Russia’s Fluctuation Situation

by+Xu+Poling

Many cultural or political traits may come to mind when mentioning Russia， but few people know much about the Russian economy. U.S. Senator John McCain called Russia “a gas station masquerading as a country.” Is he right？

Structural Problems

Russia restored growth in 2000 with a large contribution from the energy sector after the economic recession of the 1990s. In the past few years， the energy industry has accounted for a third of the countrys annual GDP and two thirds of its annual exports. About half of Russias fiscal revenue came from taxation on energy exploi- tation and export. Russia has developed the prolonged reliance on the energy sector， which will not be eliminated in the near future.

The Russian economy is facing more structural problems. Although Russias imports accounted for only 15 to 20 percent of its GDP in the past decade， a relatively modest number compared to some economies， the countrys food， everyday consumer goods and critical manufacturing facilities heavily depend on imports. The Russian economy still lags behind in economic modernization—the country produces world-class military products but not quality consumer goods and industrial equipment.

Lack of investments is another barrier holding back Russia from solving its economic structural problems. Final consumption has maintained over 70 percent of Russias GDP since 2000， but investment in fixed assets has lingered from 18 to 20 percent， barely enough to maintain current production volume. Investment numbers even began to decline in 2014. Lack of investment and overdependence on social consumption and energy income are the root causes of Russias economic downturn since 2013.

Benefiting Residents

In 2013， Russias per capita GDP measured over US$ 13，000 at currency rates of that time， making it a high-income country. After economic sanctions， a slump in crude oil prices and currency devaluation， Russias per capita GDP plunged to US$ 6，285 in 2015， ranking it as a medium-income country. However， for Russian residents who earn and spend Rubles， GDP calculated in U.S. dollars doesnt necessarily mean much.

Of greatest concern to ordinary Russians are economic fluctuations， employment， inflation and real income. From 2008 to 2016， the nominal monthly wage in Russia more than doubled and CPI rose by 1.79 times， indicating that the living standards of Russian residents have been improved. Over the same period， the unemployment rate hovered between 5.7 and 6.2 percent， except when it peaked at 8.2 percent in 2009. The unemployment rate in Russia is generally higher than the U.S. but lower than the European Union. From this perspective， Russias economic conditions are not terrible.

Imported food and other consumer goods became more expensive to Russian residents when oil prices slumped and the Ruble dropped in 2014， compromising their living standards. Though， the basic living demand of the vast majority of Russians is free of the influence as the prices of common food items such as bread， milk and sausage remain stable.

Moreover， Russia has been making impressive gains in grain harvesting since 2013， which has kept its grain warehouses full even as exports continue increasing. For now， adequate food production has kept Russia calm， but upgrades in food processing and manufacturing are urgently needed to further improve the living conditions of Russian people. Since 2015， the food industry has been a highlight of the Russian economy.

Most Russians remain comfortable as social expenditures are still a major chunk of the Russian governments budget. More than a quarter of Russias 2015 spending， 19.4 percent of its GDP， was spent on education， health insurance， unemployment and retirement insurance. Putin kept his promise to improve the living standards of Russians through economic development.

Path Forward

Russias economic growth slowed in 2013， went stagnant in 2014 and dropped into recession with a contraction of 3.7 percent of GDP in 2015. The country is not likely to restore economic growth until 2017. The economic problems making the news such as continuous depreciation of the Ruble， constant slumps in oil prices and dried-up foreign reserves are not actually most critical to the country. With a floating exchange rate system， Russia can balance its international payments. Its economy could see fast growth if investments are revived.

Perhaps the biggest trouble to the Russian economy now is fiscal pressure on Putins government. Shrinking oil revenues limit income growth， but social expenditure cannot be cut. Furthermore， national security remains the top priority in Russia， and its military is expected to promote modernization and innovation， so Russias defense budget cannot be cut either. Therefore， tackling fiscal pressure will determine the short-term prospects of Russian economics and politics.

As for long-term prospects， the economic structure determines how the Russian economy can perform. After realization of the negative effects of overdependence on the energy sector， the Russian government added import substitutes and structural reforms to its longterm national development strategy in 2014. Russia has formulated an anti-crisis plan featuring many policies to treat economic problems and inject vitality into Russias national industries. However， a rebound of oil prices or appreciation of the Ruble could impede structural reform. Consistency and sharp execution of the governments policies will pave a forward path for the Russian economy.