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Country Commercial Guide: Russia
Published by the Department of Commerce, 2001
Executive Summary
Russia is into its third consecutive year of solid economic growth, and there is cause for optimism over the country's future economic and political direction. The effects of the 1998 crisis have largely worn off, the reform agenda of the Putin administration is steadily transforming the economic landscape, and the reformers are gaining in strength and confidence with each success. With Russia now well down the road towards a modern market economy, the focus of the debate centers not on whether to move forw but how fast, and what should be the most appropriate structure for Russia's unique circumstances.
Russia's GDP is projected to grow in the 3-4 percent range in 2001 and 2002, a respectable performance but only half of 2000's unsustainable 8.3 percent surge. Industrial output showed similarly impressive increases. However, these gains are from a very low base. With a population roughly half that of the United States, and a resource-rich territory around three times the size, Russia managed a gross domestic product of only USD 251 billion, or USD 1,707 per capita. Despite its massive potential for trade and investment in the medium- to long-term, Russia is of limited commercial interest for most American exporters due to negative market perceptions. On the positive side, Russia is a fully diversified economy with a highly educated workforce, and can be a ready market for a wide range of technologically sophisticated American products.
The Russian market is unique. No other economy has experienced so large and sudden a change in direction in modern history. The disruption and economic decline through most of the 1990s denied enterprises and state-owned entities the resources to replace aging capital equipment. In many cases the enterprises remain seriously uncompetitive, and ultimately unviable. However, through the chaos there have emerged some survivors, increasingly strong firms with good management and strong positions in their markets. In other cases the strengthening economic reform process is forcing major industrial restructuring which, when completed, will create enterprises which are viable in a market economy and for which there will be clearly identifiable income streams.
The process of economic reform is very much a work in progress, and hopes for an acceleration of the process under the Putin administration have been partially realized. After a successful drive to push through tax reform, efforts for the coming year are now focused on reforming the three big "natural monopolies," which dominate the Russian economy—the railroad system, and the giant gas and electric utilities.
Russia's trade turnover increased by 33 percent in 2000, led by a 25 percent increase in exports. The value of Russia's exports was at the highest level achieved in a decade, led largely by oil and gas. Overall U.S. exports to Russia grew by 25 percent in 2000 compared to 1999, but they remain significantly below levels of the mid-1990s. First quarter 2001 exports were still 43 percent down from the same period in 1998.
Investment:
Investment from both domestic and foreign investors is on the increase, although at a moderate pace. Despite some efforts by the Russian government to address persistent weaknesses in the investment climate, Russia remains a challenging environment for foreign investors. President Putin's administration has strongly stressed attracting foreign direct investment, particularly through structural reforms. While their record has been good to date, it is an uphill task. The high costs in complying with Russian tax authorities, inconsistent government regulation, poor corporate governance, the inability of some investors to obtain redress through the legal system, and crime and corruption all dissuade investors. These systemic problems are abetted by lack of financing sources, as well as concerns about long-term economic and political stability, which have discourage investment.
Despite a positive year for growth in 2000, unresolved structural economic problems, combined with real effective exchange rate appreciation that has dissipated the beneficial effects of the 1998 devaluation have kept massive new foreign investment away. Despite some recovery, still-low purchasing power continues to dampen the attractiveness of investments. Many U.S. companies here report recovery in their earnings, with some now back to or above pre-1998 levels. Russia's macroeconomic recovery has revived the attention of outside investors.
Political Environment:
Democratic institutions are fragile in Russia. The March 2000 presidential election was the first democratic transfer of power in Russia's 1,000-year history. Russian law now includes a civil code (which includes a commercial code) and a criminal code, although key amendments are needed to improve the business environment. President Putin has made judicial and other legal reforms one of his top priorities and has proposed extensive legislative changes that were likely to be adopted by the Duma before the end of 2001. Implementation of these changes will have the potential to improve the business climate as well as the protection of citizens' rights, but will take several more years at a minimum.
The Russian Federation is composed of 89 subjects which include regions, autonomous republics, and territories, each having some authority over internal economic and political issues. President Putin has made reforming Russian federalism a priority, and in 2000, divided the country into seven federal districts. Regional leaders became subject to removal from office for failing to comply with federal law or the constitution under a series of initiatives designed to strengthen the power of the center and to rein in regional leaders, some of whom have exercised almost unlimited authority in their own realms.
Russia in the year 2001 is a rapidly changing, fast moving economy offering opportunity and challenge in equal measure. There is a risk in entering the Russian market, and risk in staying away. Most large corporations, especially those from Europe, have concluded that they cannot afford not to have a Russian presence. A significant number are finding that presence to be profitable, and the majority express optimism for the future.
Country Commercial Guides can be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance or country-specific commercial information should consult with their nearest Export Assistance Center or the U.S. department of Commerce's Trade Information Center at (800) USA-TRADE, or go to one of the following websites: www.ustrade.gov; or www.tradeinfo.doc.gov
To the best of our knowledge, the information contained in this report is accurate as of the date published. However, the Department of Commerce does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.
INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2001. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.
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