making interest and exchange rates vulnerableto changes in foreign investor sentiment. Non-residents accounted for about25% of the domestic government securities market even after the exodus trig-gered by the Asian financial crisis in the last quarter of 1997, and the share hadrisen to almost 30% by mid-March 1998, according to the RCB.

—with the tax base takingtime to rebuild

Although the 1998 budget will again have to be cut to fit within revenueconstraints, gradual progress is being made in restoring public-sector income totarget. Revenue shortfalls during most of 1997 were actually larger than in1995-96, but the quality of fiscal income increased as the government greatlyreduced its reliance on “offsets” and other non-monetary transactions with thebudget. Much of the improvement in tax receipts in late 1997 and early 1998was due to a one-off crackdown on large corporations, and it remains to be seenwhether the progress will prove sustainable. The tax authorities have beengiven extraordinary powers to pursue major tax debtors, but as some of thebiggest are state-owned, and others are liable to meet tax demands by deferringdebt and wage payment, the government is unlikely to resolve its fiscal prob-lems by this means alone.

Privatisation has beenrapid but chaotic

Russian privatisation has proceeded far more rapidly—but in a much moredisorganised fashion—than in most other transition economies. The initialphase, which relied on vouchers issued to all citizens, resulted in widely dis-persed ownership which left most enterprises under the control of their exist-ing management. From 1995 emphasis shifted to using privatisation toconcentrate ownership, often via the sale of valuable assets at very low pricesto financial groupings with close links to leading members of the cabinet. By1997 the competition among the dominant financial-industrial groups (FIGs)

Russia: Economic policy 15


for control of the last few real “gems” to be sold off was intense, leading to theeruption of scandals and bitter press battles in the wake of major privatisations.

The revenue sacrifice and political damage from selling assets cheaply in thisfashion has forced the government to clean up the privatisation process. It hasdropped restrictions on foreign participation in the auctions of its remainingoil companies, and is now employing foreign auditors to value the assets beforesale. However, this has slowed the sale process, and it was still unclear in early1998 whether the government would indeed manage to arrange open, compet-itive sales for its most valuable remaining assets. (See Reference table 1 for anhistorical breakdown of public finances; Reference table 2 gives monetaryaggregates.)

Public finances(Rb trn unless otherwise indicated)

Consolidated budgeta 1994 1995 1996 1997b

Revenue 232.8 534.9 695.8 386.3 Federal 86.3 203.8 250.6 116.7 Regional & local 91.1 241.0 322.9 162.6 Federal off-budget funds 55.4 123.6 168.6 125.6

Expenditure 287.1 627.5 894.4 492.9 Federal 146.4 290.6 423.9 213.7 Regional & local 88.4 247.0 342.8 173.1 Federal off-budget funds 52.3 123.4 174.0 124.7

Balance –54.3 –92.6 –198.6 –106.5 Federal –60.0 –86.8 –173.3 –96.9 Regional & local 2.7 –6.0 –19.9 –10.5 Federal off-budget funds 3.1 0.2 –5.4 0.9

Balance (% of GDP) –8.9 –5.7 –8.8 –6.1

a Enlarged budget (federal, regional and local budgets, plus off-budget funds). b January-June.

Sources: EIU; Russian Economic Trends.

Taxes are not the onlyfiscal problem

Despite the recent focus on the need for tax reform and improved tax collec-tion, the expenditure side of the budget also urgently needs reform. Housingand other social subsidies are still largely unreformed, making them bothoverly generous and poorly targeted, with better-off households often receivingmore subsidy than those on lower incomes. Budget-financed organisationsshow little financial discipline, and some sectors are over-supported because oflaws tying their subsidy to some specified proportion of GDP or the totalbudget. Relatively little is spent on healthcare or basic physical infrastructure.

New owners fight for legalfights

A related long-term challenge is to tame the form of capitalism unleashed bythe initial rush to privatise. Bitter controversies over shareholders’ rights(particularly, but not exclusively, those of minority shareholders) draw atten-tion to continuing doubts about the security of property rights in Russia. Moregenerally, the rule of law remains relatively weak, and this is likely to prove animpediment to economic growth over the long term. Unless corrected, weakproperty rights, pervasive corruption and poor contract enforcement could bea long-term drag on investment, leaving more profit to be made through“rent-seeking” pursuit of monopoly and tariff privileges than through entre-preneurial behaviour.

16 Russia: Economic policy


Main policy changes since 1985

1985-90: A series of incremental market-oriented reforms fails to arrest the declinein Soviet economic performance, and causes administrative weakness whichaccelerates the Union’s collapse.1990: The so-called Shatalin plan for a rapid transition to a market economy ispresented, then abandoned after fierce opposition from communist hardliners.1992: Egor Gaidar’s stabilisation programme commences. Inflation takes off andoutput collapses after price controls are removed in an attempt to curb the budgetdeficit.1992-94: The mass privatisation programme engineered by Anatoly Chubaistransfers to private ownership some 70% of industrial enterprises.1993: The rouble zone disintegrates. Russia relaunches the rouble as its ownnational currency.1994: Tightening of monetary policy by the Russian Central Bank, and the passageof a “non-inflationary” budget, win IMF financial support.1995: An exchange-rate corridor holding the rouble within Rb4,300-4,900:$1 isadopted in July, to be replaced by a “sliding corridor” in July 1996.1996: The IMF approves a $10.2bn three-year extended fund facility in March.1997: Continuing revenue shortfalls and the Asian financial crisis put pressure on therouble (which is moved to an adjustable peg with wide fluctuation bands), and spura renewed drive to strengthen the government’s fiscal position.

Economic performance

Growth returnsafteralmost a decade of

contraction

According to official data, Russia posted a 0.4% rise in GDP in 1997, its firstyear of growth after an eight-year recession which saw real GDP fall by 43%between 1989 and 1996. Although this figure is based on GDP measures whichinclude an estimate of the informal economy, it probably overstates the depthof the post-Soviet depression, when the exaggeration of Soviet-era output istaken into account. Nevertheless, Russia lacks the economic and institutionalconditions which would allow recession to be followed by prolonged growth of5-7%, achieved by some central European economies.

The post-communistdownturn had multiple

causes

The most important reasons for the length and depth of the post-Soviet depres-sion, which exceeded post-communist output contractions in most of centralEurope, include:

• the much longer period of communism and central planning;

• the unravelling of economic ties attendant on the collapse of the SovietUnion, and the subsequent replacement of the rouble zone by a number ofnon-convertible currencies;

• sharp falls in the production of a range of goods, particularly defence-related, for which demand collapsed as a result of the shift from planners’ toconsumers’ preferences and the shrinkage of the state sector;

• the long time taken to achieve macroeconomic stabilisation and imposehard budget constraints on enterprises; and

Russia: Economic performance 17


• political uncertainty, which fuelled doubts about the durability of reforms,particularly until Mr Yeltsin’s re-election in 1996.

Growth is largelyconsumption-driven

Last year’s pick-up in real GDP growth coincided with a further decline in fixedinvestment and a fall in the trade surplus, as imports grew strongly and exportsfell. Rising household consumption, boosted by government efforts to clear thebacklog of wage and pension payments, was the main engine of growth. Realmoney incomes rose by 2.5% in 1997 and real wages by 4.3%, contributing toa 1.4% rise in retail sales turnover. Consumer confidence in 1997, as measuredby the All-Russian Centre for the Study of Public Opinion, rose to its highestlevels since surveys began in 1992.

Inflation has subsideddramatically since 1992—

Consumer price inflation slowed to 11% (year on year) in December 1997 andaveraged 14.7% throughout the year, compared with figures of 21.8% and47.6% respectively in 1996, and a year-end figure of over 2,500% in 1992. Thecritical year in Russia’s bid to restore price stability was 1995, which began withmonthly inflation at 17.8% and ended with a monthly rate of 3.2%—thelowest since September 1991, before price liberalisation began.

—but comes too late tostop a sharp fall in living

standards

Collapsing output and surging inflation had a devastating effect on livingstandards, which fell sharply in the early 1990s as household incomes wereeither lost through unemployment or eroded against steeply rising prices.Moreover, income inequality increased dramatically, with the average incomeof the top 10% of the population estimated at 15 times that of the bottom 10%by 1995, up from 4.5 times in 1991 and an estimated 3.5 times in the Sovietera. Inflation was a major culprit in widening income differentials, because themost vulnerable segments of the population were least protected against it. Asinflation has declined, poverty and inequality have fallen. Some 20.9% of thepopulation fell below the officially defined poverty line by the end of 1997, thelowest figure since 1992.

Mounting wage arrears in 1995-97 meant that wage rates did not tell the wholestory about inequality. But surveys indicate that living standards, like output,have held up far better than the official data suggest. Many households under-report their income, and actually spend far more than appears possible: onerecent estimate puts household income at about 50% higher than official fig-ures suggest. (See Reference table 5 for historical data on prices and earnings.)

Output, inflation and unemployment

1993 1994 1995 1996 1997

Real GDP growth (% change) –8.7 –12.7 –4.1 –4.9 0.4

Consumer price inflation (year-end; % change) 839.9 215.1 131.3 21.8 11.0

Unemployment rate (International Labour Organisation definition; %) 5.5 7.5 8.8 9.3 9.0Sources: Goskomstat; Russian Economic Trends.

18 Russia: Economic performance


Regional trends

Administrative divisionalong nationality lines

The Russian Federation is divided into 89 regional administrative units, manyreflecting the ethnic divisions used in Soviet times as an instrument of nat-ionality policy. The largest of these ethnic autonomies enjoy republic status;others are designated as oblast, krai or okrug (national autonomous area). Atpresent there are 21 notionally ethnic republics, all but a handful of which(including most of the larger ones) have majority Russian populations. Thereare 49 “ordinary” oblasts, six krais, ten ethnically designated okrugs and oneautonomous oblast. The cities of Moscow and St Petersburg each rank as federalsubjects in their own right.

Unequal status andwealth cause tensions

among the regions

Tensions among regions, and between regional and central government, arerooted in inequalities of economic and political power. Russia’s “ordinary”(predominantly Russian) oblasts and krais resent the privileges enjoyed by theethnic autonomies, particularly the larger republics. Local economic powertends to be inversely related to political status, the republics being on thewhole economically weaker than the oblasts and krais. In part, this reflects theway that many ethnic autonomies and ordinary regions have won significantfiscal privileges through bilateral power-sharing agreements with the centralgovernment. Tatarstan stands out in this respect, as its very membership of thefederation is based on a treaty concluded only after the 1993 constitution wasadopted. Politically driven transfers result in some wealthy autonomies (eg thediamond-rich Republic of Sakha/Yakutia) being substantial net recipients fromthe federal budget.

Conversely, none of the small handful of net donors to the federal budget is anethnic autonomy. Prosperous Russian regions resent paying taxes to supportpoorer regions which enjoy the privileges they lack. Although the centralgovernment is trying to claw back the authority which it negotiated awaywhen trying to rally regional support in 1992-96, inter-regional rivalries willnot be easily defused. The “net donor lobby” is becoming more active, andeconomic inequalities among regions are increasing.

Chechnya was aspecial case

In late 1994 Moscow launched a crackdown on the rebellious republic ofChechnya, after separatists rejected a power-sharing treaty with the centre andopted for outright secession. After more than 18 months of war, the centralgovernment decided to cut its losses and pulled out its forces. Chechnya’spresidential election on January 27th 1996 produced an outright victory forAslan Maskhadov, viewed as a moderate among the Chechen leaders. AlthoughRussian and Chechen interpretations of the sovereignty clauses in the peaceagreements are not entirely coincident, Moscow will not allow the conflict toreignite. Nor, despite occasional rumblings from other ethnic separatist move-ments, will it make similar shows of force elsewhere in the federation.

Russia: Regional trends 19


Population and land area, by administrative region, at Jan 1st 1997

Total population (’000) Territory (’000 sq km)

North 5,833 1,466 Arkhangelsk Oblast 1,506 587 Nenets Autonomous Okruga 55 178 Republic of Karelia 780 172 Republic of Komi 1,172 416 Murmansk Oblast 1,030 145 Vologda Oblast 1,344 146

North-west 8,017 197 St Petersburg City 4,774 n/a Leningrad Oblast 1,677 86 Novgorod Oblast 738 55 Pskov Oblast 827 55

Central 29,751 485 Bryansk Oblast 1,473 35 Ivanovo Oblast 1,256 24 Kaluga Oblast 1,096 30 Kostroma Oblast 801 60 Moscow Oblast 6,573 47 Moscow City 8,637 n/a Oryol Oblast 910 25 Ryazan Oblast 1,316 40 Smolensk Oblast 1,166 50 Tver Oblast 1,642 84 Tula Oblast 1,800 26 Vladimir Oblast 1,637 29 Yaroslavl Oblast 1,443 36

Volgo-Vyatka 8,404 263 Republic of Chuvash 1,359 18 Kirov Oblast 1,623 121 Republic of Mary-El 764 23 Mordovian Republic 950 26 Nizhny Novgorod Oblast 3,710 75

Central Black Earth 7,863 168 Belgorod Oblast 1,477 27 Kursk Oblast 1,341 30 Lipetsk Oblast 1,248 24 Tambov Oblast 1,301 34 Voronezh Oblast 2,495 52

Volga 16,890 536 Astrakhan Oblast 1,029 44 Republic of Kalmykia 317 76 Penza Oblast 1,555 43 Samara Oblast 3,763 54 Saratov Oblast 2,726 100 Republic of Tatarstan 3,763 68 Ulyanovsk Oblast 1,490 37 Volgograd Oblast 2,702 114

North Caucasus 17,778 355 Republic of Dagestan 2,121 50 Chechen Republic 862 19 Ingush Republic 303 n/a Kabardino-Balkar Republic 789 13

continued

20 Russia: Regional trends


Total population (’000) Territory (’000 sq km)

Krasnodar Krai 5,066 76 Republic of Adygeya 449 8 North Ossetian Republic 664 8 Rostov Oblast 4,415 101 Stavropol Krai 2,672 67 Karachevo-Cherkess Republic 436 14

Urals 20,410 824 Republic of Bashkortostan 4,134 144 Chelyabinsk Oblast 3,675 88 Kurgan Oblast 1,105 71 Orenburg Oblast 2,226 124 Perm Oblast 2,997 161 Komi-Permyak Autonomous Okrugb 160 33 Sverdlovsk Oblast 4,668 195 Udmurt Republic 1,636 42

Western Siberia 15,087 2,427 Altai Krai 2,675 169 Republic of Altai 202 93 Kemerovo Oblast 3,042 96 Novosibirsk Oblast 2,745 178 Omsk Oblast 2,174 140 Tomsk Oblast 1,072 317 Tyumen Oblast 3,177 1,435 Khanty-Mansy Autonomous Okrugc 1,314 523 Yamal-Nenets Autonomous Okrugc 493 750

Eastern Siberia 9,112 4,123 Republic of Buryatia 1,050 351 Chita Oblast 1,288 432 Agin-Buryat Autonomous Okrugd 78 19 Irkutsk Oblast 2,785 768 Ust-Orda Buryat Autonomous Okruge 138 22 Krasnoyarsk Krai 3,095 2,340 Taimyr (Dolgano-Nenets) Autonomous Okrugf 54 862 Evenk Autonomous Okrug 25 768 Republic of Khakasia 584 62 Republic of Tuva 310 171

Far East 7,421 6,216 Amur Oblast 1,016 364 Kamchatka Oblast 402 472 Koriak Autonomous Okrugg 40 302 Khabarovsk Krai 1,555 825 Jewish Autonomous Area 207 36 Magadan Oblast 251 1,199 Chukchi Autonomous Okrug 87 738 Primorsky Krai 2,239 166 Sakhalin Oblast 632 87 Republic of Sakha (Yakutia) 1,032 3,103

Kaliningrad Oblast 935 15

Russian Federation 147,501 17,075

a Included in Arkhangelsk Oblast; population data refer to 1991. b Included in Perm Oblast;population data refer to 1991. c Included in Tyumen Oblast; population data refer to 1991.d Included in Chita Oblast; population data refer to 1991. e Included in Irkutsk Oblast; populationdata refer to 1991. f Included in Krasnoyarsk Krai; population data refer to 1991. g Included inKamchatka Oblast; population data refer to 1991.

Source: Goskomstat.

Russia: Regional trends 21


Resources

Population

Numbers are declining— Russia’s population has been falling for the past seven years, reaching an esti-mated 147.8m at the beginning of 1997 compared with 148.7m in 1992. Inthat year the death rate exceeded the birth rate for the first time in modernhistory; it has continued to do so since, although the gap began to closeslightly after 1994. The decline in the natural population has to a considerableextent been offset by immigration, mainly of ethnic Russians from the formerSoviet republics. Some 1.1m settled in Russia in 1994, while the figures for 1995and 1996 are estimated at 800,000 and 700,000 respectively. (See Referencetable 6 for historical data on the population.)

—but partly fortemporary economic

reasons—

The Russian mortality crisis is not a purely post-communist phenomenon:death rates for all age groups except 11-20 began rising in the 1960s. Male lifeexpectancy peaked at 70 in 1971-72, and began to fall thereafter—an unprece-dented development in an industrialised country in peace time. Infant mortal-ity, comparable to Austrian and Italian rates in 1960, was above those of Jamaicaand Fiji by the mid-1980s. These long-standing Soviet-era trends became farmore pronounced in the 1990s, when death rates and infant mortality rates roserapidly. Although the former peaked in 1994 and the latter in 1993, Russia’saverage life expectancy in 1995 was 58 years for men (slightly up from its lowpoint of 57.3 years) and 71 years for women. Sharp falls in the birth rate primar-ily reflect depressed household incomes and economic uncertainty. The risingdeath rates are a product of environmental degradation, stress, malnutrition, adeteriorating healthcare system, the reappearance of epidemic diseases such asdiphtheria and cholera (linked to declining housing and public health stand-ards), and high alcohol consumption, especially among men. The number ofdiagnosed cases of tuberculosis jumped from 50,400 in 1991 to 99,000 in 1996.

—and the population isageing

Despite the sharp fall in male life expectancy, the population is ageing, incommon with those of most higher-income industrial economies. The propor-tion of citizens below 15 years fell from 24.3% in 1991 to 22.5% in 1996, whilethe proportion of the population above 64 years rose from 19% to 20.5% overthe same period. Moreover, increasing numbers are drawing pensions beforereaching normal pensionable age, mainly because of unemployment. As aresult, the total number of pensioners per 1,000 population rose from 228 in1990 to 262 in 1996, a 14.9% increase, despite the official male retirement age(60) being above the average male life expectancy.

Education

Once accessible to all— The Soviet industrialisation drive created the need for mass education, whichthe state provided generously, especially in engineering and science. Educationis compulsory, and free of charge, for all children between the ages of seven and17. In 1996-97 there were 2.96m students in Russia, studying at 817 institutionsof higher education, making it the first year in which student numbers

22 Russia: Population


surpassed the level of 1990-91. With demand for commercially oriented qualifi-cations outstripping the modest growth in state higher education places, privateschools for economics, business, accountancy and law have expanded rapidly.

—provision has worsenedwith the economy

Attempts to insulate education from the budget cuts of recent years have failed.Spending was set at Rb14tn (2.6% of federal expenditure) in the 1997 budget,but actual expenditure was far lower. Teachers have been among those hardesthit by budget-sector wage arrears. More broadly, the income and status of theintellectual elite has altered sharply, affecting both its motivation to pass on itsskills through the education system and students’ motivation to acquire them.Many previously privileged professions have lost their social as well as eco-nomic status to the emerging class of entrepreneurs. Unable to beat the newbusinesspeople, a large number have chosen to join them: it has been esti-mated that up to half of the new entrepreneurs are former professionals, suchas engineers and teachers. (See Reference tables 7 and 8 for historical data onemployment by sector and unemployment.)

Health

Another casualty of Sovietcollapse

State-funded healthcare has also been seriously affected by budget cuts, forcingmany households to turn from underfunded state facilities to private provi-sion. The ratio of medical personnel to population still compares favourablywith those of Western countries: in 1996, for example, there were 45.7 doctorsper 10,000 inhabitants, the total number of doctors actually rising to 669,000in 1996 after sinking to 632,000 in 1991. But health infrastructure was alreadydeteriorating in the final years of the Soviet era, and all but the new rich mustnow endure long waits for treatment in severely run-down hospitals, as manyas one in five still lacking hot water and sewerage facilities. A system of manda-tory insurance payments, introduced in 1994, now accounts for about 20% ofhealthcare expenditure. Private healthcare has made only modest inroads intothe system, but staff in the state medical services are poorly paid and unmoti-vated, and bribes are frequently needed to get attention.

Economic infrastructure

Transport and communications

The road network isunderdeveloped—

The transport infrastructure remains underdeveloped. Indeed, although in 1995there were 531,400 km of roads regarded as fit for automobile traffic, of whichover 90% had a hard surface, approximately 40% of villages cannot be accessedon metalled roads. This partly reflects Soviet planners’ neglect, partly the diffi-culty of building hard-surface roads over permafrost. The country has no Western-style motorways, although a motorway linking St Petersburg, Moscow, Minskand Rostov is envisaged. The government is committed to a major investmentprogramme, intended to produce a 30-40% increase in road length by 2000, butthis will not move forward until the fiscal crisis is resolved and clearer rules areset out for private-sector involvement in capital projects.

Russia: Health 23


—and freight haulage hasfallen sharply

Total freight haulage fell by 43% during 1990-96, with every form of cargotransport except pipelines recording a steeper decline than production ingeneral. Railways remain the dominant form of cargo transport, but the1,129bn ton-km moved in 1996 was down 55.3% on 1990. Road haulageregistered a mere 25bn ton-km in 1996, just 37.8% of its 1990 level. Thetechnical state of railways and roads is very poor, and has worsened in recentyears owing to a lack of investment, so that an estimated 10% of all railways aredefective in some respect. At the beginning of 1996 Russia had 87,000 km ofrailways, of which 44% were electrified. Six cities have underground transportnetworks (Moscow, St Petersburg, Yekaterinburg, Nizhny Novgorod, Novosibirskand Samara). Buses are the leading form of passenger transport in terms ofpassenger-km, overtaking the railways on this indicator in 1996. This largelyreflects rising charges for long-distance passenger rail travel. (See Referencetable 9 for a breakdown of transport statistics.)

River transport accounted for just 2.1% of haulage (in ton-km) in 1996, downfrom 3.6% in 1990. Russia has a number of major rivers, but the longest ofthese are in Siberia and flow into the Arctic Ocean. The north-south orient-ation of most major rivers limits the potential for development of river trans-port, as freight haulage tends to be predominantly east-west.

Air travel has also beenaffected by recession

Air transport plays a comparatively large role in internal transport. In 1995 itaccounted for about 13% of total passenger movement (in passenger-kmterms). Impressive growth in the 1980s raised air passenger transport from10.2bn passenger-km in 1980 to a peak of 159.5bn passenger-km in 1990. Airtraffic has fallen sharply since then, to 65bn passenger-km in 1996, as pricerises put air travel beyond the budgets of ordinary Russians. Russian airlinefleets are generally obsolescent, with 50% of civil aircraft already more than 15years old, leading to increasing fears about operational safety.

Ports are under pressureto expand

The Russian Federation has access to the Baltic Sea in the west, the Black Sea inthe south and the Pacific Ocean in the east. There are 43 sea ports, the majorones being St Petersburg and Kaliningrad on the Baltic, Novorossiisk and Sochion the Black Sea, and Vladivostok, Nakhodka, Madagan and Petropavlovsk inthe east. The development of Novorossiisk, the major western export route forRussian (and CIS) oil, is arguably the most important port-development issuefacing Russia. By the mid-1990s the demand for exports via the Novorossiiskterminal exceeded its capacity by up to 65%. Timely completion of plans toupgrade the terminal, and the pipelines serving the port, will be crucial to thedevelopment of a range of Caspian Basin oil projects.

Telecommunications:modernisation promised

The Russian telecommunications system is undersized and very outdated.There were only 27.6m telephones at the end of 1996, of which 19.7m wereprivate, amounting to just 18.7 telephone lines per 100 inhabitants (comparedwith 36 in Spain, 44 in Belgium and 69 in Switzerland). Demand for connec-tions has risen rapidly despite the post-communist slump in production andincome. The number of private fixed-line telephones rose by 35.3% betweenend-1990 and end-1996, and the long delays involved in being allocated a linehave fuelled explosive growth in the number of cellular phones, which jumpedfrom 27,700 at the end of 1994 to 233,500 at end-1996. Fax machine

24 Russia: Transport and communications


connections have multiplied almost as rapidly, from 2,100 in 1990 to 89,200by end-1996.

The recent part-privatisation of the telecoms system should facilitate an accel-eration of expansion and modernisation plans. It is estimated that up to $40bnneeds to be invested in the network over the next decade, to remedy pastdeficiencies and meet new subscriber needs. Some 2m new lines are to beinstalled annually (in part replacing obsolete ones) until 2005. So far, around90% of newly installed telephone exchanges are imported digital systems. Thesector has attracted major foreign investment. Among equipment suppliers,Siemens (Germany) and NEC (Japan) have been especially active in the modern-isation programme. Among network operators, a consortium including FranceTélécom, Deutsche Telekom and US West is heavily involved.

Investor interest (and fierce political controversy) has centred on the privatis-ation of the state holding company, Svyazinvest, which controls almost allsegments of Russia’s telecommunications market. It holds controlling stakes inthe country’s 89 largest regional communications companies and in the long-distance telephone monopoly, Rostelekom, as well as the largest stakes in thecity telephone networks of Moscow City (MGTS) and St Petersburg (PTS), and anumber of other communications companies including AO TsentralnyiTelegraf and the Yekaterinburg City telephone network. In some cases, controlover these companies ensures control of enterprises in which they themselveshave stakes. By this route, Svyazinvest has also gained a significant share of therapidly expanding cellular communications market, and of companies whichown the cable and broadcasting infrastructures for distributing televisionsignals.

Energy provision

Fuels are a traditionalhard-currency earner

Russia’s export of fossil-fuel energy has withstood the recent decline in dom-estic production, and mineral fuels are now the country’s main hard-currencyearner, accounting for more than 40% of export revenue in 1997. Domestically,natural gas has become the dominant energy source. In 1997 it accounted for49% of the total supply of primary energy, while oil contributed 32% and coal11%, according to Energy Data Associates. (Reference table 10 gives nationaldata on the production of fuels and electricity.)

Russia’s production, distribution and consumption of energy is extremelywasteful by OECD standards, a legacy of subsidised prices, plentiful suppliesand lax environmental regulation under communism. In the 1980s the con-sumption of energy per unit of GDP was several times higher than in the West,and the discharge of pollutants was similarly excessive.

Falling volumes, thenprices, depress the oil

sector

Crude oil output rose dramatically in the late Soviet period, from 49m tonnesin 1955 to a peak of 570m tonnes in 1987. Since then, the industry has beenconstrained both by collapsing industrial demand after 1992 and lack of fundsto develop supply. Output bottomed out at 301m tonnes in 1996, although the1.5% increase in 1997 was more of a stabilisation than a recovery. Exports havecontinued to grow, reaching 127m tonnes in 1996, but this is approaching the

Russia: Energy provision 25


limits of the current pipeline capacity. Subdued oil prices are likely to holdexport revenue down even if volume recovery is sustained.

The production decline has been due mainly to the depletion of existing oil-fields, the deterioration in transport infrastructure and an acute shortage ofinvestment. New capital is needed not only to develop the massive new fieldsthat have recently been the focus of press and multinational interest, but alsoto extend the productive lives of existing fields. Poor Soviet oilfield practice,and lack of access to the latest extraction technology, meant that the fullpotential of many fields was not realised. Natural gas production also roseimpressively under communism, from 115bn cu metres in 1975 to a peak of643bn cu metres in 1991, and has fared better than oil during the transition,falling to 595bn cu metres in 1995 and rising above 60bn cu metres in 1996.

Russia has created its own“oil majors”—

Privatisation has resulted in the creation of a group of large oil companiesoperating in an increasingly competitive market. The largest include the newlyformed Yuksi (based on the planned merger between Yukos and Sibneft), Lukoil,Surgut Holdings and Sidanco. Yuksi is easily the largest: total production of itsconstituent companies amounted to 65m tonnes of crude oil in 1997—22% ofRussian output, and enough to make it the world’s third largest private oilproducer after Shell and Exxon. Yuksi’s proven reserves, at 3.2bn tonnes of oiland gas, will be the largest of any private oil company in the world. Lukoil, withestimated reserves of over 12bn barrels, is also a formidable company, and is thebest-integrated of Russia’s major oil producers, having led the way in consolid-ating the many different companies from which it was assembled.

—and is beginning todraw Western investment

Despite the mineral riches on offer, foreign investment in Russia’s energy sectorhas been slow to arrive. Among the deterrents have been continued politicalinstability, an inadequate legislative framework, and the reluctance of Russianoil companies to face Western competition and governance constraints. This ischanging, and some significant partnerships were launched in 1997, with morelikely to be established during 1998. Political life has largely stabilised, Russianoil companies are increasingly interested in forming alliances with foreignmultinationals, and these are to be allowed to participate in the privatisation ofthe last major state-owned oil company, Rosneft. The legal framework con-structed on the basis of the 1996 law on production-sharing agreements (PSAs)is still quite restrictive, especially with respect to those areas open to exploit-ation under PSAs, but this will change as resource-rich regions in need of invest-ment lobby have their oilfields and other resource deposits added to the list ofthose authorised for PSAs. Given the right conditions, Russian output of oilcould rise to 350m-370m tonnes (7.0m-7.5m barrels/day) by 2010.

Electricity production hasdeclined

Economic contraction during and after the fall of communism caused a 22%drop in electricity generation between 1990 and 1996. A further small declinewas registered in 1997, even though industrial production was growing againby this time, but this may reflect improved efficiency of use now that power ismore commercially priced. About 12% of electricity production in recent yearshas come from nuclear plants, of which approximately 50% use the RBMKdesign employed in Ukraine’s ill-fated Chernobyl plant. In 1995 there were 29nuclear reactors on Russia’s territory, with a total capacity of 21,268 mw. Most

26 Russia: Energy provision


of Russia’s electricity generation and distribution industry is obsolete by Westernstandards and badly in need of new investment.

Energy balance, 1997(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary supplyProduction 307 478 110 62a 15 972Imports 10 3 10 4a 0 27 Exports –177 –160 –15 –8a 0 –360 Stock change 0 4 0 0 0 –4 Total 140 325 105 58a 15 643

22b 607b

Processing & transformationInput to refining 180 0 0 0 0 180Input to transformation 10 80 20 58b 1 169Refining/transformation output 180 0 0 70b 0 250Energy industry fuel loss 15 30 10 20b 1 78

Final consumptionTransport fuels 25 0 0 4b 0 29 Industrial fuels 35 70 35 24b 6 170 Residential etc 45 130 40 22b 7 244 Non-energy uses 10 15 0 0 0 25 Total 115 215 76 50b 13 468

a Expressed as input equivalents on an assumed generating efficiency of 38.5%. b Output basis.

Source: Energy Data Associates.

Financial services

Banks are going through apainful consolidation

phase

Commercial banking took shape in Russia in the late 1980s, when the firstnon-state banks were formed under the 1988 law on co-operatives. The sectorenjoyed explosive growth in the early 1990s. Triple-digit inflation worked inthe banks’ favour (their assets re-priced faster than their liabilities while hyper-inflation relieved them of non-performing loans), foreign-exchange specul-ation proved highly profitable, and there were numerous opportunities forhandling soft credits and state funds. Lax regulation and licensing policiesmeant that Russia had over 2,500 banks by 1994.

Macroeconomic stabilisation came as a shock to most banks, depriving them ofeasy speculative profits without creating conditions conducive to traditionallending or investment operations. The number of licensed commercial banksfell from 2,000 in 1994 to around 1,700 by the end of 1997, and by 2000 nomore than 500 are expected to survive. The Russian Central Bank has sought toaccelerate and manage the sector’s consolidation, using tighter regulation topromote the emergence of fewer, larger banks.

Foreign banks play alimited role

Most of the protectionist measures adopted in 1993 to restrict foreign banks’activity in Russia expired in 1996. Foreign banks’ share of the sector’s totalcapital is still limited to 12%, although it has never been made clear how thisis to be calculated. The widely feared influx of foreign banks as entry barriersare removed has so far not occurred, and one reason why the 12% quota has

Russia: Financial services 27


never needed clarification is that foreign participation in the sector remains farbelow that level, however defined. Russian corporate and private customerscontinue to prefer local banks, which corporate clients often regard as betterattuned to local conditions and better able to reach quick decisions. Moreover,banks and their corporate clients are often linked by personal relationships andownership. The so-called pocket banks are owned by their major customers,while others are owned by their banks. Foreign banks’ activities have largelybeen limited to Moscow and St Petersburg—which have the most sophisticateddomestic banks—and are heavily oriented towards servicing foreign ratherthan local clients. (See Reference table 11 for banking statistics.)

The major banks havebuilt industrial empires

In financial terms the largest Russian banks remain quite small, not only byinternational standards but also in relation to the size of the economy and statesector. Despite this, they wield enormous influence. The leading banks haveused the privatisation process, and personal links with key officials, to constructlarge, multi-branch commercial empires. Aside from banking, these financial-industrial groups (FIGs) are usually centred on resource-based export industries,a limited range of fast-moving consumer products, and the media. The mainFIGs (see box) owe their influence in government to strategic alliances andacquisitions (in particular to their ability to assemble privatisation bids and fundpolitical campaigns) and public opinion (through newspapers and television).Leading resource companies, such as Gazprom and Lukoil, have done the samein reverse, creating their own groups of banks and media interests.

The stockmarket plays asmall role in the real

economy

The first stockmarket was opened in 1991 in Moscow, but over 100 were inoperation by 1996. The range and volume of securities traded has expandedrapidly, outpacing the development of regulation, shareholder protection,registration and custody arrangements, whose inadequacy has subsequentlyhindered market development. The Moscow markets “freely floating” equity ismuch smaller than aggregate figures suggest: many companies’ shares are notordinarily traded, and only a handful trade actively on markets that can beregarded as transparent and liquid. Stockmarkets are still not important chan-nels for mobilising new investment funds in Russia, nor for enforcing im-proved corporate governance through the active oversight of management bymain shareholders.

The insurance sectorremains underdeveloped

Over 2,000 insurance companies have been created in the past six years, butmost were formed to carry out specific short-term tasks or to serve a narrowclientele. They are generally undercapitalised, and lack both skills and financialresources. Two-thirds of Russian insurance companies in 1997 had charter capi-tal of under Rb600m (Rb600,000 after redenomination), and the aggregate char-ter capital of the entire sector at the end of 1997 was comparable to that of anaverage OECD country insurance company. Total premium income in the firsthalf of 1997 was only about $2.7bn. The sector has great long-term promise, asRussia is seriously underinsured at present, but some entry barriers to foreignproviders are likely to stay in place until domestic providers are better equippedto withstand competition.

28 Russia: Financial services


The “big seven” financial-industrial groups

Oneksimbank: The largest banking group in terms ofauthorised government funds in 1997, Oneksimbank tookthe lead in launching the government bond market, and inbidding for state assets under the shares-for-loansprogramme of 1995-96 (which it helped to design) and the cash auctions of 1997-98. This brought it controllingstakes in, among other enterprises, Svyazinvest (telecoms),Sidanco (oil), Norilsk Nickel, Zil (autos) and the dailynewspaper, Izvestia. The founder-president, Vladimir Potanin,is a close associate of the veteran reformist minister, Anatoly Chubais, and briefly served as finance minister in 1996.

LogoVAZ: Another leading privatisation beneficiary,LogoVAZ holds major stakes in, among others, Sibneft (oil),Aeroflot (airlines), the private broadcaster TV6 and (directlyand via Obedinionny Bank) the state television service, ORT.Thought to be politically close to President Yeltsin’s daughter(and adviser), Tatyana Dyachenko, the LogoVAZ founder,Boris Berezovsky, was regarded as a possible financialsupporter of the presidential ambitions of the former primeminister, Viktor Chernomyrdin, but is also suspected by someof playing a role in Mr Chernomyrdin’s dismissal. Inco-operation with the Yeltsin campaign, Mr Berezovskyprovided money and media access to Aleksandr Lebed’s1996 presidential bid (1), and served briefly as Mr Lebed’sdeputy on the federal Security Council in 1996-97. Thesubsequent conduct of its media interests lends some weightto the view that it was seeking to countervail theOneksimbank-Chubais axis, but Mr Berezovsky has hedgedhis bets by expressing support both for Sergei Kiryienko asprime minister and Mr Chernomyrdin’s presidential bid.

Most: An engineering and media conglomerate closelyaligned with LogoVAZ through shared rivalry withOneksimbank. Most Media interests include the main privatenetwork and cable/satellite TV broadcaster, NTV, Moscow’sRadio Ekho, and the daily newspaper, Segodnya. Thefounder, Vladimir Gusinsky, appeared to have swung these behind Mr Chernomyrdin after 1996, but recentlydeclared his political support for Yabloko’s Grigory Yavlinsky.Most’s early financial business for the City of Moscowappears to have been severed in 1996, breaking its previous strong links with the mayor of Moscow, ViktorLuzhkov (2).

Menatep: The main bank behind the Rosprom FIG,Menatep has a diversified industrial holding and a share in

the consortium which owns 38% of ORT. The decision tomerge the oil group, Yukos (its main prize from the shares-for-loans auctions), with LogoVAZ’s Sibneft, under theRosprom founder, Mikhail Khodorkovsky, may presage closerrelations between the two groups. This would cement arivalry with the Oneksimbank group, whose next com-mercial flashpoint could be the battle for control of Rosneft.

Alfa: Generating its early capital from finance of foreigntrade rather than government, Alfa stayed out of the mainprivatisation deals but has built up holdings in oil, powergeneration, construction, food-processing and chemicals.Alfa is another member of the ORT television consortium. Itspresident, Pyotr Aven, served briefly as foreign economicrelations minister.

Inkombank: The largest of the FIG banks in 1997 (althoughstill small in asset terms compared with the state-ownedSberbank, Vneshtorgbank and United ExImBank), Inkombankcould also claim the closest resemblance to a conventionalinvestment bank. It has fewer known political connections(although links with some regional governments are strong),and was notably absent from the major privatisation deals.Inkombank’s industrial interests include metallurgy,food-processing and aircraft. It was the first Russian bank tolist abroad through the sale of American Depository Receipts(ADRs) in January 1997, and has a rapidly expanding branchnetwork.

SBS-Agro: The fourth co-owner of ORT, whose print mediainterests include the Kommersant business publisher, whichran a strongly pro-Yeltsin editorial campaign in 1996.Although this appeared to align it with Mr Chubais,SGS-Agro (the product of a merger between StolichnySavings Bank and the collapsed Agroprombank whoseVienna-based chairman is Aleksandr Smolensky) alsoreportedly helped finance the LogoVAZ acquisition ofSibneft. Another absentee from the privatisation processwithout large enterprise stakes, it has more recentlyconcentrated on retail and small-business banking, andlaunched the first Russian corporate Eurobond (for $200m)in July 1997.

References: (1) Y Brudny, “In pursuit of the Russianpresidency: why and how Yeltsin won the 1996 presidentialelection”, Communist and Post-Communist Studies 30 (3), 1997,255-275. (2) D Jensen, Russia’s Financial Empires, Radio FreeEurope/Radio Liberty, January 1998.

Russia: Financial services 29


Other services

Retailing The producer-driven Soviet industrial system has put few resources into mar-keting or retailing. Consumer goods and services were heavily subsidised, butthis led to frequent short supply, and lack of competition kept quality low.State-owned retail monopolies operated in each segment of the market, thenumerous supply gaps being to some extent bridged by informal private activ-ity (most of it legal, although some were based on diverting official supplies).Because its units are relatively small and do not require significant capitalinvestment, retailing was one of the sectors to be privatised the fastest and aprincipal area for new business launches. The share of retail turnover by state-owned organisations had fallen to below 10% by 1996 and that of the privatesector having expanded to 73.5%, with the balance going to consumer co-operatives and other non-state entities.

The dramatic real appreciation of the rouble since 1992, households’ concern toturn savings into durable purchases at times of high inflation, and the advertising-enhanced power of Western brand-names has led to considerable import pene-tration of the consumer market. In 1996 imports accounted for about 90% oftotal sales of shoes, 80% of colour televisions and virtually all video recorders,with Western firms also grabbing a growing share of whitegoods sales. However,this trend may have reached its limit, as domestic producers strike back withlower prices and improved quality. The share of imported goods in total retailturnover declined to 49% in 1997, from 53% in 1996.

Tourism International tourism was neglected under the communist regime, althoughthe cities of St Petersburg and Moscow attracted a steady stream of visitors. Thishas greatly accelerated since the collapse of communist rule, with 5.2m touristsvisiting Russia in 1995. The number is expected to rise to some 7m in the nexttwo years, and the authorities believe there is potential to attract up to 15mtourists per year, as well as to increase revenue per tourist. Western-ownedhotels have sprung up in large cities, to cater for business and foreign visitors.Accommodation for domestic tourists remains underprovided, as Russians whocan afford holidays now generally prefer to travel abroad.

Production

Industry

Basic industries were aweak foundation for

transition—

Post-communist Russia inherited an industrial base which was energy-intensive, technologically backward (especially with respect to micro-electronics), and oriented towards low value-added basic processing and de-fence. Few enterprises could compete internationally when subsidies and cap-tive markets were taken away. Soviet-era subsidy tended to increase with thelevel of processing in a sector. As a result, the most technologically developedsectors suffered the most from the post-communist withdrawal of subsidies.Even in its areas of comparative technological advantage, such as aerospace,Russia’s production is suffering from a severe shortage of investment and loss

30 Russia: Other services


of human capital. (A breakdown of industrial production by sector is shown inReference table 12.)

—and all sectors slumpedafter liberalisation

These disadvantages resulted in a sustained collapse in production, which in1997 was officially down to 47% of its 1990 level. Within this average, electric-ity output was still at 84% and that of fuel at 74%, while chemicals andpetrochemicals had slumped to 44%, machine-building and metal working to38%, and ferrous and non-ferrous metallurgy to 61% and 54% respectively.Only the construction materials industry, with 1997 output at 31% of its 1990level, and light industry (13%), performed worse than core engineering sectorsover this period. This has led to growing concern within Russia about ongoingdeindustrialisation, making the country a resource-producing dependency ofthe West. One positive by-product of industrial downturn is that the closure ofsmokestack industries has reduced pollutant emissions: SO2 by 34.8%, NO2 by36.8% and CO by 40% between 1990 and 1996.

Demand deserts thedefence sector

Recent years have seen a sharp fall in military spending, which has severelydepressed the formerly privileged defence production sector. According to theMinistry for the Defence Industry (which was abolished in 1997), the output ofthe defence-industrial complex in 1996 had dropped to 23% of its 1991 level,and of specifically military products to just 12%. Early hopes that convertingdefence enterprises to civilian production would rescue the sector have for themost part proved unfounded. Instead, the prospect is for an increasing diver-gence between those able to find export markets for their goods and plough theexport revenue back into R&D, and those facing an uncertain future, eitherproducing for the Russian military or attempting to find lines of civilian prod-uction they can successfully develop.

Mining

Russia is a major producerand trader of fuels and

ores

Russia’s exceptionally rich natural resource endowment has made it a majorsource of most types of minerals, and in many cases the world’s leading pro-ducer and exporter. In particular, there are vast reserves of fuels and metal ores,including significant deposits of gold-bearing ore. About 10% of the world’sproven reserves of oil are located in Russia, and even after the recent decline inproduction the country accounts for about 10% of world output of oil, 30% ofgas, 10% of hard coal, 14% of iron ore and 10-15% of non-ferrous metal ores.Russia’s looming presence on world markets for key minerals is often enhancedby the domination of production by a single enterprise. The diamond giant,Almazy Rossii-Sakha, accounts for about one-quarter of world production,while Norilsk Nickel is estimated to produce one-third of the world’s nickel and40% of its platinum.

The collapse of domestic demand for many basic metals in the early 1990s ledto sharply rising exports of ferrous and non-ferrous metals, in some casesprovoking anti-dumping duties and other protectionist measures. The exportboom also intensified the battles for control of main metals enterprises, manyof which remain unresolved. Meanwhile, falling world metals prices and risingdomestic energy prices have begun to squeeze the sector, highlighting the need

Russia: Mining 31


for productivity-raising restructuring and modernisation even of enterpriseswhich hitherto seemed to be managing the market transition successfully.

Depression in the coalsector

Russia’s coal sector was already in crisis in the 1980s, when it became clear toSoviet planners that production was uneconomical. The share of budgetaryfunds in financing coal enterprises had reached 77%; only around 15% ofmines were technically comparable to those of leading Western producers(which were themselves raising efficiency rapidly), and about two-thirds ofmines were rendered dangerous by a build-up of gas and dust. The situation hasdeteriorated since 1992, with falling profitability and subsidy withdrawal leav-ing coal enterprises unable to finance wage payments or invest in basic safetymeasures, let alone modernise production. Productivity in underground minesis about one-twelfth that of world-leading US producers. In late 1997 the WorldBank approved a second coal restructuring loan for Russia, with stiff conditionsto ensure that it is used to close loss-making mines, and restructure those thatare viable.

Agriculture, forestry and fishing

Most agricultural land isnot fertile—

Poor-quality acidic soil with few natural nutrients means that agriculture in thenorth of Russia is concentrated on livestock production. Southern parts of thecountry, and western Siberia, produce grain and other crops. Grain harvests,although recovering from their recent low in 1995, remain well down onaverages for the 1980s. With generally unfavourable relief, and a tendency todrought on a three-year cycle, agriculture occupies only about 32% of the totalland area. Some 45% of the total land area is forested, and timber forms one ofthe most important export items. Further soil damage has been inflicted bychemical and pollution discharges from industry, and by overintensive cultiv-ation and inappropriate crop choice in some regions.

—and farming still lackscommercial incentives

Forced collectivisation of agriculture has left most farms inefficiently struc-tured and managed, chronically short of working capital and dependent onstate support. This is largely a product of the failure to tackle land reform.Although the constitution confirms the right to private ownership of land, thelegal mechanisms for exercising this right do not yet exist. The president, BorisYeltsin, has sought via presidential decrees to operationalise the right to buyand sell agricultural land, but the State Duma has refused to pass a land codewhich would allow it to be treated as a normal commodity. The Duma has alsosought to impose restrictions on property rights to urban land. As a result, landcannot be used as collateral for loans, and the farm sector’s access to credit isconsequently limited. Failure to strengthen land ownership rights has alsobeen an impediment to the development of private farming. Only 9% of thearea sown to major crops in 1996 was in private hands, the rest remaining inthe hands of agricultural enterprises—basically former state and collectivefarms reorganised as partnerships or joint-stock companies, usually under theirold managers.

32 Russia: Agriculture, forestry and fishing


Agriculture has faredpoorly in the 1990s—

The area of land under cultivation has declined steadily since 1990, as financialconstraints tighten and large tracts of land cease to be commercially viable.Yields on major crops, especially grain, have generally declined in recent years.By 1996, grain output was 41% down on 1990, sugarbeet 50%, and meat 47%.The size of livestock herds also shrank substantially over the period. Financialconstraints on the purchase of fuel, lubricants, spare parts, mineral fertilisersand other inputs have restricted the preparation and sowing of land, withexceptionally poor weather in 1995-96 damaging much of the crop that couldbe raised, sending grain harvests to their lowest levels since the early 1960s.(See Reference tables 13 and 14 for historical data on agricultural productionand livestock numbers.)

—with cautious signs ofrecovery in 1997

Grain harvests have begun to recover from the slump in 1995, when netproduction dropped to 63.4m tonnes: this rose to 69.3m tonnes in 1996 and88.5m tonnes in 1997 according to the CIS Intersate Statistics Committee. Thishas raised the prospect of modest wheat and barley exports during 1997/98, thefirst grain exports in decades. Moreover, although structural change will pro-ceed extremely slowly until the issue of land reform is settled, the new mecha-nism for providing government finance to agriculture instituted in 1997 is animportant step forward. For the first time, soft credits to farms were repaid,chiefly because the new system, despite certain defects, differs from its prede-cessors in two important ways:

• it creates incentives for farms to try to look financially healthy, rather thanrewarding those which are, or appear to be, in the worst financial shape; and

• the banks handling the credits have a clear incentive to collect the debts,and can channel them to borrowers with this in view.

The forest productsindustry has been cut

down to size

Russia is a major producer and exporter of timber, of which it has an estimated82bn cu metres of harvestable stock. However, the extensive exploitation poli-cies promoted by the Soviet regime have depleted its forests, with loggingmoving steadily eastwards. Siberia accounted for one-third of Russia’s sawntimber production in the early 1990s, up from one-quarter in 1970. The timberindustry has experienced severe depression in recent years, with investmentvirtually ceasing, and production of timber, paper and cellulose falling by 64%between 1990 and 1996. Cellulose production for the domestic market virtu-ally stopped, as customers turned to superior imports from Finland. Exports,however, recovered strongly in 1995, fuelled by rising demand in China, theUS and Japan.

Fishing output has alsodeclined

When the Soviet Union disintegrated, Russia’s fishing industry was the world’sfourth largest, after those of Japan, the US and China. It still accounts for nearly25% of the world’s production of fresh and frozen fish, and for about one-thirdof world tinned fish output. However, production of fish and other sea prod-ucts has contracted severely in recent years, with output of tinned fish fallingfrom 2bn tins in 1991 to under 600m tins in 1995. One possible advantage ofthis lull in production may be to reduce the danger of overdepleting traditionalfishing grounds. In May 1996 Russia reached agreement with Norway, Iceland

Russia: Agriculture, forestry and fishing 33


and the Faroe Islands over herring stocks in international waters surroundingthese countries, which are thought to contain one of the world’s largest stocks.

Construction

Privatisation is underway, as the market begins

to recover

Like the rest of the economy, construction was until recently almost com-pletely state-owned. A small number of housebuilding co-operatives existed,but relatively few dwellings were built privately. The sector is now being priva-tised, and private and co-operative housing construction activity has increasedboth in absolute terms and as a proportion of the total. In the first threequarters of 1996 the purely state-owned companies accounted for fewer than20% of housing completions.

Under central planning, construction suffered from the same problems as theeconomy at large: inefficiency, excessively long lead-times, and a high rate oflabour turnover. Since 1989 the rate of completion of industrial and other largestate-run projects has deteriorated further. Available figures on housing com-pletions show that after a steady increase in the 1980s there was a significantfall in the early 1990s (see Reference table 15). However, activity in the housingsector stabilised in 1993-95, and is expected to recover slowly as lower inflationand rising real incomes assist the launch of mortgage lending.

The external sector

Merchandise trade

Foreign trade($ bn)

1995 1996 1997a

Exports fob 81.6 88.5 86.7

Imports fob –60.1 –67.6 –66.9

Trade balance 21.5 20.9 19.8

a Figures for 1997 do not include an estimate for unrecorded imports.

Source: Goskomstat.

The trade surplus willdiminish as recovery takes

hold

Growth in Russia’s external trade has been rapid since the collapse of the Sovietsystem. The evident constraints of the autarky attempted under communism,and the disruption of payment arrangements with other former Soviet repub-lics (along with their ability to pay), made integration with the world economya priority for reformers. Although collapsing domestic demand led to a sharpfall in imports in 1991-92, exports grew strongly, leading to large trade sur-pluses. The main spurs for this export growth were weak domestic demand forraw materials and semi-finished goods, an undervalued rouble exchange rate,and the profit to be gained from diverting previously subsidised intra-Sovietexports to hard-currency markets where world prices could be charged. Importssubsequently picked up as well, largely as a result of real rouble appreciation,and overall trade turnover grew each year until 1997. Total foreign trade fell by

34 Russia: Construction


1.5% that year, and the trade surplus (on customs-service data) fell by $7.1bnto $19.8bn. In part, this reflected a recovery in domestic demand which bothconstrained exports and drew in increased imports.

Post-Soviet trade haschanged direction—

In 1990 some 70% of all Russian exports went to other Soviet republics; and47% if imports were purchased from them. Outside the Soviet Union, most ofRussia’s communist-era trade was with client states within the Council forMutual Economic Assistance (CMEA). Trade with the West was limited, andsometimes involved barter of raw materials for manufactured products. Thissituation changed dramatically following the collapse of the Soviet Union.Problems with inter-enterprise payments and the break-up of the rouble zoneinto more than a dozen non-convertible currencies disrupted trade with theCommonwealth of Independent States (CIS), while collapsing domestic de-mand led to rising exports of energy, minerals and semi-finished goods tonon-CIS states. Russian imports from non-CIS states also grew rapidly,prompted by the new demand for consumer and capital goods not availablethere, and assisted by the rouble’s real appreciation against the main currenciesof the West during 1992-96.

In 1997 non-CIS states accounted for 78.5% of Russia’s foreign trade turnover,up from 76.3% in 1996. The EU accounts for 40% of Russian foreign trade. CISmarkets, however, remain important for exporters in such sectors as machine-building, where products are not competitive in the West. Trade with formerCMEA states, which fell sharply in 1992-94, has also begun to recover.

—but retains its primarycommodity composition

Fuels and energy, the principal hard-currency earners in the Soviet era, madeup 46% of total exports in 1997. Oil and oil products are now the largest exportcategory owing to a boost in revenue from the switch to dollar pricing as salesare diverted to non-CIS states. Ferrous and non-ferrous metals are the secondlargest export item, accounting for 17% of total exports in 1997. The share ofmachinery and equipment rose by about half a percentage point in 1997, butremained just over 10%.

The import bill is correspondingly biased towards intermediate and downstreamindustrial products, with machinery and equipment accounting for 35% ofimports from outside the CIS in 1997. Foodstuffs and unprocessed agriculturalproducts are the next largest imports, reflecting the depleted state of Russianagriculture and its inability to cater for new consumer tastes. (See Referencetables 16 and 17 for data on the most important export and import sectors.)

Still an industrial supplierto former Soviet republics

Trade with the former Soviet republics is overwhelmingly in industrial prod-ucts, reflecting the pattern of specialisation developed under the CMEA. At thetime of the Soviet Union’s disintegration, engineering and metal products wereRussia’s main export categories, together accounting for around 30% of thetotal compared with only 13% for electricity and fuels. However, the extent ofdependence on primary commodity exports was concealed by their artificiallylow prices. The substantial realignment of prices since the end of communistrule has turned fuels into the largest visible export, accounting for about 45%of the total in 1995.

Russia: Merchandise trade 35


Main trading partners, 1996(% of total value)

Exports to: Imports from:

CIS 18.8 CIS 32.4 Ukraine 9.3 Ukraine 14.4 Belarus 3.6 Kazakhstan 7.0 Kazakhstan 3.1 Belarus 6.1

EU 33.1 EU 36.2 Germany 8.3 Germany 11.8 Netherlands 4.1 Italy 5.3 UK 3.9 France 3.8 Switzerland 4.8 UK 2.6

China 5.7 China 2.3

US 5.6 US 5.2

Japan 3.5 Japan 2.2

Others 33.3 Others 21.7Source: IMF, Direction of Trade Statistics.

Trade agreement withthe EU

In July 1995 Russia signed a trade agreement with the EU, which took effect inFebruary 1996. The trade agreement forms part of a full-scale Partnership andCo-operation Agreement. The trade agreement abolishes EU quotas on mostindustrial imports from Russia (with the exception of textiles, steel and nuclearmaterials), and stipulates compliance with World Trade Organisation (WTO)anti-dumping procedures. The EU is to end its categorisation of Russia as anon-market economy, which puts Russian exporters at a disadvantage whencontesting anti-dumping actions. The agreement also requires that a mutualdecision be taken during 1998 as to whether to create a common free-tradezone. (See Reference table 18 for data on main trading partners outside theformer Soviet Union; Reference table 19 shows the main trading partners of theSoviet Union.)

Invisibles and the current account

The current-accountsurplus has begun to

shrink

Russia has kept its current account in surplus ever since the break-up of theSoviet Union, with the large positive merchandise trade balance offsettingregular deficits on service trade. The current-account surplus increased in 1996(on IMF measures), mainly because of a temporary recovery in world oil prices,but began a trend decline in 1997 with the onset of economic recovery. Acurrent-account deficit of around $2bn was actually recorded in the thirdquarter of 1997, reducing the surplus for the first three quarters to $3bn, from$7.4bn in the first three quarters of 1996.

Russia has recently recorded deficits on every item on the current account, withthe exception of merchandise trade, although not always of any significance.The deficit on trade in services declined from $8.7bn in 1995 to $6.4bn in1996, and that for January-September 1997 was $3.6bn, down from $4.2bn.However, the services deficit is expected to widen again with the return togrowth. Travel and transport are the largest invisible trade items, and exportsof both declined in 1997, mainly because of lower exports to other CIS states.A total of 56% of services imports arose from Russian citizens’ travel abroad,with payments for freight transport ranking a distant second.

36 Russia: Invisibles and the current account


Remittances by foreigners working in Russia consistently exceed those byRussians abroad, but this is relatively insignificant. The negative balance onincome from investment and labour ($5.7bn for January-September 1997)mainly results from a deficit on investment income. That this exceeded thefull-year 1996 figure, and was more than triple that of 1994, reflects the growthof foreign investment in Russia, and the beginnings of a repatriable return onit. Russia’s income under this item principally arose from servicing of the debtsof the former Soviet Union. The significance of current transfers to the currentaccount continues to decline, in line with falling inflows of official assistance,and the deficit on this item for January-September 1997 was $95m. (SeeReference table 20 for balance-of-payments data.)

Current account($ bn)

1996 1997a

Merchandise exports fob 89.2 87.4

Merchandise imports fob –62.3 –67.6

Trade balance 26.9 19.8

Net services balance –6.5 –3.6b

Net interest, profit & dividends –5.2 –5.7b

Net transfers 0.2 –0.1b

Current-account balance 9.3 3.0b

a Preliminary. b January-September.

Source: Goskomstat.

Capital flows and foreign debt

Capital inflows have beeninsignificant so far—

Foreign capital inflows since the fall of the Soviet Union have been meagre inthe context of the country’s size and economic potential. This mainly reflectsthe continued political instability and legislative confusion, especially in rel-ation to production-sharing in natural resource extraction. According toGoskomstat (the State Statistics Committee), the cumulative foreign capitalstock (including direct investment, portfolio investment and “other” inflows)had reached $15.3bn by mid-1997. From its low base, foreign direct investment(FDI) is now starting to rise rapidly—an apparent reward for the gradualclarification of commercial laws and regulations and the greater price andexchange-rate stability. Total FDI inflow reached around $2.5bn in 1996 andan estimated $5bn in January-September 1997. The bulk of FDI has been at-tracted into trade and services, rather than manufacturing or the fuel andenergy sector. Russia’s relatively poor performance in attracting FDI must alsobe seen against the background of massive capital flight from the country,which appears to have been of the order of 3% of GDP in 1995-96.

—and net capital outflowcontinued in 1997

Capital inflows to Russia were $36.9bn in the first nine months of 1997 accord-ing to provisional balance-of-payments data, compared with estimated out-flows of $32bn-33bn when “errors and omissions” of $7.8bn (mostly illegalcapital flight) is added to the official inflow of $24.7bn. If sustained throughthe fourth quarter, this would have represented the first net capital inflow sincethe Soviet collapse. However, the net flow of private capital in the first three

Russia: Capital flows and foreign debt 37


quarters remained distinctly negative, with a net outflow of private resources inthe region of $15bn-16bn; and provisional payments data for the full yearshow that intensified outflows sparked by renewed currency pressure kept theoverall total negative for 1997 as a whole. FDI and portfolio investment inRussia’s private sector, and lending to it, amounted to $17.2bn, just over halfthe private capital outflow. Although net outflows are shrinking, confidence inexchange-rate, price and political stability will need to be bolstered furtherbefore Russia begins to experience a sustained inflow of medium- and long-term capital.

Main sovereign debts havebeen refinanced—

The collapse of the Soviet Union in 1991 gave its Western creditors a majorproblem, requiring quick decisions on how repayment of the huge Sovietforeign debt would be managed. According to the World Bank, the country’sforeign debt stock stood at $67.5bn at the end of 1991, but had grown to$78.7bn by the end of 1992. In agreement with the other successor states,Russia assumed responsibility for the repayment and servicing of former Sovietdebt. However, Russia was in no position to stick to its obligations, and inJanuary 1992 it secured a deferral of principal payments due that year. A suc-cession of rollover agreements were negotiated between 1993 and 1995, whilethe government negotiated a comprehensive rescheduling. In October 1995 itreached a preliminary agreement with the London Club of bank creditors onrestructuring the $32.5bn commercial debt, over 25 years with a seven-yeargrace period finalised at the end of 1997. The London Club deal recognised thatRussia was not meeting its debt-service obligations anyway: only $1.1bn of the$9.7bn in debt service due in January-September 1997 was paid.

A similar deal affecting $40bn in debt owed to official creditors was reachedwith the Paris Club in April 1996, and finalised in October 1997. This agree-ment includes a six-year grace period, and the bulk of the debt is to be repaidwithin 20 years. The postponement of a portion of debt service will alleviateone source of balance-of-payments pressure reducing the debt-service burdenin 1998-2002 so that full repayments can then resume out of a larger and (ifreform stays on course) fast-growing GDP.

—but external debt isrising again

Total Russian (and Soviet) external convertible-currency debt had reached ap-proximately $135.5bn by the end of 1997. This includes the debt of the formerSoviet Union, loans taken on in Russia’s own name since 1991, and interestarrears. Only about 10-11% of the end-1997 debt was short-term; figures fromthe Bank for International Settlements (BIS) show a rapid build-up of short-term foreign bank debt during 1997, but these are exaggerated by the inclusionof some domestic-currency lending, and some foreign loans rolled over underthe 1997 reschedulings. The debt-service burden as a share of current-accountrevenue also remained low in 1997, at around 20%, largely owing to reliefobtained under London and Paris Club agreements. About 60% of the nationaldebt is owed to official creditors, 30% to commercial bank creditors and thebalance to other private creditors (such as bond holders). Germany is thelargest creditor. (See Reference table 21 for sovereign debt details.)

38 Russia: Capital flows and foreign debt


Foreign reserves and the exchange rate

Foreign reserves were drained by the trade disruption and capital flight causedby the disintegration of the Soviet Union, but steadily recovered between 1994and 1997, helped by the persistent current-account surplus and the build-up ofinward investment and multilateral lending. Foreign reserves (excluding gold,whose valuation has declined steadily with world prices) reached $20.2bn inJuly 1997, before falling to $13bn by the end of that year, as a result of capitaloutflows following several currency crashes in East Asia.

Foreign reserves, 1997($ m; end-period)

Foreign exchange 12,894.7

SDRs 122.4

Reserves position in the IMF 1.2

Total excl gold 13,018.3

Gold (national valuation) 4,889.2

Gold (m fine troy oz) 16.297Source: IMF, International Financial Statistics.

The rouble has risendramatically in real terms

since 1992

The rouble has depreciated dramatically in nominal terms against the dollar asa result of post-communist inflation, falling from an average of Rb30:$1 in1991 to Rb5,785:$1 in 1997 and around Rb6:$1 (following 1:1,000 redenomi-nation) in the first quarter of 1998. In real terms, however, this amounts to asubstantial appreciation, the rouble’s decline against the dollar having failed tokeep pace with the differential of Russian over US price inflation. The rouble’srelative strengthening against the dollar meant that, despite severe economiccontraction, Russian GDP had increased more than 20fold in dollar terms by1996. This steep revaluation of dollar GDP is the main reason why Russia passesas a relatively low debt country. The dollar debt:GDP ratio has fallen sharplysince 1991 despite the rise in external debt and steep decline in real GDP.

Russia: Foreign reserves and the exchange rate 39


Appendices

Sources of information

National statistical sources Although Russia’s statistical sources have improved since the fall of the SovietUnion, they are still considerably lacking in coverage and consistency.Comprehensive annual data is presented in Rossiiski statisticheski ezhegodnik(Statistical Yearbook of the Russian Federation), produced by Goskomstat (theState Statistics Committee). In addition to this, Goskomstat also producesmonthly reports on the economy, including regional data: Sotsialno-ekonomicheskoe polozhenie Rossii (Socioeconomic Conditions in Russia) gives anaccount of key trends over the preceding year. Also of value is the annual reportof the CIS Intergovernmental Statistics Committee (CIS Stat), Sodruzhestvonezavisimykh gosudarstv v 199X godu: statisticheskie ezhegodnik.

The best data publication in the English language is Russian Economic Trends,produced by the government’s Working Centre for Economic Reform with theassistance of a team from the London School of Economics’ Centre forEconomic Performance (CEP) working within the Russian-European Centrefor Economic Policy. This source draws on official published and unpublisheddata and contains useful analysis of key trends and issues. There is also amonthly supplement.

International statisticalsources

European Bank for Reconstruction and Development, Transition Report(annual)

IMF, Economic Review: The Economy of Former USSR in 1991, 1992

IMF, Economic Review: Russian Federation, 1992

IMF, The Russian Federation in Transition, 1994

OECD, Economic Surveys, The Russian Federation, 1997

World Bank, Russian Economic Reform: Crossing the Threshold of StructuralChange, 1993

World Bank, Statistical Handbook: States of the Former USSR, 1996

Select bibliography Business in the Ex-USSR (English-language monthly)

Economist Intelligence Unit, The New Russia: A Political Risk Analysis, 1994

Europa Publications, Eastern Europe and the Commonwealth of Independent States,1997

Ekonomika i zhizn (Russian economic weekly)

Finansovye izvestia (Russian-language financial newspaper, appearing twiceweekly)

Kommersant (economic weekly in English and Russian)

Russia Review (English-language weekly)

40 Russia: Sources of information


Reference tables

Reference table 1

Federal and consolidated budgets(Rb bn unless otherwise indicated)

1993 1994 1995 1996 1997

Consolidated budgeta

Revenue 41,771bc 177,400 444,800 573,500 279,300d

Expenditure 57,319b 234,800 537,600 766,700 386,800d

Balance n/a –57,400 –92,800 –193,200 –107,500d

% of GDP n/a –10.4 –3.4 –4.1 –8.6d

Balance incl federal off-budget funds –15,548 –54,300 –92,600 –198,600 –106,600 % of GDP –9.6 –8.9 –5.7 –8.8 –6.1

Federal budgetd

Revenue 17,200 70,300 221,500 278,700 227,800e

Expenditure 34,100 135,600 270,300 353,000 305,300e

Balance (Ministry of Finance definition) –16,900 –65,300 –48,700 –74,300 –77,500e

% of GDP –9.8 –10.7 –3.0 –3.3 –3.6e

Balance (IMF definition) 11,100 69,800 88,500 176,600 158,400ef

% of GDP –6.5 –11.4 –5.4 –7.8 –7.3ef

a Comprises federal, regional and local budgets. b Includes federal extra-budgetary funds. c Cash-flow basis; calculated on the basis of tax collected but not necessarily received by the Ministry ofFinance. d January-June. e January-October. f Includes arrears-payment provision for January andFebruary.

Source: Whurr Publishers, Russian Economic Trends.

Reference table 2

Money supply(Rb trn)

1993 1994 1995 1996 1997

Total RCB credit 191.2 650.0 258.8a n/a n/a

Monetary baseb 16.7 48.0 103.8 130.9c 163.6d

M2c 32.6 97.8 220.8 295.2c 371.1d

a January-March. b Monetary base is the fundamental determinant of broad money (M2) growth.It is defined in accordance with IMF standards: stocks of cash outside the banking system plus cashheld by the commercial banks plus commercial bank deposits held by RCB. c M2 includes currencyin circulation, demand deposits and time deposits. d November.

Source: Whurr Publishers, Russian Economic Trends.

Russia: Reference tables 41


Reference table 3

Gross domestic product(in rededominated roubles unless otherwise indicated)

1993 1994 1995 1996 1997

Total (Rb m)At current prices 171,510 630,700 1,630,100 2,256,120 2,675,000At constant (1990) prices 478 417 401 377 382Real change (%) –8.7 –12.6 –4.0 –5.0 0.4

Per head (Rb)At current prices 1,154.95 4,248.89 11,194.33 15,561.50 18,197.30At constant (1990) prices 3.22 2.81 2.71 2.59 2.60Real change (%) –8.5 –12.7 –3.6 –4.3 0.3Sources: Goskomstat; EIU.

Reference table 4

Gross domestic product by expenditure(Rb bn; current prices)

1992 1993 1994 1995 1996

Household consumption 6,550 76,997 285,370 796,513 1,107,111

Public consumption 2,634 29,758 136,683 305,627 452,802

Gross fixed asset formation 4,550 34,965 133,208 325,443 461,729

Change in stocks 2,031 11,352 22,762 53,401 60,563

Exports of goods & services 11,848 65,525 169,535 428,116 499,192

Imports of goods & services –9,173 –52,300 –141,665 –362,635 –378,938

GDP incl statistical discrepancy 19,006 171,510 610,745 1,630,079 2,256,120Source: IMF, International Financial Statistics.

Reference table 5

Prices and earnings(% change, year on year; period averages)

1993 1994 1995 1996 1997a

Consumer prices 876.0 307.0 198.0 48.0 14.6

Average wages 878.5 272.7 123.6 51.9 n/a

a Goskomstat.

Sources: Whurr Publishers, Russian Economic Trends; Goskomstat.

Reference table 6

Population(at Jan 1st)

1993 1994 1995 1996 1997

Estimated population (m) 148.7 148.4 148.3 148.0 147.8

Birth rate per ’000 of population 9.4 9.6 9.3 8.9 n/a

Death rate per ’000 of population 14.5 15.7 15.0 14.2 n/aSources: Goskomstat, Statistical Yearbook of the Russian Federation; EIU.

42 Russia: Reference tables


Reference table 7

Employment by sector(’000; % of total in brackets)

1992 1993 1994 1995 1996

Agriculture & forestry 10,336 10,347 10,528 10,003 9,800(14.3) (14.6) (15.4) (15.1) (14.8)

Industry 21,324 20,805 18,576 17,182 16,300(29.6) (29.4) (27.1) (25.6) (24.7)

Construction 7,887 7,140 6,788 6,208 6,300(10.9) (10.1) (9.9) (9.3) (9.5)

Transport & communications 5,632 5,408 5,354 5,253 5,240(7.8) (7.6) (7.8) (7.9) (7.9)

Trade & catering 5,679 6,374 6,484 6,679 6,840(7.9) (9.0) (9.5) (10.0) (10.4)

Health, education, arts & science 17,043 16,701 16,630 16,429 16,920(23.7) (23.6) (24.3) (24.6) (25.6)

Administration & finance 1,974 2,230 2,404 2,833 2,800(2.7) (3.1) (3.5) (4.3) (4.2)

Others 2,157 1,847 1,720 1,791 1,800(3.0) (2.6) (2.5) (2.7) (2.7)

Total 72,032 70,852 68,484 66,441 66,000(100.0) (100.0) (100.0) (100.0) (100.0)

Source: Goskomstat, Statistical Yearbook of the Russian Federation.

Reference table 8

Unemployment(’000 unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

No. of registered unemployed 1,037.7 1,552.0 2,327.0 2,506.0 n/a

Unemployment rate, registered (%) 1.2 2.4 3.4 3.4 3.3a

Unemployment rate, ILO definition (%) 5.5 7.5 8.8 9.3 9.0

No. of unfilled vacancies 422.8 346.8 309.0 256.0 n/a

a January-October.

Sources: Whurr Publishers, Russian Economic Trends; Goskomstat.

Reference table 9

Transport statistics

1992 1993 1994 1995 1996

RailPassenger-km (bn) 253.2 272.2 227.1 192.2 168.8Freight traffic (bn tonne-km) 1,967 1,808 1,195 1,214 1,129

AirPassenger-km (bn) 117.7 83.2 72.3 71.7 65.0Freight traffic (bn tonne-km) 1.8 1.6 1.5 1.6 2.1Source: Goskomstat, Statistical Yearbook of the Russian Federation.



Reference table 10

National energy statistics(m tonnes unless otherwise indicated)

1992 1993 1994 1995 1996

Oil (incl gas condensates) 399 354 316 307 301

Natural gas (bn cu metres) 641 618 607 595 601

Coal 337 306 271 262 255

Peat 7.8 2.5 n/a n/a n/a

Oil shale 3.8 3.3 n/a n/a n/a

Electricity (bn kwh) 1,008 957 876 862 847 of which: nuclear 120 119 n/a n/a n/aSource: Goskomstat, Statistical Yearbook of the Russian Federation.

Reference table 11

Banking statistics(as at Jan 1st)

1994 1995 1996

No. of registered commercial banks 2,000 2,500 2,600

No. of branches 4,500 5,500 5,800

Credits extended to companies, private individuals etc (Rb bn) 24,542.3 63,964.5 97,770.4 Short-term 23,742.3 60,544.4 92,993.8 Long-term 799.4 3,410.1 4,776.6

Credits extended to other banks (Rb bn) 2,165.5 9,059.8 14,375.4Source: Goskomstat, Statistical Yearbook of the Russian Federation.

Reference table 12

Industrial production(Index 1990=100)

1993 1994 1995 1996 1997

Electricity 91 83 88 86 84

Fuels 77 69 76 74 74

Ferrous metallurgy 65 54 60 58 61

Non-ferrous metallurgy 59 54 56 53 54

Engineering & metalworking 65 45 41 37 38

Chemicals & petrochemicals 58 44 48 43 44

Timber & cellulose industry 63 44 44 34 34

Construction materials 65 47 43 32 31

Light industry 49 26 18 13 13

Food industry 69 57 52 47 47

Total 65 51 49 46 47 of which: extractive industry 77 70 69 59 59 processing industry 63 48 46 44 44Source: Goskomstat, Statistical Yearbook of the Russian Federation.



Reference table 13

Agricultural production(m tonnes unless otherwise indicated)

1992 1993 1994 1995 1996

Crop sectorGrain (after processing) 106.9 99.1 81.3 63.4 69.3Sugarbeet 25.5 25.5 13.9 19.1 16.1Sunflower seed 3.1 2.8 2.6 4.2 2.8Soybeans (’000 tonnes) 505 497 400 300 n/aCotton (’000 tonnes) 78 58 54 69 n/aPotatoes 38.3 37.7 33.8 39.7 38.5Fruit & berries 3.4 3.2 2.4 2.5 n/aVegetables 10.0 9.8 9.6 11.2 10.7

Animal sectorMeat (slaughter weight) 8.3 7.5 6.8 5.8 5.3 of which: beef 3.6 3.4 3.2 2.7 n/a pork 2.8 2.4 2.1 1.9 n/a lamb & mutton (’000 tonnes) 329 359 316 261 n/aMilk 47.2 46.5 42.8 39.3 35.7Eggs (bn) 42.9 40.3 37.4 33.7 31.5Wool (’000 tonnes) 179 158 122 98 n/aSource: Goskomstat, Statistical Yearbook of the Russian Federation.

Reference table 14

Livestock numbers(m; as at Jan 1st)

1993 1994 1995 1996 1997

Cattle 52.2 48.9 43.3 39.7 35.1

Sheep & goats 51.4 43.7 34.6 28.0 22.8

Pigs 31.5 28.6 24.8 22.6 19.1Source: Goskomstat, Statistical Yearbook of the Russian Federation.

Reference table 15

Housing completions(m sq metres)

1991 1992 1993 1994 1995

Towns & cities 35.1 31.0 32.3 30.7 32.1

Villages 14.3 10.5 9.5 8.5 8.9

Total 49.4 41.5 41.8 39.2 41.0Source: Goskomstat, Statistical Yearbook of the Russian Federation.



Reference table 16

Key exportsa

($ bn at current prices; % of total in brackets)

1993 1994 1995 1996 1997b

Machinery & equipment 2.9 3.2 5.3 5.1 6.7 (6.5) (6.0) (8.1) (7.7) (10.1)

Fuels & minerals 20.7 22.8 26.4 31.0 28.4 (46.7) (43.1) (40.2) (46.9) (47.4)

Metals & precious stones 10.3 16.5 19.6 17.5 12.5 (23.2) (31.1) (29.8) (26.4) (20.8)

Chemicals & rubber 2.6 4.1 6.3 5.4 4.9 (6.0) (7.8) (9.6) (8.2) (8.2)

Timber, cellulose & paper 1.9 2.2 3.9 n/a n/a (4.2) (4.1) (5.9) (–) (–)

Textiles & textile products 0.2 0.9 0.8 n/a n/a (0.4) (1.7) (1.3) (–) (–)

Leather, fur & products 0.1 0.4 0.3 n/a n/a (0.2) (0.7) (0.4) (–) (–)

Food & agricultural products 1.6 2.3 2.3 n/a n/a (3.8) (4.3) (3.5) (–) (–)

Others 4.0 0.6 0.8 n/a n/a (9.0) (1.2) (1.2) (–) (–)

Total 44.3 53.0 65.7 66.1 66.0

a To countries outside the former Soviet Union only. b EIU estimates.

Sources: Goskomstat, Statistical Yearbook of the Russian Federation; EIU.

Reference table 17

Key importsa

($ bn at current prices; % of total in brackets)

1993 1994 1995 1996 1997b

Machinery & equipment 9.1 10.6 12.9 10.9 13.6(33.8) (37.6) (38.8) (37.0) (34.9)

Fuels & minerals 1.1 0.8 0.9 n/a n/a(4.0) (2.9) (2.8) (–) (–)

Metals & precious stones 0.9 1.1 1.7 1.8 2.7(3.5) (4.0) (5.0) (6.3) (6.9)

Chemicals & rubber 1.7 3.1 3.8 4.6 5.8(6.2) (11.0) (11.4) (15.8) (14.8)

Timber, cellulose & paper 0.1 0.5 1.0 n/a n/a(0.5) (1.7) (3.0) (–) (–)

Textiles & textile products 3.7 2.2 1.6 n/a n/a(13.9) (7.6) (4.7) (–) (–)

Leather, fur & products 0.7 0.2 0.1 n/a n/a(2.6) (0.6) (0.4) (–) (–)

Food & agricultural products 5.9 8.6 9.7 7.3 6.3(22.2) (30.4) (29.3) (24.9) (16.1)

Others 3.6 1.2 1.5 n/a n/a(13.3) (4.2) (4.6) (–) (–)

Total 26.8 28.3 33.2 29.4 39.0

a From countries outside the former Soviet Union only. b EIU estimates.

Sources: Goskomstat, Statistical Yearbook of the Russian Federation; EIU.



Reference table 18

Main trading partners, 1996

Value ($ m) % of total Exports Imports Exports Imports

Western industrialised countriesGermany 6,726 5,130 8.3 11.8US 4,584 2,231 5.6 5.2Switzerland 3,901 496 4.8 1.1Netherlands 3,315 999 4.1 2.3UK 3,160 1,115 3.9 2.6Japan 2,882 963 3.5 2.2Italy 2,803 2,307 3.4 5.3Finland 2,569 1,659 2.0 3.8Slovakia 1,854 262 2.3 0.6Hungary 1,793 649 2.2 1.5Czech Republic 1,743 529 2.1 1.2France 1,596 1,256 2.0 2.9Poland 1,439 704 1.8 1.6Belgium-Luxembourg 1,322 660 1.6 1.5Sweden 995 554 1.2 1.3Bulgaria 914 243 1.1 0.6Austria 822 651 1.0 1.5Romania 775 134 1.0 0.3Canada 91 337 0.1 0.8

Other CISUkraine 7,574 6,248 9.3 14.4Belarus 2,940 2,629 3.6 6.1Kazakhstan 2,542 3,026 3.1 7.0

OthersChina 4,670 993 5.7 2.2India 747 598 0.9 1.4South Korea 659 466 0.8 1.1Singapore 570 220 0.7 0.5Cuba 462 406 0.6 0.9

Total incl others 81,438 43,318 100.0 100.0

Note. World import and export totals are not consistent with International Financial Statistics totals.

Source: IMF, Direction of Trade Statistics.



Reference table 19

Main trading partners of the former Soviet Union(% of total)

Exports Imports 1992 1993a 1994a 1995a 1992 1993a 1994a 1995a

Ukraine 44.2 53.0 49.7 49.1 49.2 42.3 42.7 48.9

Kazakhstan 18.7 17.2 13.4 17.0 18.0 16.4 19.3 20.2

Belarus 13.4 15.9 21.6 20.6 13.5 22.8 20.3 15.4

Uzbekistan 6.2 5.3 5.4 5.8 5.0 11.9 8.3 6.6

Moldova 3.2 2.9 3.8 2.9 0.9 1.3 4.6 4.7

Azerbaijan 1.8 1.2 1.3 0.6 4.2 2.1 1.4 0.8

Lithuania 3.8 n/a n/a n/a 1.7 n/a n/a n/a

Kyrgyz Republic 1.5 1.4 0.8 0.7 1.7 1.3 0.9 0.7

Turkmenistan 2.1 1.4 0.8 0.7 1.0 n/a 0.6 0.4

Latvia 1.3 n/a n/a n/a 1.2 n/a n/a n/a

Armenia 0.9 0.5 1.1 0.9 1.0 0.2 0.5 0.6

Georgia 0.9 0.3 0.5 0.3 0.0 0.3 0.5 0.4

Estonia 1.0 n/a n/a n/a 0.5 n/a n/a n/a

Tajikistan 1.0 0.9 1.0 1.3 0.4 n/a 0.9 1.2

a CIS countries only (ie excluding Baltic states).

Sources: Goskomstat, Statistical Yearbook of the Russian Federation; IMF, Economic Review: Russian Federation.

Reference table 20

Balance of payments($ m)

1995 1996 1997a

Exports of goods fob 81,553 88,463 62,852

Imports of goods fob –60,085 –67,577 –50,337

Trade balance 21,468 20,886 12,516

Exports of services 10,058 10,649 10,174

Imports of services –18,800 –17,160 –13,817

Balance on services –8,742 –6,511 –3,643

Balance on goods & services 12,726 14,375 8,873

Income: credit 4,292 4,231 3,705

Income: debit –7,626 –9,429 –9,451

Net transfers 108 165 –95

Current-account balance 9,501 9,342 3,032

Medium & long-term debt inflows 3,122 3,066 1,890

Net direct investment 1,710 2,108 3,215

Net portfolio investmentb –1,436 7,331 n/a

IMF credit 5,453 3,755 n/a

Other capital inflows (net) 7,943 –12,244 n/a

Change in international reserves –9,310 1,357 n/a

Financing requirement 7,483 5,443 n/a

a January-September. b Net of international bonds.

Source: Goskomstat.



Reference table 21

External debt($ m unless otherwise indicated; debt stocks as at year-end)

1992 1993 1994 1995 1996

Public medium- & long-term 64,891 102,158 107,748 100,279 102,222

Private medium- & long-term 0 0 0 0 0

Total medium- & long-term debt 64,891 102,158 107,748 100,279 102,222 Official creditors 11,547 55,149 62,782 56,765 59,776 Commercial creditors 53,344 47,009 44,966 43,514 42,446

Short-term debt 13,112 8,314 9,976 10,564 11,500 of which: interest arrears 4,412 2,914 5,276 6,214 8,816

Use of IMF credit 989 2,469 4,198 9,617 12,538

Total external debt 78,992 112,940 121,921 120,461 126,261

Principal repayments 948 1,558 2,283 3,275 3,122 Medium- & long-term debt 948 1,558 2,283 3,275 2,600 Official creditors 153 166 267 885 350 Commercial creditors 795 1,392 2,015 2,391 2,250 IMF debits 0 0 0 0 522

Interest payments 357 775 1,392 3,028 4,049 Medium- & long-term debt 357 683 1,217 2,733 3,482 Official creditors 59 67 501 1,389 1,750 Commercial creditors 298 616 716 1,344 1,732 IMF charges 0 78 175 294 542 Interest on short-term debt 0 14 0 0 25

Total debt service 1,305 2,333 3,674 6,303 7,171 Medium- & long-term debt 1,305 2,241 3,499 6,009 6,082 Official creditors 212 233 768 2,274 2,100 Commercial creditors 1,093 2,008 2,731 3,735 3,982 IMF debits & charges 0 78 175 294 1,064 Short-term debt (interest only) 0 14 0 0 25

Ratios (%)Total external debt/GDP 91.4 61.4 43.7 33.7 28.7Debt service/exports 2.6 4.3 5.9 8.2 7.9Debt service/GDP 1.5 1.3 1.3 1.8 1.6Interest payments/debt service 27.4 33.2 37.9 48.0 56.5Interest payments/exports 0.7 1.4 2.3 3.9 4.5

Note. In 1993 the World Bank started to include the old intra-CMEA debt in its calculations of total Russian debt.

Sources: World Bank, Global Development Finance; EIU.

Reference table 22

Foreign reserves($ m unless otherwise indicated; end-period)

1993 1994 1995 1996 1997

Foreign exchange 5,829 3,976 14,265 11,271 12,895

SDRs 5.0 3.1 116.7 4.5 122.4

Reserve position in the IMF 0.7 1.2 1.1 1.3 1.2

Total excl gold 5,835 3,980 14,383 11,276 13,018

Gold (national valuation) 3,059 2,525 2,824 4,047 4,889

Gold (m fine troy oz) 10.2 8.4 9.4 13.5 16.3Source: IMF, International Financial Statistics.



Reference table 23

Exchange rates(period averages)

1993 1994 1995 1996 1997

Rb:$ 932 2,191 4,559 5,121 5,785

Rb:DM 564 1,350 3,181 3,400 3,325Source: IMF, International Financial Statistics.

Editor:All queries:

Alan ShipmanTel: (44.171) 830 1007 Fax: (44.171) 830 1023



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