Russia

RUSSIA

Russian Federation

Rossiyskaya Federatsiya

COUNTRY OVERVIEW

LOCATION AND SIZE.

In terms of territory, Russia is the world's largest country. With a total area of 17,075,200 kilometers (6,592,735 square miles), Russia covers about one-eighth of the world's land surface. Russia is 60 percent larger than the world's second-largest country, Canada. But, like Canada, much of Russia's territory is located above the 50th parallel, where subarctic and arctic weather conditions are prevalent. Until the disintegration of the Union of Soviet Socialist Republics (USSR or "Soviet Union") in 1991, the Russian Soviet Federated Socialist Republic was the largest and dominant administrative component of the Soviet Union. In August 1991, the Russian Republic was one of the 15 countries that declared independence from the Soviet Union.

Russia stretches from its westernmost point in the city of Kaliningrad, just north of Warsaw, Poland, to its easternmost point at Big Diomede Island in the Bering Strait. Within eyesight is Little Diomede Island, belonging to the United States just off the coast of Alaska's Seward Peninsula. Russia's great breadth of territory includes many different geographical regions. These include areas of permafrost (areas of eternal ice) in Siberia and the Far North as well as taiga and steppes (vast grassland). Much of Russia's northern and eastern coastline is hemmed in by ice for much of the year, complicating navigation. However, Russia has year-round warm water seaports at Murmansk on its northwestern coastline of the Barents Sea and at Vladivostok at the far eastern coast on the Sea of Japan.

POPULATION.

The population of Russia was estimated at 146,001,176 (July 2000 est.) by official U.S. government sources. According to official figures, the Russian population growth rate is negative, declining at a rate of 3 percent a year. The birth rate was at 9 births per 1,000 persons per year in 2000. The death rate was at 13.8 deaths per population per year. The declining population in Russia is taking place in the presence of a net in-flow of migrants. Migration to Russia averaged 1.38 migrants per year per 1,000 persons during 2000. The migration into Russia is composed heavily of migrants from the 14 countries of the former USSR that adjoin Russia but became independent states in late 1991.

Roughly 80 percent of Russia's population is ethnic Russian. The remaining 20 percent is made up of a wide variety of ethnic groups including Tatar, Ukrainian, Belarussian, Moldavian, Kazakh, and many others. About three-fourths of the population of Russia is urban. Moscow, Russia's capital and largest city, is home to some 9 million people. Russia has a well-educated population with near universal literacy.

Previously Russia was the world's sixth most populous country, following China, India, the United States, Indonesia, and Brazil. The Population Reference Bureau, one of the world's leading professional demographic organizations, differs with the official U.S. government estimates regarding the size of Russia's population, and estimated Russia's population in July 2000 to be 145,231,000. At the same time, the bureau estimated Pakistan's population to be 150,648,000. This differs with the U.S. Central Intelligence Agency's (CIA) World Factbook, which estimated Russia's population to be 146,001,176 and Pakistan's to be 141,553,775. Despite the difficulties in measuring population accurately, it is clear that Russia's population is declining and Pakistan's is growing rapidly. If the estimates of the Population Reference Bureau are accurate, Pakistan has already overtaken Russia. This would mean that Russia, previously the world's sixth most populous country, has fallen to seventh place behind Pakistan. Even if the figures are not exactly accurate, the population trends suggest that this transition is not far away.

The USSR was a multinational country with a population of 289 million people. The country was made up of more than 100 ethnic or "national" groups. Today's Russian Federation (or simply "Russia") emerged from the USSR with roughly one-half of the USSR's population. In the aftermath of the Soviet breakup, millions of people relocated from the parts of the USSR in which they lived to new homes in the 15 countries that resulted. This migration involved many of the citizens of the USSR relocating to their native homelands. Even after these population adjustments, however, Russia is still a large and varied country. Dozens of different language groups and ethnic groups occupy Russia today.

Many of the minority groups within Russia have asserted their right to greater cultural autonomy and, sometimes, political autonomy. A minority area within Russia inhabited largely by the Chechen people proclaimed independence from Russia in 1994. Russian troops crushed the separatist movement. Russia proclaimed victory over the breakaway area of Chechnya in 1996, but the war erupted again in 1997. The brutal Chechen war has left much of this corner of Russia in ruins and has contributed to an ethnic terrorist campaign against Russia. Chechnya lies in one of Russia's most economically strategic regions, across which passes oil and gas pipelines carrying energy resources to European and world markets. Independence in Chechnya would result in these pipelines falling under the control of Chechnya rather than Russia.

OVERVIEW OF ECONOMY

Russia today has a 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. Russia ranks among the world's leading producers of petroleum and gas, copper, manganese, bauxite, graphite, uranium, titanium, gold, silver, and platinum. The former Soviet Union was a leading international producer of manufactured items such as chemicals, weapons, and military and aerospace equipment. Much of the industrial base of these manufacturing sectors was located within the Russian Republic itself. However, the disintegration of the USSR led to significant interruptions in commercial relationships.

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. The USSR became one of the world's largest producers of numerous processed materials and manufactured items, ranging from foodstuffs to nuclear warheads. But efficiency of productionthat is the ratio of inputs to outputs for any given product was not a major objective of the Soviet economic system. Great emphasis was put on outputs. Accordingly, the USSR developed an economic system that was focused almost exclusively on the achievement of production targets. The system proved to be extremely bureaucratic and highly resistant to technological change. The Soviet economic system was not capable of meeting the requirements of the dynamic international markets of the 21st century. Even before the Soviet Union broke up, the Russian government began initiating reforms to move the economy from a centrally-planned to a market-based liberal economy . This process of change has come to be known as the transition to a market economy.

Soon after independence, 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. The government budget was organized along new lines so that it could be balanced through bringing tax revenues into line with government spending. A restrictive monetary policy was adopted. 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. Privatization and restructuring of state monopolies was undertaken. Efforts were commenced to establish the legal and regulatory structure for a market environment. New legislation was passed to establish laws and procedures for the banking industry, capital markets, civil and contract law, adjudication of commercial disputes, and the development of a social safety net to cushion the social impact of economic structural transformation.

But the first years of transition proved very difficult for Russia. In its first decade as a market-oriented economy, the Russian economy suffered a contraction of nearly 60 percent over pre-independence levels as measured by GDP. Sharp declines in production in key industries and exports led to a continuously contracting economy between 1990 and 1997 as industrial production went into a "free fall," dropping more than 50 percent during the decade of the 1990s. The Soviet military-industrial complex, suppliers of goods to the state sector, and light industry were the hardest hit by the structural adjustment to a market-oriented economy and the withdrawal from superpower status.

In 1997 the economy began to show the first signs of post-transition recovery, posting a growth rate of slightly less than 1 percent. Despite the "shock therapy" of a rapid transition and the decline in industrial production, increase in poverty and unemployment, and the weakening of the social service infrastructure , Russia was beginning to show signs of an economic turnaround. Inflation , which skyrocketed in 1993 and 1994, finally had been brought under control. The ruble was stabilized. An ambitious privatization program had transferred thousands of enterprises to private ownership. Important market-oriented laws had also been passed, including a commercial code governing business relations and the establishment of an arbitration court for resolving economic disputes.

However, in the summer of 1998, a powerful wave of financial instability that originated in the Asian financial crisis of 1997 swept through the Russian financial community. The Russian economy has undergone tremendous stress as it has moved from a centrally-planned economy toward a free market system . Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance government budget deficits led to a serious financial crisis in 1998. Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid decline in the value of the ruble, flight of foreign investment, delayed payments on government and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation. In August 1998 the Russian government allowed the ruble to fall precipitously and postponed payment on US$40 billion in treasury bonds. In the wake of the financial crisis, billions of dollars of foreign direct investment were swept out of the country, investor confidence fell, and Russia moved into a sharp economic contraction.

The 1998 financial crisis produced a steep and sudden decline in personal incomes, as GDP per capita in Russia dropped from US$3,056 in 1997 to US$1,867 in 1998. The sharp decline in per capita income and contraction of the financial markets also had some benign effects, however. In some economic sectors, Russian economic performance improved as higher world prices for fuelsworld oil prices nearly tripled in 1999and some metals facilitated improvement in exports. The Russian ruble was devalued in connection with the financial crisis. The devalued ruble rendered Russian-made products relatively cheaper than imports. This contributed to increased purchases of domestically produced goods and services as well as facilitating exports.

In 1999 output increased for only the second time since 1991, by an officially estimated 3.2 percent, regaining much of the ground lost during the 4.6 percent drop of 1998. The 1999 increase was achieved despite a year of potential turmoil that included the ousting of 3 premiers and culminated in the New Year's Eve resignation of President Boris Yeltsin. Of great help was the tripling of international oil prices in the second half of 1999, raising the export surplus to US$29 billion. On the negative side, inflation rose to an average 86 percent in 1999, compared with a 28 percent average in 1998. Average citizens found their real wages fall by roughly 30 percent and their pensions by 45 percent. The new Russian government, under the leadership of Vladimir Putin, gave high priority to supplementing low incomes by paying back wage and pension IOUs. However, many investors, both domestic and international, remained on the sidelines, scared off by Russia's long-standing problems with capital flight , widespread corruption, and newspaper articles on organized crime and the Russian mafia. The international press gave sensational coverage to investigations of money laundering schemes designed to move ill-gotten gains into safe havens out of Russia.

The rebound continued in 2000 as the Russian economy grew briskly throughout the year, 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. Growth in industrial output, which reached 8 percent in 1999, further increased in 2000. The increase in industrial production led to a reduction in the unemployment rate, with recorded unemployment falling to just over 10 percent by the end of 2000.

On the negative side, it must be noted that Russia's economic growth was still largely concentrated in a few sectors. Nor were the benefits of growth widely distributed throughout the society. More than one-third of the population of the Russian Federation continued to live below the poverty line. The social assistance provided by the government was not sufficient and was not successfully targeted to the poor and those most in need. In sum, the general quality of the government's services has deteriorated since 1991. The poor and the most vulnerable were the most directly affected by this deterioration.

The declines in industrial production have taken place simultaneously with a modest but steady growth in the trade and service sectors. These sectors were underdeveloped during the years of the USSR's central planning. The majority of Russian manufacturing enterprises remain uncompetitive if judged by world standards. Output has continued to fall at medium and large Russian enterprises, while many small companies and joint ventures have grown in output and efficiency. 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.

POLITICS, GOVERNMENT, AND TAXATION

Until 1991 Russia was the largest republic in the Union of Soviet Socialist Republics, born out of the Russian Revolution that took place in 1917-18. Russia was ruled by a monarchy headed by a tsar until 1917 when, following Russia's disastrous participation in the First World War, the tsar abdicated the throne, leaving a provisional government in power. In the harsh Russian winter of 1917 a band of Marxist revolutionaries seized power. The Marxists called themselves the Bolsheviks ( bolshe in the Russian language means "larger," and this group of Marxists claimed to be in the majority, hence "Bolsheviks").

The Bolshevik Revolution introduced a new form of government and economics to the world. The Bolsheviks promised that they would create a humanitarian Marxist form of economics. The Bolsheviks championed the labor theory of value, claiming that all value was derived from the importance of the human effort that went into creating a good or service. They promised to create a new economic system that would eliminate economic exploitation of people, would substitute cooperative production for boom and bust cycles of production under capitalism , and would free people to take only what they needed from society and contribute whatever they could. The Soviet government followed this economic policy throughout its 73-year rule.

Political and economic discord brought the USSR to a critical juncture in the 1980s, when a new and dynamic political leader, Mikhail Gorbachev, introduced plans for economic restructuring and political reform. Gorbachev announced major political changes at the 19th Conference of the Communist Party of the Soviet Union (CPSU) in June and July 1988. Gorbachev invited the leaders from the 15 Soviet Socialist Republics of the USSR to announce that free elections and economic reform were on the country's agenda.

There were those who thought that the reform efforts would allow the system to release some steam. In reality, once the lid was off, the situation quickly boiled over into a massive change of political and economic systems. A group of high party leaders from 11 of the 15 Soviet republics met in December 1991 in Alma-Ata, Kazakhstan, to pass an agreement that declared the "Union of Soviet Socialist Republics shall henceforth cease to exist." The leading countries in the world rapidly acknowledged this declaration. The Alma-Ata Declaration sealed the fate of the Soviet Union and created a successor, the Commonwealth of Independent States (CIS). The CISa loose affiliation of the former Soviet stateshas not proved to be a viable political entity, and today exists largely in form. Without a popular referendum or mandate, without parliamentary advice or consent, and without judicial review, the Soviet state simply was declared a thing of the past. USSR President Mikhail Gorbachev, acknowledging the inevitable, resigned on 25 December 1991. The Soviet flag ceased to fly over the Kremlin.

Today, the Russian Federation is a constitutional democracy with 3 branches: executive, legislative, and judicial. The Russian Constitution, which came into effect on 12 December 1993, recognizes a separation of powers. The constitution describes the purposes of government, outlines the rights and responsibilities of citizens, and defines the structure of public institutions in the Russian Federation. The legal framework is based on a civil law system, and there is judicial review of legislation.

Despite the separation of powers, in terms of process, the Russian Federation functions as a presidential style of government, which concentrates most authority in the president as the head of state. The first president of the Russian Federation was Boris Nikolaevich Yeltsin, who was succeeded by Vladimir Putin. The Russian president is elected for a 4-year term. There is no vice-president. In the event of the incapacity of the president to carry out the constitutional mandate, the prime minister succeeds the president. The legislative branch consists of the Federal Assembly, made up of an upper housethe Council of Federation, made up of 1 representative from each of Russia's 89 federal constituent unitsand a lower housethe State Duma, made of up 450 seats.

The executive branch includes: 1) the Presidential Administration, which drafts presidential decrees and provides staff and policy support to the entire executive branch; 2) the Security Council, which was established as a presidential advisory body in June 1991 and restructured in March 1992, when it was given responsibility for managing state security; 3) the Cabinet, which includes the ministersthe heads of the government ministries, who are appointed by the president; 4) the Council of Heads of Republics, which includes the leaders of the 21 ethnic-based republics; and 5) the Council of Heads of Administrations, which includes the leaders of the 66 autonomous territories and regions, as well as the mayors of Moscow and St. Petersburg.

Since 1991 the Russian government has frequently tried to minimize its budget deficits by failing to pay for wages and pensions. Weak tax administration, a cumbersome tax system with high rates that invite tax evasion, falling industrial output, the use of barter in the economy, and blunt refusal to pay by large, politically powerful firms has weakened the government's ability to meet its obligations. Under the new leadership of President Vladimir Putin, overcoming the travail of the collapse of the financial markets in Russia in August 1998 is high on the government's agenda. A comprehensive program to transform the Russian economy was approved on 26 July 2000. The Putin government has sought to establish a prudent fiscal policy in part by collecting significantly higher tax revenues than anticipated under the state budget and managing to restrain spending. The government placed considerable emphasis on reforms of the tax code.

But there are other weaknesses in the structure of the government. The Russian state bureaucracy is still at an early stage of its adjustment to the needs of a modern market-oriented economy. The objectives, functions, and competencies of the different governance structures are poorly defined, leaving substantial space open for discretionary action by bureaucrats. Civil servants are underpaid and inadequately monitored, which creates a strong incentive for the use of public office for private gain. Government decisions, privileges, and regulatory exemptions in Russia are routinely and quite openly influenced by bribes to public officials. While there are many civil servants who maintain high professional standards, the institutions within which they serve are poorly equipped to regulate a market-oriented economy.

Fair and impartial adjudication of disputes is a key to an effectively functioning market economy. Russia's judiciary and justice system remain weak. Numerous matters that are dealt with by administrative authority in European countries remain subject to political influence in Russia. The 1993 constitution empowers the courts to arbitrate disputes between the executive and legislative branches and between Moscow and the regional and local governments. The court also is authorized to rule on violations of constitutional rights, to examine appeals from various bodies, and to participate in impeachment proceedings against the president. The July 1994 Law on the Constitutional Court prohibits the court from examining cases on its own initiative and limits the scope of issues the court can hear. President Yeltsin reconvened the Constitutional Court in March 1995 following its suspension in October 1993. The Russian government has begun to reform the criminal justice system and judicial institutions, including the reintroduction of jury trials in certain criminal cases. Despite these efforts, judges are only beginning to assert their constitutionally-mandated independence from other branches of government.

Public accountability is complicated by the existence of a substantial informal sector . One of its features is the practice of barter arrangements. Many enterprises, being unable to meet their commercial or their tax obligations, turn to barter transactions. Because these barters are not always denominated in currency, their true value for purposes of taxation is often obscure. Moreover, many local and regional governments have been willing in the past to sometimes accept barter payments or "in-kind" payments in lieu of taxes from enterprises that could not pay but had an important social role as a major employer in the community.

When Russia liberalized its economy, explicit budgetary subsidies for enterprises were drastically curtailed. However, industrial enterprises have continued to be supported by "implicit subsidies" channeled largely through the energy sector and lax tax enforcement. These implicit subsidies have taken the form of non-cash settlements for energy and tax payments. Sometimes these non-cash settlements were "payments-in-kind," such as when a factory could not pay its tax bill in rubles because it was not selling its goods. It would then agree with the local tax authorities to pay in production of the goods it makes. This might mean that a tire factory, for instance, would pay its local tax bill in the form of tires supplied to the local tax authority. The tires, in turn, would be used or traded by the tax authorities. These forms of payment were also used to pay energy companies for electricity and gas, which are critical for the operation of factories.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

The transportation infrastructure in Russia is underdeveloped. The transport system is heavily Moscow-centered, with virtually all transportation channels of economic significance emanating from Moscow. Commercial transportation relies heavily on rail. Roughly 90 percent of commercial haulage is rail-based and insufficiently integrated into world transport systems. The Russian trucking industry is only minimally developed, and roads are not designed to carry heavy and long-distance truck traffic.

The Russian railway system includes a total of 150,000 kilometers (93,210 miles) of broad gauge rail, making it one of the most extensive railway systems in the world. However, of this total only 87,000 kilometers (54,061 miles) is in "common carrier" service. The remaining 63,000 kilometers (39,148 miles) serve specific industries or are dedicated railways lines and are not available for common carrier use. Following decades of insufficient investment in maintenance and capital improvement, the railway infrastructure has badly deteriorated. About 30 percent of freight cars, 40 percent of passenger cars, and nearly half the locomotives are of such poor quality that they should be replaced immediately.

The Russian highway system includes a total of 948,000 kilometers (589,087 miles) of road including 416,000 kilometers (258,502 miles) that serve specific industries or farms and are not maintained by governmental highway maintenance departments. Of the total road system, only 336,000 kilometers (208,790 miles) are paved. Russia's great territorial expanses and rugged terrain have hindered the development of a nation-wide highway

Communications
Country Newspapers Radios TV Sets a Cable subscribers a Mobile Phones a Fax Machines a Personal Computers a Internet Hosts b Internet Users b
1996 1997 1998 1998 1998 1998 1998 1999 1999
Russia 105 418 420 78.5 5 0.4 40.6 13.06 2,700
United States 215 2,146 847 244.3 256 78.4 458.6 1,508.77 74,100
China N/A 333 272 40.0 19 1.6 8.9 0.50 8,900
Germany 311 948 580 214.5 170 73.1 304.7 173.96 14,400
aData are from International Telecommunication Union, World Telecommunication Development Report 1999 and are per 1,000 people.
bData are from the Internet Software Consortium (http://www.isc.org) and are per 10,000 people.
SOURCE: World Bank. World Development Indicators 2000.

system. The European parts of the country are much better served than the areas east of the Ural mountains.

The Russian waterways system is an important component of the transportation infrastructure. Total navigable routes in general use by the Russian River Fleet amount to 101,000 kilometers (62,761 miles). Among Russia's most important ports are Arkhangelsk, Kaliningrad, Kazan, Krasnoyarsk, Moscow, Murmansk, Novorossiysk, St. Petersburg, Rostov, Sochi, Vladivostok, Volgograd, and Vyborg. The Russian merchant marine includes some 700 ocean-going vessels, but its fleet is twice as old as the global average.

Russia has some 630 improved airport facilities, 50 of which are capable of accommodating international flights. The country also has an extensive oil and gas pipeline system, with some 48,000 kilometers (29,827 miles) of pipelines for crude petroleum, 15,000 kilometers (9,321 miles) designed for shipment of refined petroleum products, and 140,000 kilometers (86,996 miles) designed for shipment of natural gas.

There are serious capital and operating inefficiencies and poor financial performance in what should be cost-recovery sectors, that is, sectors that should be able to pay their own way through user fees rather than through central government subsidies or direct administration. These include public utilities (called "natural monopolies" in Russia) such as public transportation, water, gas, and electricity, as well as some commercial transportation systems such as river and lake navigation. Transportation tariffs (user fees) have not kept pace with inflation.

Russia's overall electricity production (1998) was 771.94 billion kilowatt hours (kWh). Of this amount, some 69 percent was produced through burning fossil fuel, 20 percent resulted from hydroelectric generation, and roughly 13 percent was produced at commercial atomic generating stations. Electricity consumption amounted to 702.71 billion kWh, while 21 billion kWh was exported and 5.8 billion kWh was imported.

Effective wholesale gas and electricity tariffs have been at only around one-tenth of the Western European level for the past decade, with the ratio even worse in distribution to households. The problem has been exacerbated by low rates of cash collection. In the power sector, cash collection rates stood at less than 20 percent in 2000. Due to its financial unattractiveness but also due to the lack of an appropriate legal and regulatory framework to facilitate private sector participation, infrastructure services are generally provided by state and local government-owned entities. Progress in the corporatization (turning utility systems into corporate entities) and commercialization of infrastructure has been poor. There has been some separation of publicly-owned service providers from government, transforming them into legally autonomous corporate entities. However, there continues to be a high degree of government (federal, regional, and local) interference in their management and financial operations.

Russia's telecommunications system is in the midst of the global telecommunications revolution. The country's phone system has undergone significant changes since the breakup of the state phone monopoly in 1990. By 2000, there were over 1,000 companies licensed to offer communication services. During this period access to digital lines has improved, particularly in urban centers. Internet and e-mail services are now widespread and rapidly improving. In a few short years, Russia made significant progress toward building the telecommunications infrastructure necessary for a market economy. Cross-country digital trunk lines run from Saint Petersburg in the northwest to Khabarovsk in the Russian Far East and from Moscow in the country's European center to Novorossiysk in the south. The telephone systems in over 60 regional capitals had installed modern digital infrastructures by 2000. Cellular services, both analog and digital, expanded rapidly in 2000 and 2001. Three undersea fiber-optic cables connect Russia to the international phone system. Digital switches in several cities provide more than 50,000 lines for international calls. Satellite earth stations provide access to Intelsat, Inter-sputnik, Eutelsat, Inmarsat, and Orbita.

ECONOMIC SECTORS

The chief sectors of the Russian economy are natural resources, industry, and agriculture. The natural resources sector includes petroleum, natural gas, timber, furs, and precious and nonferrous metals. The agriculture sector includes grain, sugar beets, sunflower seeds, meat, and dairy products. Manufacturing and industry includes a complete range of manufactures, notably automobiles, trucks, trains, agricultural equipment, advanced aircraft, aerospace, machine and equipment products, mining and extractive industry, medical and scientific instruments, and construction equipment. Trade exports emphasize petroleum and petroleum products, natural gas, woods and wood products, metals, and chemicals. Major markets include the countries of the European Union, the other former Soviet countries, China, and Japan, as well as countries of the Middle East. Imports include machinery and equipment, chemicals, consumer goods , medicines, meat, sugar, and semi-finished metal products. The trading partners for imports are the same as those for exports.

The Soviet economy created distorting policies and reduced the interest of firms and individuals to use natural resources carefully. The costly and destructive environmental legacy of the Soviet economy is still very much evident in Russia. There is a high risk of environmental accidents and emergencies. Environmental policy at both the federal and regional levels is not always consistent or clear. Enforcement of regulations to protect the environment is often left to the discretion of the firms that create the problems. The merging of the independent environmental agency into the Ministry of Natural Resources in 1999 created a further cause for concern given the potential conflicts of interest of the institutions involved.

Russia is the most industrialized of the former Soviet Republics. However, much of its industry is antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in machinery. Russia inherited most of the defense industrial base of the Soviet Union. Efforts have been made with little significant success over the past few years to convert defense industries to civilian use.

Most major industry sectors showed an increase in output in 1999 over 1998. However, this was not true of agribusiness and the power and fuel sectors, which showed improvements over 1998, but declines compared to 1997. The sub-sectors showing declines in output in 1999 over 1998 include heating oil, machine tools, television, and sausage production. Some sub-sectors that fared poorly in the mid-and late 1990s, such as light industry and the pulp/paper, chemical, and building materials sector, showed increased output in 1999 over 1998. Sectors that fared the worst in 1998 included light industry, metallurgy, chemicals, and agribusiness. Despite across-the-board improvements in recent years, many Russian enterprises remain uncompetitive. In addition, output through 2000 continued to decline at medium and large Russian enterprises, while small companies and joint ventures were responsible for increased output. The CIA World Factbook estimated that agriculture accounted for 7 percent of GDP, industry 34 percent, and services 59 percent in 1999.

AGRICULTURE

Employment in agriculture and forestry remained relatively constant in recent years. Agriculture and forestry employment accounted for about 14 percent of total employment in 1999, about the same level as a decade earlier. Russia comprises roughly three-quarters of the territory of the former Soviet Union, but only a small amount of this vast area is suited for agriculture because of its arid climate and inconsistent rainfall. Nevertheless, with 133 million hectares of arable land, a large agrarian workforce (14 percent of the total), and 146 million inhabitants to feed, Russia is a major regional and global agricultural producer and consumer. The Russian fishing industry is the world's fourth-largest, behind Japan, the United States, and China. Russia accounts for one-quarter of the world's production of fresh and frozen fish and about one-third of world output of canned fish. Russia has a major forestry industry, possessing one-quarter of the world's forests.

Northern areas concentrate mainly on livestock and the southern parts and western Siberia produce grain. Restructuring of former state farms has been an extremely slow process, partially due to the lack of a land code allowing for the free sale, purchase, and mortgage of agricultural land. Private farms and garden plots of individuals account for more than one-half of all agricultural production. Much of the agricultural sector has been almost unaffected by the transition to the free market. Accordingly, the output performance of agriculture has been very weak. This has tended to strengthen the arguments of those who oppose economic reform in favor of a return to the state-managed economy of the past.

Primary agriculture in Russia continues to be dominated by inefficient, Soviet-type collective farms with outdated technologies and management skills and strong political connections, especially at the regional level. Household plots and small private farms comprising only 3 percent of the agricultural land account for over 40 percent of the country's food production. The business infrastructure for the agriculture sector is especially underdeveloped including support services, transportation, distribution networks, and financial services. For agriculture in Russia to go through the transformation to a modern system, the key step will be establishing and enforcing farmers' rights to use land. The first step in this process is to develop an efficient system of issuing and protecting title to land rights. This will also require a more reliable and enforceable framework for secured financial transactions so that farmers can buy and sell their land or use the land as collateral for obtaining loans.

The economic reform that began in Russia in the early 1990s reduced Russia's livestock sector. The down-sizing of the livestock sector ended the need for imports of feed grain, soybeans, and meal. At the same time, imports of meat and other high-value products such as processed foods, fruit, and beverages grew considerably. The 1998 economic crisis reduced Russia's ability to import food. After plunging to extremely low levels in late 1998, agricultural imports rebounded in 1999. Imports of most agricultural and food products grew to roughly 60 percent of the level of the pre-crisis period. Imports dropped because the crisis reduced consumer incomes, thereby decreasing demand for food in general, and the severe crisis-induced depreciation of the ruble made imported food more expensive compared to Russian domestic output.

The large former state and collective farms control most land. Farm workers can branch off as private farmers by obtaining a grant of land from their parent farm, though they lack full ownership rights. The land code proposed by the Russian legislature (the Duma) does not change existing lawthat is, it does not allow the free purchase and sale of land for agricultural use. Rather, it would allow land to be bought and sold solely for economically insignificant purposes, such as building a summer cottage, a dacha.

INDUSTRY

Russia has a range of mining and extractive industries. These include coal, oil, and gas extraction as well as the chemicals and metals industries. Russian enterprises take part in all forms of machine building from rolling mills to high-performance aircraft and space vehicles. Russian enterprises are involved in shipbuilding, manufacturing of road and rail transportation equipment, communications equipment, agricultural machinery, tractors, and construction equipment. Russian firms produce electric power generating and transmitting equipment, medical and scientific instruments, consumer durables, textiles, foodstuffs, processed food products, and handicrafts.

Russia is a leading producer and exporter of minerals, gold, and all major fuels. Oil and gas exports continue to be the main source of hard currency . Russia has vast reserves of oil, gas, and timber. Siberia and the Russian Far East are particularly rich in natural resources. However, most deposits of resources are located in remote areas with challenging climate conditions.

The most important export sector is energy. Russia is the world leader in natural gas production, third in oil, and fourth in coal. Gazprom, the large natural gas monopoly, inherited from the former USSR a massive network of production and distribution facilities that was built over a period of decades. The energy industry is significant also in its intricate ties with political elites. Energy monopolies are thus able to enjoy special privileges such as subsidies of various kinds. However, much of the physical infrastructure is in a state of disrepair. Gazprom will require billions of dollars to upgrade its physical systems. Declining energy prices hit Russia hard in the mid-1990s. The rebound in energy prices in the late 1990s was a great benefit to Russia's foreign trade account.

The oil sector has undergone substantial liberalization and now is primarily restructured and privately held. The oil industry, unlike gas and electricity, was broken up into a dozen companies as it was privatized. Oil prices have therefore moved very quickly toward world prices. Oil export tariffs were phased out entirely in July 1996. Simultaneously, however, oil production excise taxes were increased.

Russia has an estimated 49 to 55 billion barrels of oil in proven reserves, but aging equipment and poorly developed fields are making it difficult to develop these reserves. The depletion of existing oilfields, deterioration in transport infrastructure, and an acute shortage of investmentaggravated by the country's August 1998 financial crisismay lead to further declines in oil production unless these trends can be reversed.

Natural gas is the predominant fuel in Russia, accounting for nearly half of the country's domestic consumption. With 1.7 quadrillion cubic feet (TCF) in proven gas reserves, Russia has more than enough for itself, allowing it to export significant amounts of gas. In fact, Russia is the world's largest gas exporter. Europe is a major consumer. Although the country's natural gas production has dipped only slightly (8 percent from 1992 to 1999) during the transition to democracy, low investment has raised concerns about future production levels. Gas production in the established West Siberian fields that account for 76 percent of Russian gas output is declining. At the same time, the planned development of new fields continues to be delayed as a result of lack of investment resources.

SERVICES

Russia's previously underdeveloped services sector has played an important role in containing the social calamity of the collapse of the USSR, manufacturing and industrial sectors. The service sector employed 55 percent of the workforce and contributed 59 percent of GDP in 1999, according to the CIA World Factbook. Important service industries include financial services; advertising, marketing, and sales; tourism; and retail trade.

TOURISM.

Foreign and domestic tourism was centrally managed during the Soviet Union. In 1991 the tourism industry was reorganized and today is one of the most important branches of the service sector, both in terms of total revenue and numbers of employees. The number of tourist companies has grown from several state tourist organizations in 1991 to several hundred in the larger Russian cities today. Most tourist firms are small, employing fewer than 15 people, and function as both operators and agencies. Operators are those firms that develop their own tourist routes. Tourist agencies market the existing routes established by operators. Most travel transactions involve the domestic market, offering travel services within Russia either for foreigners or for domestic travelers. Providing services for Russians traveling abroad is a smaller but more lucrative market.

The August 1998 financial crisis in Russia had a major impact upon the tourist industry. The number of Russian tourists traveling to foreign countries dropped off sharply and the number of foreign tourists visiting Russia also declined. According to the Russian Statistical Committee, the number of Russians visiting the United States in 1999 fell by nearly half between 1998 (175,660) and 1999 (95,280). The number of Americans visiting Russia also fell considerably between 1998 (216,976) and 1999 (177,120).

In the old USSR domestic tourism was one of the largest industries. There were many resorts, recreational centers, tourist bases, and summer camps for children. Large enterprise and labor unions provided people with inexpensive package tours. During the first years after the breakup of the Soviet Union, domestic tourism declined sharply, but has regained ground since then. Russian tourists travel abroad to Europe, the countries of the Mediterranean, and the United Statesa popular tourist destination for young people. Local foreign language schools often offer English language training in the United States to teenagers and young people. Obtaining visas to travel to the United States, however, involves complicated regulations and is often a hindrance.

Russia is a popular destination for foreign tourists, primarily because of its cultural attractions. Over 80 percent of foreign tourists come to Russia with the intention of visiting Moscow and/or St. Petersburg. However, in recent years the country's natural environment has attracted a growing proportion of foreign travelers. Russia may one day become a popular destination for eco-travel, attracting adventure travelers and tourists looking for something out of the ordinary. Travel to Russia is particularly well-represented by travelers from Germany, China, the United States, Japan, Italy, Poland, Turkey, and Israel.

A legacy of Soviet-era infrastructure neglect, oppressive paperwork, high costs, and lack of local marketing know-how have limited attractiveness of travel to Russia for many foreigners. Despite improvements in the first decade since the Soviet breakup, the Russian travel industry continues to be hindered by the lack of accommodations and travel-related services that are in accordance with international standards. Recent years have witnessed improvements in the quality of services. In addition, new programs have been instituted that provide training in hotel and restaurant management services. At the same time, new hotel, restaurant, and recreational equipment and expertise have become more widely available.

FINANCIAL SERVICES.

The Russian government has put considerable emphasis in recent years on restructuring and stabilizing the banking system and the financial services industry. A legal framework was adopted, establishing procedures for forming statutory capital, specifying procedures for starting and terminating commercial bank activities, procedures of issuing and recalling licenses for bank audits, establishing procedures for bank bankruptcies, and establishing procedures for the operation of non-banking financial organizations that offer financial services and were licensed and regulated by the National Bank.

But the Russian banking system is still in a state of transition. Banks do not have the resources, capability, or the population's trust to attract substantial savings and channel them to productive investments. While ruble lending doubled in the 2 years following the August 1998 financial crisis, loans remained at the pre-crisis level of 30 percent of total bank assets. The Russian Central Bank reduced its refinancing rate 3 times in 2000, to 33 percent, signaling an attempt to lower lending rates. However, banks still perceived commercial lending as risky, and some banks were inexperienced at assessing credit risk. The Russian Central Bank announced that it was developing a procedure to finance banks for promissary notes, rights of claim under credit agreements, and mortgages.

INTERNATIONAL TRADE

Russia's foreign trade consisted of US$75 billion in exports and imports of US$48.2 billion in 1999 and then to US$105.1 billion in exports and US$44.2 billion in imports by 2000. Russia sells a broad range of commodities and manufactures including petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals, and a wide variety of civilian and military manufactures. Russia's largest trading partners for exports are Ukraine, Germany, United States, Belarus, the Netherlands, and China. Russia imports machinery and equipment, consumer goods, medicines, meat, grain, sugar, and semi-finished metal products. Russia's largest trading partners for imports are Germany, Belarus, Ukraine, the United States, Kazakhstan, and Italy.

Real GDP growth in Russia in 1999 was over 3 percent. The main contributing factors were the devaluation of the ruble, which made Russian products competitive abroad and at home; high commodity prices on international markets, particularly oil (while domestic costs were substantially lower); low inflation and a consensus that inflation must be controlled; and a relatively healthy fiscal situation based on strict government budget discipline. The major contributor to growth was trade performance. Exports rose to US$74.3 billion while imports slumped by 30 percent to US$41.1 billion. As a result, net exports ballooned to US$33.2 billion, more than double the previous year's level. Higher oil prices had a major effect on export performance, particularly in the latter half of the year. Even though volumes of crude oil exports (to non-CIS countries) were down by 3 percent, prices jumped 46 percent. Fuels and energy comprise 42 percent of Russian exports. Other exports performed better in 1999; fertilizer exports were up 16.7 percent, forestry products up 38 percent, copper up 17.6 percent, and aluminum up 10 percent.

Trade (expressed in billions of US$): Russia
exports Imports
1975 N/A N/A
1980 N/A N/A
1985 N/A N/A
1990 N/A N/A
1995 81.096 60.945
1998 74.160 58.996
SOURCE: International Monetary Fund. International Financial Statistics Yearbook 1999.

Trade with other former Soviet states is overwhelmingly in energy and industrial products, and in many instances has been, until quite recently, conducted by barter. Russia's trade surpluses eroded over the course of 1998. Imports to Russia grew by 10-15 percent per year between 1995 and 1997, as consumers benefited from an appreciating ruble and rising average wages. At the same time, export revenues were falling, due in particular to sharply lower prices for oil and gas (accounting for 43 percent of merchandise exports in 1997). Moreover, Russia's manufactured exports compete poorly on the world market, especially since Asian goods have become less expensive following steep currency devaluations. The devaluation of the ruble and difficulties in completing transactions through the Russian banking system reduced imports substantially. Frequent changes in customs regulations also have created problems for foreign and domestic traders and investors.

Russian oil companies have been rushing to export their oil (resulting in a windfall of hard currency coming into the country) to such an extent that Russian officials have set export quotas in order to maintain an adequate domestic supply of oil. In 2000, Russian net oil exports totaled 4.3 million metric barrels a day (MMBD). In addition to export quotas and higher taxes levied on oil exports, a serious problem facing exporters is the lack of export routes. Russia is maneuvering to become a major player in the exploration, development, and export of oil from the Caspian Sea. Transneft is the parastatal responsible for Russia's extensive oil pipeline system. Many of these pipelines are in a poor state of repair. The Russian Fuel and Energy Ministry notes that almost 5 percent of crude oil produced in Russia is lost through pipeline leaks. Transneft lacks the funding to repair or upgrade many of these malfunctioning pipes. The company's focus has been on building new pipelines rather than repairing the old. In addition to those in the Caspian Sea Region, Russia has a number of new oil and gas pipelines planned or already under construction.

MONEY

At the start of the economic transition, key reform-oriented policy makers in the Russian government sought to get market price mechanisms working as quickly as possible. These reformists argued that price liberalization and policies designed to bring about macroeconomic stabilization could be expected to impose some economic hardship for a period of time, but that it was better to live with temporary difficulties than to be burdened by distorted prices and unsound policies that might endure for years or even decades. This pro-reform perspective became known as "shock therapy." The reformists took their inspiration in large measure from Western monetarist doctrines that maintained that

Exchange rates: Russia
rubles per US$1
Jan 2001 28.3592
2000 28.1292
1999 24.6199
1998 9.7051
1997 5,785
1996 5,121
Note: The post-January 1, 1998 ruble is equal to 1,000 of the pre-January 1, 1998 rubles.
SOURCE: CIA World Factbook 2001 [ONLINE].

sound monetary policy should be the basis of a govern-ment's economic programs.

The Russian post- communist economic transition thus started with prices being rapidly liberated from artificially low levels. This led to a rapid rise in prices for many basic commodities. It also led quickly to an immediate burst of inflation. The pent-up demand for consumer goods that had been suppressed during the period of Soviet central planning gave additional impetus to inflation as consumers rushed to buy previously unavailable goods, thereby bidding up prices. Early in the transition, inflation averaged over 1,000 percent per year in Russia. As inflation ate away at the value of the ruble, the amount of money necessary to buy a loaf of bread, for instance, appeared to grow inordinately large. While the size of the numbers on a country's currency should be arbitrarythat is, no one should care if the cost of a loaf of bread is 1 ruble or 1,000 rubleswhat matters is what proportion this represents of a person's income. The fact that it had become necessary in Russia to hand over large amounts of rubles to buy simple, everyday necessities was psychologically unnerving for the public. To address this problem, on 1 January 1998 Russia "rede-nominated" its ruble, introducing new bills with 3 fewer zeros than pre-1998 rubles.

Redenomination is a process by which a country's money is reissued but assigned a different number. The Russian bank authorities simply decided to remove the "excess" 3 zeroes after the numbers on the face of the currency. For instance, a 1,000 ruble note was reissued as a 1 ruble note. At the same time, Russia re-introduced the traditional coin, the kopek, valued at 1/100th of a ruble.

These redenomination measures were primarily for convenience. They were designed to have no technical effect on the value of the currency. However, they did have an effect on the public. These measures tended to contribute to the erosion in public confidence in the currency and an increase in the use of foreign currencies, particularly the dollar, as an alternative to saving.

Russia has undertaken a number of different approaches to exchange rate policy. These included establishing a "currency corridor" in 1995 and a "crawling band" mechanism from 1995 to 1997. For the most part, these measures were viewed as part of an effort to establish a more "natural" ruble-to-foreign currency rate. From 1994 until 1998, falling inflation, slow money supply growth, and the effective functioning of Russia's ruble-dollar mechanisms contributed to a period of relative ruble stability. In January 1998, with the ruble trading at just over 6 to the dollar, Russia replaced the crawling band mechanism with a more freely floating but still semi-managed ruble. The exchange rate policy allowed the ruble to fluctuate within 15 percent around a central exchange rate, which Russia intended to maintain at between 6.1 and 6.2 rubles to the U.S. dollar between 1998 and 2000. In July 1998, the ruble was trading at R6.2 to the U.S. dollar. In August of 1998, Russia widened the band within which the ruble was allowed to fluctuate, resulting in an unofficial but real devaluation of the ruble. In total, the ruble lost 71 percent of its value in 1998, closing the year at R20.65 to the dollar. The ruble fell to R25 and lower to the dollar in April 1999, mildly appreciated in value through early summer, but began to decline again at the height of summer. The ruble ended 1999 at R27 to the dollar.

The monetary authority in the former Soviet Union was the Soviet Central Bank. The Soviet Central Bank functioned as an investment mechanism to achieve social objectives, not as a bank in the Western sense of provider of specific financial services. Soviet practice emphasized financial stability and the assignment of prices not on the basis of relationships of scarcity (that is, supply and demand) but on the basis of social criteria. Prices were established at levels that the government thought would achieve the most social good. Typically, necessities such as bread and housing were extraordinarily cheap to the consumer while luxuries, such as cars and foreign vacations were extremely high or unavailable altogether. Prices of foreign goods were established indirectly through the exchange rate that was stipulated by the Central Bank for foreign currencies. When the transition started, price liberalization implied that buyers and sellers should be able to establish their own agreed-upon prices. New laws were passed to allow the functioning of private banks, but initially these banks did not have provisions for inter-bank settlement of accounts. Consequently, the private banks begin to function less as banks and more as investment funds.

Spurred on by the potential gains of the initial waves of privatization of state enterprises between 1993 and 1995, these private banks in fact offered few financial services but served mainly as holding companies for large investors and conglomerates. The unevenness of supply and demand in the transitional markets created opportunities for great profit-taking and great risk-taking. This led to a serious problem of capital flight. As investors and speculators captured gains from buying and selling, they sought to park their earnings in stable investments. For the most part, this meant foreign currencies, particularly the American dollar. For a period of time in 1992 and 1993, Western currencies were in popular use in Russia and were preferred to the ruble. Massive amounts of money moved out of the Russian economy to Europe and America. To address this problem of capital flight, the government imposed a series of frequently changing regulations on the financial services industry between 1993 and 1994. In 1994, the Central Bank imposed new currency controls, requiring all exchanges of foreign currency to go through licensed currency traders who were closely regulated by the government.

After the financial markets collapsed in 1998, the Russian central bank, aided by increased technical assistance from the international financial institutions and Western countries, developed a considerable amount of autonomy from the Russian government. This allowed the central banking authorities to resist the attempts of the government to call upon the bank's assets to solve short-term problems or address the demands of important political constituencies. Gradually, the role of the Russian Central Bank came to resemble that of most market economies, a role in which the bank functions as a neutral and independent manager of financial functions, not as a personal banker to the government or government officials.

POVERTY AND WEALTH

The transition from communism to a market-based economy did not create poverty in Russia, but it certainly made life more difficult for many groups of people. Poverty became widespread in 1992 and grew in 1993, widening from not more than about 10 percent of the population in the 1980s to nearly 30 percent by 1993. Poverty, often associated with family size, was concentrated increasingly in families with children, as well as in families with unemployed or handicapped persons. Poverty grew especially quickly in the rural areas. Certain

GDP per Capita (US$)
Country 1975 1980 1985 1990 1998
Russia 2,555 3,654 3,463 3,668 2,138
United States 19,364 21,529 23,200 25,363 29,683
China 138 168 261 349 727
Germany N/A N/A N/A N/A 31,141
SOURCE: United Nations. Human Development Report 2000; Trends in human development and per capita income.
Distribution of Income or Consumption by Percentage Share: Russia
Lowest 10% 1.7
Lowest 20% 4.4
Second 20% 8.6
Third 20% 13.3
Fourth 20% 20.1
Highest 20% 53.7
Highest 10% 38.7
Survey year: 1998
Note: This information refers to expenditure shares by percentiles of the population and is ranked by per capita expenditure.
SOURCE: 2000 World Development Indicators [CD-ROM].

geographical regions of Russia were disproportionately affected by poverty, reflecting increasing disparities in wages. The Russian Far North and Far East were hard hit. Poverty was strongly associated with single-parent status, and the majority of such households were female-headed.

Measuring poverty is difficult. Nevertheless, it is undisputed that a large share of the Russian population lives below the poverty line. The social assistance provided by the Russian government has not been sufficiently targeted to the poor. According to surveys of the standard of living, the share of eligible households who did not receive social benefits increased from 60 to 80 percent. Further, the share of the households that were legally entitled to public benefits and received them has decreased dramatically as local governments have "postponed" payments. Measures of public satisfaction indicate the quality of government services has generally deteriorated since 1991, and the poor, particularly the elderly poor, have been the most directly affected.

The economic transition also witnessed the "feminization" of poverty. Single-mother families and single elderly women make up a group with the highest poverty risk. In the case of single-mother families, poverty factors include the low individual income of the mother. Added to this is the insufficient amount of private and public transfers designed to partly offset the absence of other income sources such as alimony after divorce or pensions for the benefit of children after the death of their father.

The elderly also suffer from insufficient pensions, of which 90 percent go to women, according to a World Bank report. The average pension allowance is two-thirds of a retiree's cost of living. This means that pensions cannot meet even the most basic necessities of the elderly population. The problem for women retirees is compounded by the fact that pensions, which for this age group is largely the only source of income, are higher for men of retirement age than for women.

Household Consumption in PPP Terms
Country All Food Clothing and footwear Fuel and power a Health care b Education b Transport & Communications Other
Russia 28 11 16 7 15 8 16
United States 13 9 9 4 6 8 51
China N/A N/A N/A N/A N/A N/A N/A
Germany 14 6 7 2 10 7 53
Data represent percentage of consumption in PPP terms.
aExcludes energy used for transport.
bIncludes government and private expenditures.
SOURCE: World Bank. World Development Indicators 2000.

WORKING CONDITIONS

Russia has paid a high social price for its rapid progress in the transition from communism. Under communism, economic growth was restrained but there was a very low level of inequality. Most workers made roughly the same income. Extremes of high and low incomes were rare. Since embarking on a market economy, Russia's rapid macroeconomic and political reforms created anxiety among the citizens who came to expect a modest but dependable lifestyle. Russia's abandonment of subsidies for Soviet-era industries permitted a steep industrial decline, throwing millions of citizens out of work. Today the Russian labor force is undergoing tremendous change. Although well-educated and skilled, it is mismatched to the rapidly changing needs of the Russian economy. Millions of Russian workers are underemployed . Unemployment is highest among women and young people. Many Russian workers compensate by working other part-time jobs.

Russia's financial crisis had a severe effect on wages in the country. Many employees were helpless as ruble devaluation and price increases drastically eroded the buying power of their salaries. Meanwhile, both foreign and Russian companies, faced with their own challenges stemming from the crisis, resorted to pay cuts in order to maintain what staff they felt able to keep. As a result of the financial crisis, although nominal wages in Russia continued to climb, real wages in the country continued to fall. The average nominal monthly wage in January 1999 was approximately 1,200 rubles. In January 2000, the nominal wage was roughly 1,575 rubles, or about US$58 at the prevailing exchange rate at the time. According to official figures, real wages and real disposable income had fallen roughly 30 percent by the end of 1999 compared to 1997.

According to a minimum wage law signed by President Putin in June 2000, the minimum wage increased to 300 rubles per month by mid-2001. In December 1999, the average monthly subsistence minimum was 943 rubles, or approximately US$36 at the prevailing exchange rate. Therefore, approximately one-third of Russia's population is living below the subsistence level. As of 1 February 2000, Russian pensions increased 20 percent. The minimum Russian pension is 410 rubles per month. The average pension is 650 rubles per month, which is still below the subsistence minimum.

Although the Russian government has been using International Labor Organization (an arm of the United Nations) statistical methods to determine unemployment, officially reported unemployment levels in Russia, as with other official statistics, have often been lower than figures determined by the international community. Russia reported several years of very slowly growing unemployment, which temporarily peaked at 9.6 percent in the spring of 1997 before dropping to a low of 9 percent at the end of 1997. During this time, alternative estimates of unemployment suggested a combined unemployment and underemployment rate of between 12 and 15 percent. In 1998 unemployment levels resumed their climb. In the wake of Russia's financial crisis, both Russian and foreign companies resorted to layoffs and salary cuts. In November 1998, when the official unemployment rate was 11.6 percent, the Russian Ministry of Economy predicted that unemployment would grow 70 percent by 2001. In early June 1999 the Russian government reported that unemployment had reached 14.2 percent of the country's workforce, or 10.4 million people, the highest level ever officially reported by Russia. For much of 1999 the unemployment rate hovered at 12.4 percent, or 9.12 million people. Russia closed 1999 with an official unemployment level of 11.7 percent.

Russia's well-educated but relatively inexpensive labor force has been a leading attraction for foreign firms. While in the early 1990s many Western firms initially found it challenging to find employees educated in Western business concepts and practices, there is a growing pool in Russia of individuals with Western business exposure, education, and experience. Russian law requires that wages be paid in rubles.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

945. Treaty of Igor with Byzantium (Constantinople) establishes first claim to government in the many lands of Russia, known as the many "Russias."

1237. Mongol tribesmen, invading from the East, conquer Russia and impose foreign rule for over 240 years.

1565-72. Ivan the Terrible's "reign of terror" establishes a precedent of strong, unaccountable central government.

1802. Formation of the first government ministries, establishing a strong principle of government control of the private economy.

1864-85. Conquest of Central Asia.

1891. Beginning of the Trans-Siberian railway.

1906. First Duma (parliament) established; first written constitution adopted.

1914. World War I begins.

1917. Russia pulls out of World War I; Bolsheviks take power and begin communist era.

1918. The period of "war communism" with emphasis on administrative direction of the economy is introduced.

1921. Retreating from tight control of the economy, the government introduces the "New Economic Policy" (NEP). The policy favors market-based economic relations in lieu of administrative measures.

1928. Return to communism and top-down direction of the economy as the first "Five-Year Plan" is adopted. Joseph Stalin (Iosef Dhugashvili) assumes control of the communist party organization. Agriculture is collectivized. A massive industrialization campaign begins.

1932-33. A severe famine in Ukraine is testimony to the effects of the agricultural collectivization program.

1937-41. The Stalin-era purges of political opponents take place.

1941. German invasion of USSR (June 22) and Second World War.

1957. First Soviet "Sputnik" (satellite) is launched. The "space race" begins.

1973. United States and the USSR embrace "Détente," a policy of relaxation of tensions, and adopt a new bilateral trade agreement, but implementation is not successful.

1979. In December, Soviets invade Afghanistan. This futile war drains Soviet resources and creates negative sentiment toward communist party rule. This eventually plays an important role in the collapse of communism.

1985. Mikhail Gorbachev becomes communist party leader, calling for economic reforms ( perestroika ) and greater openness ( glasnost ).

1986. 26 April disaster at Chernobyl nuclear generating station debunks myth of Soviet technological superiority.

1989. Political reforms begin in Central Europe; Berlin Wall comes down.

1991. On 19 August, a group of Communist Party hardliners announces takeover of the Soviet government. The takeover fails. Boris Yeltsin emerges as the most popular politician.

1991. On 21 December, 11 high leaders of USSR meet in Alma-Ata, Kazakhstan, to sign the "Alma-Ata Declaration" ending the USSR and establishing the "Commonwealth of Independent States" (CIS).

1992. On 2 January, Russian prime minister frees prices; ruble value plummets; prices skyrocket.

1992. On 1 October, voucher privatization begins in Russia.

1993. On 21 September President Yeltsin dissolves the parliament. On 22 September a breakaway parliament appoints Vice President Alexander Rutskoi as president. On 4 October, government forces loyal to Yeltsin storm the parliament building and arrest Rutskoi and the disloyal parliament.

1998. Following a massive sell-off of Russian bonds, securities, and rubles, the prime minister announces a ruble devaluation; financial markets are paralyzed by liquidity shortages, and share prices plunge. Unable to pay its creditors, Russia defaults on foreign loans.

1998. Yeltsin fires the prime minister and the entire government cabinet. He appoints Victor Chernomyrdin as interim prime minister, but parliament refuses to confirm him.

1999. After months of political turmoil, Yeltsin appoints Vladimir Putin as prime minister.

2000. On 31 December, Yeltsin resigns the presidency (with a full pardon), leaving Vladimir Putin as head of state.

2000. Vladimir Putin is elected president.

FUTURE TRENDS

The Russian economy faces serious challenges. Russian industry is not likely to regain an important role in a global economy that demands peak efficiency. Consequently, the export of primary commodities and raw materials is likely to remain the bulwark of economic development. Primary commodity markets are relatively more susceptible to fluctuations than are industrial markets. Russia is likely to continue to be influenced by economic trends that it cannot control. International investors, including the major investment banks, commercial investors, and companies interested in expanding their businesses in world markets have remained on the sidelines, scared off by Russia's long-standing problems with capital flight, reliance on barter transactions, corruption of government officials, and fears of organized crime.

The Russian government and leading economists in the country have developed a consensus on the need for various kinds of administrative changes. Failures such as corruption are not moral failures, but a failure of administrative structure. There is a consensus that the country needs to strengthen the institutional and legal underpinnings of a market economy. Improving the legal and regulatory structure would provide a reliable framework for improving governance, strengthening the rule of law, reducing corruption, and attracting the long-term capital needed for deep restructuring and sustained growth. The country also needs to improve its tax system to encourage greater tax compliance and a realistic appreciation in the population that the people must pay for the costs of a modern society. The government must avoid pressures to use central bank money to finance its budget deficit. Further reforms are needed in the banking sector, including a legal framework to make it easier to close down troubled banks.

Any measures aiming to reduce poverty levels among workers are primarily associated with the increase in the official wages drawn by the lower paid workers, the majority of which are women, and also with the identification and taxation of income in Russia's informal sector.

A positive sign was that in mid-year 2000, the Russian government adopted an official development strategy for the period 2000-10. The strategy identified economic policy directed at ensuring equal conditions of market competition, protecting ownership rights, eliminating administrative barriers to entrepreneurship, making the economy more open, and carrying out tax reform. The strategy identified the creation of an effective state performing the function of a guarantor of external and internal security and also of social, political, and economic stability. The strategy spoke of a "new social contract" between the more active sections of Russian society and the reformed government.

Russia's economy remains very vulnerable to external shocks and has not yet been able to develop a stable base for continued growth and poverty reduction. While the data are not yet sufficient to carefully assess the impact of the economic recovery on the enterprise sector, it appears that the rebound in the non-oil/gas traded goods sector has so far been driven by the real depreciation of the ruble and the greater availability of capital. Furthermore, there are indications that industrial growth is beginning to slow. Therefore, maintaining a realistic exchange rate, while controlling inflation, must remain a policy priority for sustaining the recovery and future growth of the real economy. Strong fiscal discipline needs to be maintained. A large swing factor is, of course, the level of capital flight, the reduction of which depends on progressive improvement in the investment climate in Russia. Finally, over the longer-term, Russia's deteriorating infrastructure is a matter of concern. Russia's basic public infrastructureincluding roads, bridges, railways, ports, housing, and public facilities such as schools and hospitalswas built during the Soviet period. After independence, investment in maintenance and new construction of public infrastructure has fallen dramatically. Russia's aging physical plant is likely to become an increasing constraint to growth unless an improved investment climate can ensure substantially higher levels of investments than is presently the case.

DEPENDENCIES

Russia has no territories or colonies.

BIBLIOGRAPHY

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Government of the Russian Federation. <http://www.pravitelstvo.gov.ru/english/>. Accessed June 2001.

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Varese, Federico. The Russian Mafia: Private Protection in a New Market Economy. Oxford: Oxford University Press, 2001.

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Gregory Gleason

CAPITAL:

Moscow.

MONETARY UNIT:

Ruble (R). R1 equals 100 kopeks. Coins are in denominations of R1, 2, and 5. Paper currency is in denominations of R10, 50, 100, and 500.

CHIEF EXPORTS:

Petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals, and a wide variety of civilian and military manufactures.

CHIEF IMPORTS:

Machinery and equipment, consumer goods, medicines, meat, grain, sugar, semi-finished metal products.

GROSS DOMESTIC PRODUCT:

US$1.12 trillion (purchasing power parity, 2000 est.).

BALANCE OF TRADE:

Exports: US$105.1 billion (2000 est.). Imports: US$44.2 billion (2000 est.).