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4.1 An overview of the Russian economy

Major macroeconomic indicators

 

2007

2008

2009

Population (million of inhabitants)

142.2

142.0

141.4

Gross domestic product (US$ billion)

1,294

1,660

1,229

Real GDP growth (%)

8.1

5.6

-7.9

Consumer prices (year-on-year % change)

9.0

14.1

11.7

Exports of goods (US$ billion)

354.4

471.6

304.0

Imports of goods (US$ billion)

223.5

291.9

191.9

Average exchange rate (Russian ruble per US dollar)

24.6

29.4

30.2

Although the economic structures and stages of development in Russia differ from that in the US and other Western European neighbours, oil-rich Russia is not immune to the global economic crisis and its aftershocks. The worldwide recession and the resultant decline in economic activities have suppressed demand for energy and commodities, which account for more than 80% of Russia’s total exports. Also noteworthy is the spillover of the crisis into the overall economy. By and large, negative wealth effects from falling asset prices together with rising joblessness have battered consumer confidence and constrained spending in Russia. What’s even worse, the tightening of credit and retreat of foreign capital have put a stop to credit-financed consumption and loan-fuelled business investment (after receiving investment-grade rating in 2003, Russia had seen strong capital inflows and increases in FDI), engendering abstinence from consumption of non-necessities such as consumer electronics, high-end fashion and jewellery and long-term investment such as construction and retail expansion.

Oil price and GDP growth

Source: The Central Bank of the Russian Federation

After years of fast expansion, the Russian economy was brought to a shuddering halt in the autumn of 2008, following the plunge of prices of energy products and commodities, as well as the freeze of international capital markets. Russia lurched into recession in the fourth quarter of 2008, despite the government’s various stimulus policies to shelter the country from the worsening economic situation. While the Russian economy managed to keep growth in 2008, the Russian Ministry of Economic Development revised several times downwards its annual forecasts for economic growth in 2009 in view of the uninspiring economic indicators throughout the year. The Russian economy shrank by a startling 7.9% in 2009 under the weight of the global economic crisis. The downward shift in overseas demand for oil and metals, the country’s primary export revenue earners, had dragged Russia’s foreign exchange earnings, while the retreat of foreign investment, negative rating actions and sizable external corporate debts caused a visible depreciation of the ruble, curbing the nation’s import demand.

Official exchange rates (Rubles/US$)

Source: The Central Bank of the Russian Federation

Nevertheless, Russia’s low dependence on foreign borrowings and small exposure to housing mortgages (mortgage-per-capita in Russia is estimated at only US$200) are believed to provide a shield from a long and painful economic correction, while allowing the country a better rebounding position. More importantly, thanks to the high oil prices and exports in the past few years, Russia, which has been running both capital and current account surpluses for years, is one of the world’s largest reserve holders and owes one of the world’s lowest public external debts.

Russia's external balance

Source: The Central Bank of the Russian Federation

Looking ahead, while the recent rebound of crude oil and non-energy commodity prices following the gradual recovery of the global economy has helped prevent Russia from falling deeper into recession, escalating joblessness plus still-tight credit conditions will continue to weigh on the Russian economy for some time, giving rise to a rather conservative GDP forecast of 3%-4% by the Russian government for 2010. However, the IMF, on the other hand, has recently revised upwards its GDP forecasts for Russia to 4.3%, signifying encouraging signs of economic revival in the country. With evidence that an economic recovery is taking hold, the Russian economy and its consumer market, though on a more humble growth path, are likely to regain momentum in 2010, not to mention the pent-up demand for goods and services arising from the accumulated wealth and rising consumerism over the past decade, and continuing stimulus policies such as the cash-for-clunkers programme launched on 8 March 2010.

If anything, while the Russian economy was battered by the global financial crisis, Russian economic planners were striving to look for ways of turning a negative into a positive. It is believed that while the crisis has hit the Russian economy hard, it has also necessitated and hastened economic reform and transformation in the country.

Content provided by Hong Kong Trade Development Council
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