Contemporary Russia: the fall and rise of the market economy

A recent survey compared the cost of living for expatriates in cities around the world. Not surprisingly, the top ten most expensive cities included Tokyo, London and New York. But more expensive than any of these was... Moscow! Less than two decades ago, Moscow was the heart of the world's biggest planned economy. There was no property for sale back then. The state-run shops had few consumer goods. Shortages for simple things like shoes were common. Today, things could not be more different. Moscow is the centre of a free market with some of the highest property prices in the world. The state-run shops have been replaced by expensive shopping centres and designer stores. But the change has not been easy.

The figures for Russia's real gross domestic product since 1991, when the economic reforms began, show that the economy has been on quite a roller-coaster ride. In 1991 GDP was over $350 billion. That fell dramatically year after year until 1998, when GDP was just over $220 billion. However, the situation improved again from '98. In fact, Russia's GDP increased steadily year after year from 1999 until 2006 when it reached around $740 billion. What caused such a change of fortunes?

Changing over to a completely different economic system could never be painless. The Russian government of the early 1990s decided to use a shock therapy approach. They introduced severe fiscal and monetary policies. The government drastically reduced its spending. It cut subsidies to its crumbling state industries. Interest rates and taxes were raised. Government price controls on nearly all consumer goods were lifted. Only prices for staple goods like food and energy remained controlled by the government. New laws were introduced to allow private ownership and businesses to exist.

All of these measures were intended to create conditions for a market economy to grow. However, they also caused great hardship for ordinary people. Most workers at that time were on fixed incomes. The measures caused the cost of living to rise, but their salaries did not rise at the same rate. To make matters worse, events in the banking system in 1992 caused the money supply to balloon. This resulted in hyperinflation levels of 2,000%. Despite Russia's enormous reserves of oil and gas, the economy went into a long and difficult depression. Finally, in 1998, when an economic crisis hit the East Asian Tigers, oil prices began to fall around the world. For Russia, it turned a depression into an economic crisis.

However, from 1999, world oil prices began to rise again. Mostly with money earned from energy exports, Russia began to pay off its foreign debts. Inflation fell and the value of the rouble stabilised. The economy was recovering. GDP grew steadily year after year, and foreign investors began to show confidence in investing in the country. Moscow's place at the top of the list of the world's most expensive cities is not enviable. However, it is a clear sign that the Russian economy has survived a difficult time.

(from Raitskaya L., Cochrane S.Macmillan Guide to Economics, Издательство: McMillan, 2005)

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Recent developments

The Russian economy, buoyed by the sustained energy and commodity prices, has been fast recovering from the staggering contraction in 2009. Thanks to the improving labour market and a low interest rate environment, growth in consumer spending and investment activity has both contributed strongly to the recovery, although the lingering sovereign debt crisis across Europe would remain a stumbling block on the country’s road to robust recovery.

Current economic situation

Russia has been fast pulling itself out of the doldrums after the 7.8% contraction in 2009, ending last year with a 4% GDP growth. Domestic consumption in Russia, thanks to the coming down of joblessness, has rebounded strongly, while investment activity has buoyed by a low interest rate environment. On the external front, with oil and gas accounting for two thirds of its export receipts, the Russian economy has received a boost from still-high prices of oil and other non-energy commodities. Meanwhile, countercyclical fiscal and monetary policies such as tax and interest rate cuts have also been introduced to underpin domestic spending and support the exchange rate of rubles.

Looking ahead, the current loose stance on monetary policy in most developed economies will continue to underpin the prices for Russia’s oil and commodity exports and therefore the country’s economic growth. In the process, impaired credit flows due to banks’ balance sheet correction, along with the lingering sovereign debt crisis across Europe, would remain a stumbling block on Russia’s road to robust recovery, not to mention the accelerating inflationary pressures and the attendant tightening of monetary policy. Taken together, Russia is forecast to see growth of 4.3% in 2011 and 4.1% in 2012.

Trade policy

The Russian business and trade regime has been liberalized considerably, especially during the process of negotiation for membership in the World Trade Organization (WTO). In contrast to the previous tightly-controlled situation, all enterprises and individuals are now allowed to trade without special registration. They are free to import nearly all products.
The Russian customs tariff classification is based on the Harmonised Commodity Description and Coding System (HS). All goods carried across the country’s customs border have to be declared to customs authorities of the Russia Federation. A customs declaration should be submitted within 15 days after the goods are presented to customs authorities. Customs duties, if any, should be paid to the authorities when the goods cross the Russia border.

Import and export duties are calculated as a percentage of the customs value of the goods (ad valorem) or in euros per unit of measurement of the goods, and/or as a combination of these two rates. In most cases, however, ad valorem customs duties are levied as a percentage of the customs value. On the other hand, export duties are set for a few commodities like oil products, copper, nickel and goods made of these materials.
Aside from import tariffs, most imported products, as well as services, are subject to a value-added tax (VAT). Most imports, including consumer goods, are required to comply with appropriate Russian safety standards. The most common certificate that is required by customs border is the GOST R Certificate of Conformity (CoC) issued by the Gosstandart (GOST) of Russia Federation or its authorised agencies.

Russia has put forward Eurasian integration and created a customs union (CU) with Belarus and Kazakhstan, scrapping interstates customs tariffs and attempting to establish a "Eurasian Schengen" (free movement of people among the three countries, built on the example of the European Union) by 2015

(from Raitskaya L., Cochrane S.Macmillan Guide to Economics, Издательство: McMillan, 2005)

Appendix 5

Rendering the article

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