Economic Environment In Russia Economics Essay
In the year 1990 the Russian system underwent tremendous stress as it transformed from a centrally planned economy to a free market system (US Commercial Service, 2010). Following the breakup of USSR, Russia’s GDP observed a continuous period of decline from the beginning of 1991 until 1998 (PriceWaterhouseCoopers, 2010). The reasons for the serious financial crisis in 1998 were difficulties in executing fiscal reforms aimed at raising government revenues and a reliance on short term borrowing to finance budget arrears. The financial problems aggravated due to lower prices for Russia’s major export earners (oil and minerals) and the loss of investor confidence due to the Asian financial crisis. This resulted in the rapid and steep decline (60%) in the value of the rouble, runaway of foreign investment, delayed payments on sovereign and private debts and a breakdown of commercial transactions through the banking system (US Commercial Service, 2010).
The Russian economy began to bounce back after the 1998 economic crisis with an annual GDP growth of 7% from 1999 to 2007. This led to a sharp increase in prices for Russia’s main exports (oil, petroleum products) and import substitution effect led to the rouble’s devaluation in 1998, a tax reform, tightening of fiscal policy and greater political and social stability. The economy witnessed growth as a result of extraordinary rise in the consumer oriented sectors, particularly in the construction and services industries. In the year 2007, Russia’s GDP increased by 8.1%, and by 2008 the GDP further increased by 5.6% (PriceWaterhouseCoopers, 2010).
Russia was hit by the global economic crisis in the second half of 2008, which impacted the Russian economy immensely. The economy began to shrink, which led to falling sales, production and layoffs. In the year 2009 the economy diminished by 7.9%, through a positive revival trend that occurred in the second half of 2009, when the economy recommenced reasonable growth. The manufacturing, industrial production and construction industry witnessed a sharp decline in growth. The wages decreased and the labour force was only 66% of the total population. The number of unemployed measured 8.4% of the workforce (PriceWaterhouseCoopers, 2010).
The downturn faced by the global capital market reached Russia, which led to the closure of the global sources of funding. Foreign direct investment dropped by 41%, that is 3.6% of GDP. The major attractions for foreign direct investment were manufacturing, retail, mineral resource extraction and transport. The figure estimated for net outflow of capital is US $52bn. In 2009, the Russian equity market was affected adversely. Russian companies attracted US $1.7bn via IPOs and SPOs, whereas in 2009 only one IPO (Initial Public Offering) was registered. Nevertheless, the IPO is expected to witness a boom in 2010 (PriceWaterhouseCoopers, 2010).
The end of 2009 brought positive news for Russia: the international credit rating agencies Standard