Invest in Russia

In terms of reducing government spending, its aim was to reduce the budget deficit from 20% of GDP in 1991 to 9% in 1992 and 3% by 1993. The government imposed new taxes as well as improving the current tax collection methods. These were the fiscal measures which were taken.

In terms of monetary measures, Russia created a Russian Central Bank which set interest rates and controlled the money supply. One of the aims was to reduce the level of inflation from 12% per month in 1991 to 3.5% by 1993.

Monetary and Fiscal Policy Results

During 1992-93 the government increased the money supply at very high rates, leading to hyperinflation and a collapse in the ruble's value. The government proved unable to restrain the money supply.  By 1992 the money supply had increased approximately 1700 percent.

Learn More About Russia

Starting a Business in Russia Macro economics data and statistics for Russia Economic charts The most liquid RTS board stocks

During the first year of "reform" Russia’s retail prices increased 2520%. By 1993 that rate had fallen to a still-intolerable 245%. By 1994 the level "improved" to 224%.

Inflation

Although the long-term trends in inflation rates were somewhat masked by monthly variations, the rates were still very unstable. Instability of Russian monetary policy was the cause. After tightening monetary flow in 1994, the government loosened its restrictions in response to demands for credit by the agriculture industry. In 1995  high rates of interest were avoided by tight monetary policy. Thus the monthly inflation rate was only 5%; however, for the first half of 1996 the monthly rate increased to 16.5% again.

Foreign Exchange Rates

One of the consequences of Russia’s macroeconomic instability has been severe volatility of the ruble. The ruble was first available for trading in 1992. From 1992 to 1995 the FX rate between USD and ruble changed from 144 rubles/1 USD to 5000 rubles/USD. In October 1994 the rate dropped by 27% relative to the US dollar.

In 1995 the Russian Central Bank announced that it would maintain the currency within a band. Macroeconomic stability improved, but most Russians' savings had already been wiped out, and "reform" had already become a dirty word.

By October 1995 the ruble had stabilized. In 1996 the government imposed a “crawling band” exchange rate to allow for additional flexibility in the ruble's exchange rate, within a stable range.

Privatization

Privatization was the core of Yeltsin's economic policy, and the Russian Federation sold many of the publicly controlled companies to the Russian public. Foreign investors, not noticing the gangsterist and political undertones to much of the privatization, poured money into Russia. By the end of 1993 more than 80% of Russian small enterprises and over 80000 state enterprises had been privatized.

Economic Impact of the Changes

Through the first four years of restructuring, the Russian economy went through a severe depression. Russia’s GDP fell by more than 50% between 1990 and 1995 (although the original GDP figure had been artificially inflated by extremely high government spending under the communist regime). The Russian economy bounced back from 1996-97, but Russia's debt had spiraled out of control. In 1998, Russia defaulted on its debt, setting off a massive series of shocks that nearly destroyed the global financial system (claiming Victor Niederhoffer and Long Term Capital Management, among other finance titans), crippled the Russian economy, and provided the final nail in the coffin of Yeltsin's credibility.

Russian inflation:

1996 to the Present

After the catastrophic contraction of 1991-96, in 1997 GDP growth was around 3.6%. In 1998, the Russian economy contracted a catastrophic 9.1% of GDP, before a 12% recovery in 1999. In 2000 the economy grew 8%. Boris Yeltsin and his oligarchic Family felt secure enough to pass the throne to a new figurehead, a former KGB bureaucrat named Vladimir Putin.

The Family had not done their homework. Putin came from the "siloviki," the nationalistic intelligence and security officials who had attempted to overthrow Yeltsin in 1993. They had watched with helpless rage as Yeltsin's cronies eviscerated the post-Soviet economy, while Yeltsin succumbed to chronic alcoholism.

Initially, Putin surprised no one. He enacted a 13 percent flat income tax in 2001 to replace Yeltsin's overcomplicated graduated system. Money flowed back into Russia. At the same time, oil prices surged, providing Putin with a windfall of oil revenues. Then, with the backing of some liberal nationalists, the Russian military, and the FSB (identical to the KGB in all but name), Putin commenced a full-scale assault on the "Family" oligarchic establishment.

By 2003, many of the most infamous oligarchs had been stripped of most of their wealth. Boris Berezovsky, who was probably the world's richest man in the mid-1990's (and who achieved more control of the Russian economy than the Politburo ever had), found his net worth reduced by at least 90 percent--to $2 billion--by Putin's new regime. Roman Abramovitch made a separate peace with Putin and retired with over $10 billion to the United Kingdom, where he now lavishes money on the Chelsea soccer club.

Some oligarchs attempted political resistance. Mikhail Khodorkovsky, an oligarch who had rigged the auction of many Soviet oil assets, lavished money on anti-Putin opposition parties. Putin retorted by throwing Khodorkovsky in jail and demolishing Yukos Oil, Khodorkovsky's oil empire. Khodorkovsky's net worth plummeted from $16 billion to $3 billion in one year. Foreign investors were not encouraged, but Putin became wildly popular for standing up to the perceived looters of the post-Soviet economy.

Russia's investment climate remains hostage to shifting political alliances among Russian oligarchs and the Russian government. The oil and natural gas sectors are particularly vulnerable to political winds: British Petroleum stands to lose several billion dollars' investment in a joint Russian venture, TNK-BP, because TNK-BP landed on the wrong side of Gazprom, a state-owned (Putin-owned) oil and natural gas combine. TNK-BP still exists as a private entity today, but its days appear numbered.

Taxation and Government Spending

Central and local government expenditures combined to around 38% of GDP. The budget surplus dropped from 6% in 1998 to around 1% and then moved in cycles between 4% to 1% until the end of 2004, when it rocketed to 15% of GDP. Russia's revenues have surged from approximately $45 billion in 2000 to $260 billion in 2006, with a 2007 budget surplus of $60 billion, and an accumulated national surplus of $400 billion. A repeat performance of the 1998 default is nowhere on the horizon.

Legal Framework and Corporate Governance

After nearly 20 years of pseudo-free markets, Russia has failed to adopt much in the way of necessary supporting legal frameworks. Crime rates are very high. Although Russia is past the days when Berezovsky's Chechen gangsters blew up rivals' car factories, assassination is still a fairly typical part of doing business in Russia (partially because so many Russian businessmen have expropriated property in the past). However, many of those rivalries are now over, because at least one of the rivals is in permanent exile, if not dead. While Russia's nominal tax rates are highly competitive, political infighting has cost foreign investors billions. However, political stability has resulted in more and more small businesses resorting to courts before car bombs to resolve disputes (although those still happen). The Duma passed legislation in 2002 to relax rules on investment, and followed up with an overhaul of the corporate tax code.

Unfortunately, in sectors dominated by powerful state companies (natural resources), the efficiency of the Russian tax code has been more than offset by trumped-up political harassment. Russia's governing elite, having spent a decade taking fees to deposit the world's nuclear waste, suddenly discovered environmental crises clustered around TNK-BP oil fields. BP found itself slapped with extortionate "cleanup" fees. Generally, foreign investors should steer clear of sectors occupied by Gazprom (natural gas), Norilsk Nickel (nickel, platinum, palladium) and Rosneft (oil), the behemoth "powers behind the throne" in Russian politics.

Investment environment

Russian industry is concentrated in natural resources and arms export: although it was starved for cash in the 1990's, the Russian defense industry has recorded explosive growth, and offers the most sophisticated weaponry not made in the United States. Russia's Second Chechen War and exports to the very unstable Middle East have begun a new renaissance for the Russian defense industry. However, the new Russian economy is overall a healthy, consumer-driven one. State spending is high, but competitive with other nations, and more competitive than much of Western Europe.

Russia's FDI has more than doubled between 2002 and 2004. FDI is mainly concentrated in the oil and natural gas sectors. However, the TNK-BP episode does not bode well for future FDI into Russia.

Foreign Trade

Between 1992 and 1997 Russia’s exports have risen from 42.4bn USD to $68.4bn. In 1998 it dropped back down to $57bn (due to the Asian crisis), but the next seven years of economic growth saw a quadrupling of Russian exports, to $207bn in 2005. Imports have always hovered between $21bn and $79bn. The balance of payments has always been positive, except in 1998. Russia is the EU’s third biggest trading partner and China’s eighth largest trading partner. Between 2004 and 2005 Russia's trading volume with China increased 37.1%, reaching $29.1bn. China has over 700 investment projects in Russia valued over $1bn. Russian exports are concentrated in defense, and in commodities such as nickel, platinum, oil, and natural gas. Russia is the world's second-largest exporter of oil after Saudi Arabia.