DEVELOPMENT CHALLENGES
Between the financial crisis that struck Russia in 1998 and the global financial crisis in 2008-2009, Russia experienced the strongest decade of growth in its history. On average, GDP grew by nearly 7% annually over this period. A solidly “upper-middle” income country, Russia’s GNI per capita has grown steadily, from US$5,820 in 2006 to US$9,910 in 2010. The country also has a “high” Human Development Index (HDI) of 0.755, placing it in 66th place of 187 countries. However, the global financial crisis was severely felt in Russia, due to overlapping internal and external factors, and reduced the long-term trajectory of the Russian economy. The country therefore continues to face some development challenges.
Poverty and inequality
Over the past decade, poverty has been significantly reduced in Russia, decreasing from 29% in 2000 to 13.1% in 2010. National extreme poverty, defined as living on an income of less than half the minimum subsistence level, has also dropped (from 16.7% in 2000 to 3.7% in 2009). Despite this concrete progress, regional development continues to be a challenge, with severe socio-economic contrasts among regions. Rural communities are twice more vulnerable to poverty than urban areas, yet 58% of the poor population lives in urban areas. Working people constitute the largest share of the poor population, and families with children and children themselves are most at risk of poverty.
High unemployment and a large gender pay gap
While unemployment had decreased from 9.4% in 1995 to 7.0% in 2008, the global financial crisis reversed this trend: in 2009, 8.2% of the total workforce was unemployed (economic recovery pushed unemployment back down to 6.5% in July 2011). In addition, although the unemployment rate of women is lower than that of men (6.4% compared to 7.5% in 2008), a pronounced gender gap in wages has shown high resistance to change. According to official data, women earned only 65.3% of men’s earnings in 2009, even if the ratio has increased since 2005 (60.7%). Women are also more likely than men to work in sectors where the average wage is lower than the overall Russian average (71.2% and 51% respectively in 2008).
Skills gap
Universal adult literacy has been achieved in Russia, and education has become more accessible, with enrolment rates increasing at all levels. 47% of Russians have completed tertiary education, but women increasingly outnumber men at this level (57.8% compared to 42.2% in 2009). Nevertheless, although Russia invests about 4% of GDP in education, significant disparities exist in funding and access to education between and within regions. Another increasingly important development constraint is the skills mismatch in the labour market, leading to higher youth unemployment in the country. The content of general secondary education is outdated and fails to develop practical skills and train students to apply school knowledge to real-life situations.
Inefficient public administration and a large informal sector
Despite efforts to improve the quality of public services, the infrastructure and skills of the public sector still require upgrading to improve performance. The reform of the civil service is also incomplete. Inefficient public administration and service delivery have contributed to the formation of a large informal sector in the Russian economy, accounting for 40.6% of GDP by some estimates (Andreas Bühn & Friedrich Schneider, 2011).
Environmental issues
Environmental concerns constitute another major challenge to sustainable development in Russia. In the 1990s, a significant reduction of industrial, forestry and agricultural production caused a decrease in energy consumption, leading to a drop in emissions of air and water pollutants. However, with economic recovery starting in 1999, this trend has been reversed and, today, Russia is one of the world’s largest emitters of greenhouse gases (GHG), with over 80% of GHG related to the energy industry. The country’s energy intensity is 2-3 times higher on average than that of industrialized countries, and non-renewable power resources are depleting quickly.
KEY TRADE ISSUES
Product concentration and low productive capacity
Russia’s economy is highly dependent on the production of fossil fuels, with mineral fuels and oil products making up 65% of total exports in 2010. Despite some shift to services over the years, the economic structure is still concentrated on natural resources, which has exposed the country to collapsing oil prices and resulted in a sharp turnaround in the terms of trade. The range of other internationally competitive products is small, and their value-added is low, due to the weak productive capacity of enterprises in non-oil sectors.
WTO accession and regional integration
Russia’s integration into the world economy, as well as the benefits that derive from multilateral trading, is hindered by the fact that the country is not yet a member of the WTO. However, having submitted its application in 1993, Russia has made important progress towards WTO membership, which was approved by WTO Ministers on 16 December 2011. The country is expected to ratify the agreement in the summer of 2012. Russia has also undertaken concerted action to increase trade with neighbouring countries through the recent Customs Union with Belarus and Kazakhstan; however, continued efforts are required to finalize the tariff and customs unification process, in order to reap the full benefits of regional integration.
Limited access to finance
The financial crisis caused a disproportionate decrease in lending to SMEs, which were perceived as high-risk borrowers and subjected to prohibitive terms on loans. As a result, limited access to finance hinders SME development and their ability to expand trade.
Cumbersome regulatory and business environment
Russia has a very cumbersome regulatory and business environment that hampers competition, innovation and trade development. Despite major improvements in the structure of its taxation and tax collection system, the country ranks 120th of 183 economies on the World Bank’s “ease of doing business” indicator. Russia’s ranking in terms of “trading across borders” is even lower (160th). Customs clearance procedures are more complex, costly and time-consuming than the average in the region of Eastern Europe and Central Asia. For example, it takes 36 days to export, and the cost of exporting a container is US$1,850.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the 2010 UNDP National Human Development Report in the Russian Federation 2010 “Millennium Development Goals in Russia: Looking into the Future”; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2009 OECD Economic Survey of the Russian Federation; and the 2011 World Bank-Russian Federation Partnership Country Program Snapshot.