Overview of the economy

During its 73 years of existence, the USSR grew to be a great military superpower. Measured in terms of crude output, the USSR created the foundation for massive production possibilities. Soon after the disintegration of USSR, the Russian government announced a much more ambitious program of political and economic reform. The program included a transformation of the economy from the principles of state planning and administrative direction to market-based economics. Price controls were lifted. Government subsidies were eliminated or reduced. Foreign trade was liberalized through the lifting of export and import controls. The Russian currency, the ruble, was allowed to devalue to bring it into line with market rates. The Russian economy grew briskly throughout the year 2000, far exceeding expectations. Buoyed by the devaluation of the ruble and a sharp increase in average oil export prices over 1999 levels, real GDP surpassed its pre-1998 crisis level, growing by over 8 percent in 2000. On the negative side, it must be noted that Russia's economic growth was still largely concentrated in a few sectors. Overall, services have grown to account for more than 50 percent of GDP, with manufacturing contributing just slightly less than 40 percent and agriculture accounting for just under 10 percent. Overall trends indicate that the portion of GDP accounted for by services and taxes was increasing while industrial production and manufacturing were decreasing in importance as contributors to GDP. In December 2000, the Russian parliament (the Federal Assembly) passed Russia's first post-Soviet balanced budget. Between 2000 and 2008 Vladimir Putin presided over a dramatically changing Russia. During his tenure as President, the country enjoyed its strongest economic position since the end of Communism, characterized by booming average macroeconomic growth of 6.7 percent per year, modest inflation, budget surpluses, the eradication of foreign debt obligations and the accumulation of massive hard currency reserves. Between 1999 and 2008 Russia ranked among the worlds fastest growing economies, also recording the highest per capita income in purchasing power parity terms ($16,000) among the promising BRIC countries (Brazil, Russia, India, China). The 20082009 Russian financial crisis, part of the world Economic crisis of 2008, was a crisis in the Russian financial markets as well as an economic recession that was compounded by political fears after the war with Georgia and by the plummeting price of Urals heavy crude oil, which lost more than 70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009. According to the World Bank, Russias strong short-term macroeconomic fundamentals made it better prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses and high dependence on the price of a single commodity made its impact more pronounced than would otherwise be the case. In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been wiped off the value of Russia's shares, although Russian stocks rebounded in 2009 becoming the worlds best performers, with the Micex index having more than doubled in value and regaining half its 2008 losses.

Source: http://en.wikipedia.org Major Russian stock market RTS Index with S&P 500 and Oil Spot Prices. All data are in percentages to 1 May 2008 values. A Vladimir Putin criticises Mechel; B 2008 South Ossetia war starts; C Recognition of Abkhazia and South Ossetia by Russia; D Alexei Kudrin "no systematic crisis" speech; E measures to save major banks are adopted by the Russian government; F Global financial crisis of SeptemberOctober 2008; G President Dmitri Medvedev announced additional bailout financing Russia today has a moderately diversified economy, but its most important sector is the sale of raw materials and primary commodities such as oil, timber, and gold. Russia is well-endowed with natural resources and raw materials.

Effect of the crisis on the economy

Russia is a major exporter of commodities such as oil and metals, so its economy has been hit hard by the decline in the price of many commodities. Russian stock market declined significantly. Foreign investors have pulled billions of dollars out of Russia on concerns over escalating geopolitical tensions with the West following the military conflict between Georgia and Russia, as well as concerns about state interference in the economy. By September 2008, the RTS stock index plunged almost 54%, making it one of the worst performing markets in the world. Russian involvement in the US subprime mortgage crisis contributed to the volatility in Russia's financial system. The Russian Central Bank owned US$100 Billion of mortgage-backed securities of the two American mortgage giants Fannie Mae and Freddie Mac that were taken over by the US government. This investment most likely will have to be written off.

Financial Markets

Stock markets: Russian Financial Markets experienced extreme volatility in September -October 2008. On 16 September Russia's most liquid stock exchange MICEX and the dollar-denominated RTS were suspended trade for one hour after the worst one-day fall in 10 years as Finance Minister Alexei Kudrin reassured markets there was no "systemic" crisis. Next day, trading was suspended for the second day in succession on Russia's two main stock exchanges (MICEX and RTS) after shares fell dramatically, forcing the Federal Financial Markets Service to intervene. 6 October the MICEX and RTS crashed by 18.6% and 19.1% respectively. The losses forced the Federal Financial Markets Service to suspend the stocks three times. The decreases in other world markets on that day were considerable, but less dramatic than in Russia. Money markets: The crisis in money markets was imminent since spring, when Central Bank of Russia warned the public of a gradual contraction in bank lending due to unfolding world liquidity crisis. However, the regulator preferred to combat inflation, raising the refinancing rate and bank reserve contributions. 1 September hike in reserve rate alone withdrew nearly 100 billion roubles from the money market. The raise coincided with a seasonal peak in tax payments and left the banking system in a worse state of liquidity than that of August 1998. Bank failures: On 15 September the KIT Finance brokerage failed to pay off its debt, signalling problems in Russia's financial sector.[51][52] On 8 October the Russian Railways and Alrosa agreed to acquire a 90% stake in KIT Finance.

Crisis in real economy At the end of November 2008, The Russian economy as a whole was not in a state of recession. The government forecast for 2009 stood at a 6.7% annual growth rate while a November 2008 World Bank report projected 3% growth for 2009. However, a revised projection issued 30 March 2009 by the World Bank projects a 4.5% decrease for 2009 with unemployment projected to rise to 12% by the end of 2009. The World Bank report expressed concern about the condition of the poor and recommended increases in social support payments such as unemployment payments and child support payments. The report projected a slight rise in the average price of oil during 2010, up to $53 a barrel from the projected average of $45 for 2009.

Steel industry: Russian steel industry is dependent on foreign markets and domestic construction and automobile industries. Crisis in the industry was first publicly reported in the end of September early October. Magnitogorsk Iron and Steel Works laid off 3,000 workers (10% of its Urals staff) and reduced output by 15% on 7 October, another layoff of 1,300 was announced in early November Automotive industry: In June 2008 The Economist described "Russia's booming car market" as a place where "you just need someone to count the money". In November the market slowed to its lowest since January 2007. AC Nielsen linked the market drop to a collapse in auto loan programs and general uncertainty among consumers, and predicted that unless auto loans recover, the market will slide back into 1990s Construction and real estate: In the first half of 2008, Russian construction industry, apparently immune of the global financial squeeze, grew by 22% in nominal money compared to 2007. In SeptemberOctober Mirax Group, Sistema Hals, ST Group and other real estate developers announced freezing of future projects and intention to

dispose of ongoing projects in early stages, citing an unacceptable increase in interest rates and uncertain demand. Other industries: In November, the volume of Russian paper exports to China decreased by 3040%, coupled with a 30% drop in prices. Exports to Western Europe fare marginally better, with an estimated 2540% drop in production volumes. Russia's largest producer of industrial paper bags, Segezh Paper Mill (controlled by the Bank of Moscow and the City of Moscow), declared a ten day shutdown on 24 November. Airlines: In JuneAugust 2008 the fleet of KrasAir, a Krasnoyarsk-based airline with a controlling state interest, was grounded by the fuel suppliers' refusal to extend credit to the company that defaulted on payments. Other members of AiRUnion consortium, notably Dalavia, also folded in August. Thousands of passengers were stranded in airports; flight delays and cancellations became a national agenda. Agriculture, food industry and retail: Russia had a high grain harvest in 2008, but so it was elsewhere in the world, bringing the prices down. To support the trade, Dmitry Medvedev authorized a state export subsidy of 40 US dollars per metric ton. This, according to the minister of agriculture, is sufficient to maintain exports at 20 25 million metric tons. The food industry is, however, locked between high costs of farm produce and tight price and credit terms dictated by retail chains. Food industry executives anticipate that the chains will eventually lose part of their clients to street markets, as the suppliers are forced to develop this independent sales channel. Domestic retail chains, heavily leveraged, were experiencing liquidity crisis at least since April 2008. The first chain to go bankrupt in May 2008, Grossmart (190 stores in Moscow region), had a particularly high debt-to-EBITDA ratio of 6 to 1.

Study of macro-economic factors

GDP

Russia's economy grew 8.1% in 2007 and the government expected GDP to grow 7.8% in 2008 but had to lower its forecast to 6.0% due to the global financial crisis. Russia's Economic Development Ministry later revised its 2008 GDP growth again from 6.0% to 5.6%. Russia's gross domestic product grew 5.6%, year-on-year, in 2008, as per the country's top statistics body. Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record negative growth. GDP contracted by 7.9% for the whole of 2009, slightly less than the economic ministry's prediction of 8.5%. Foreign Exchange Reserves From July 2008 January 2009, Russia's foreign exchange reserves (FXR) fell by $210 billion from their peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp devaluation of the ruble. The ruble weakened 35% against the dollar from the onset of the crisis in August to January 2009. As the ruble stabilized in January the reserves began to steadily grow again throughout 2009, reaching a year-long high of $452 billion by year's end. Inflation Official consumer price inflation in JanuaryAugust 2008 reached 14.8%. By the end of November, food price inflation for an 11-month period reached 15.3%. Overall price inflation, taking into account consumer and industrial prices, reached 12.5% compared to 10.6% for the same period of 2007. Decline in short-term inflation was credited to a reduction in monetary supply.

Inflation slowed through 2009 with a year on year rate of 9.1% as of November, down from 13.8% a year earlier. Unemployment A proprietary Ernst & Young survey of 113 clients that leaked into Russian press in November 2008 summarized their losses at 8% of managerial and 6% of low-level jobs by end of October. All companies in the survey practiced some sort of reducing labour costs. One company in four practiced unpaid "vacations"; 8% of clients settled for reduced working hours. Federal Migratory Service announced in November that 1123 Russian companies reported upcoming layoffs of 45 thousand. In February 2009 the unemployment rate peaked at a seven-year high of 9.4%, then began to steadily decline, falling to 7.7% as of October.