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The Economics of Russia: From 1917 to 2018
Table of Contents
This paper examines the economic history of Russia for the past hundred years, from the Bolshevik Revolution to the present. It traces the start of the socialist state under Vladimir Lenin and examines its evolution through the Stalin Era to the collapse of the USSR in 1991. The paper describes the journey from a socialist state to a global free-market economy and describes the economic state of Russia today.
The Economics of Russia: From 1917 to 2018
The history of Russia is long and storied, starting in 882 with the establishment of Kievan Rus’, the first united Eastern Slavic State. It has survived and evolved through many different governments, regimes and internal and external conflicts. Russia is the world’s largest country in area, spanning 11 time zones, and the ninth largest population. About 77% of the population lives in the western European part of the country. Economically, the International Monetary Fund (IMF) ranks the Russian Federation 11th worldwide in nominal GDP and 65th for GDP per capita (Russian Federation: Selected Issues, 2018).
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The economic history of Russia is as diverse as its national history, and further impacted by the variation in its ethnicities, topography and landforms, and sheer size. This paper will examine the current economic picture in Russia and then look at the history that brought Russia to this state. The first section describes the economics of Russia in the present day, and addresses the 5 year period from 2013 to 2018. The second section looks at the economic history of the Soviet Union, from the Bolshevik Revolution through WWII, the regimes of Stalin and Lenin, covering the years from 1917 to 1953, and post WWII through the dissolution of the Soviet Union (USSR) from 1954 through 1991. In the third section, the decade of economic reform and transition to a free market economy from 1991 through 1998 is discussed along with look at the following decades; the recovery and growth of the years from 1999 to 2008, and the years from 2009 to 2012. The paper concludes with a summary and some observations.
The Russian economy is in a state of transition from the centrist economy of the former Soviet Union (USSR) to a free-market economy. Russia is currently in the recovery phase from the recession it entered in 2014. The outlook is positive but guarded, as the recovery has been slow, almost halting at times (Russian Economic Outlook, 2018). However, Russia has survived this crisis and others, and is slowly moving forward. Currently Russia, or the Russian Federation, is the largest country in the world with 11.2% of the world’s territory. On the other hand it has only 2.3% of the total world population and its GDP is only 1.2% of the world GDP (Russian Economic Outlook, 2018). Despite its partial location in Europe where 77% of the population is located, economically Russia is not at all like other European countries. It more closely resembles Latin American countries such as Mexico and Brazil. Russian economic output in 1999 was less than that of Belgium, which has one/fourteenth of the population and one/five hundredth of the territory (Economy of Russia, n.d.). It is, however moving up in world rankings. In 2003 the GDP was $346 billion, less than that of the Netherlands. By 2014 it reached $1.7 trillion, ranking 15th in the world between Spain and Indonesia. The current GDP is still roughly $1.7 trillion although Russia’s rank has moved to 11th worldwide(List of Countries, 2018).
The economy of Russia is primarily in the mining and industrial sectors. The enormity of Russia’s territorial imprint gives it vast sources of oil, gas, and precious metals. The World Bank estimates the natural resources of Russia to be worth $75 trillion, and they comprise about 30% of the world’s total natural resources. As seen in Fig. 1 (Modest Growth Ahead, 2018) the largest sector of the economy is energy followed by metals and metal products, and chemicals, most specifically rubber. Considering the vast stores of natural resources this would seem to be a good thing, but actually the fact that the energy sector decreased from 70% to 59% from 2013 to 2017 is considered a positive trend (Modest Growth Ahead, 2018).
Figure 1: Export structure of Russia for 2013 and 2017 (Source: World Bank)
The reason for this is that such a large reliance on energy exports such as oil and gas for revenue makes Russia very dependent on world-wide prices for these commodities, as Russia cannot control this but instead must learn to cooperate with OPEC to sustain its interests. In the latter half 2014 a sharp decline in the price of oil from $105 per barrel to $60 per barrel, put the Russian economy into a tailspin from which is narrowly avoided a recession (Focus Economics). The dependence on this sector is also detrimental to the move toward a strong free market economy. In the move from the centrist, state owned economy toward a free market economy the Russian state retained ownership of the energy, transportation, communications and heavy industry sectors. Thus, revenues and profits from these largest economic sectors remain in the hands of the government (Russian Federation: Selected Issues, 2018).
Many economists believe that for Russia to continue to move forward and indeed to increase the rate of movement toward a global free-market economy, it is necessary for the country to move away from its historical market segments and increase its footprint in other areas, in particular information technology (IT) (Modest Growth Ahead, 2018). Figure 2 shows the growth for some of the non-energy exports from 2014 through 2017.
Figure 2: Growth of Non-Energy Exports from 2014 – 2017 (Source: World Bank).
While it is possible to describe the state of Russia’s economy solely with statistics involving revenue, growth, and income, it is also worth looking at the current economic state of the Russian citizen. How do the people who work and live in Russia fare with respect to other countries of the world? Russia is still a country which has enormous diversity of wealth among its people. When the country initially began the transition from a centrally controlled economy toward a free-market economy, the state retained ownership of most of the energy and heavy industrial sectors. Those sectors that were divested were placed in the hands of a small group of Russian oligarchs who were politically connected. Thus the country’s wealth remained concentrated in the hands of a small fraction of the population.
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Unemployment. After the crisis of 2014, as the economy began to recover, employment and labor participation rates started to recover, and after the first half of 2018 the unemployment level was at a record low of 5.1%. This is seen in Figure 3 where the data labeled SA has been statistically adjusted for a change in the definition of age. The structure of the unemployed group remained stable with respect to gender and urban vs rural areas. There is still a large inequity in regions of the country and the trend is declining. According to the World Bank, the percentage of vacant jobs has increased to 2.7% along with the average number of hours worked.
Figure 3: Unemployment rates from 2015 to 2018 (Source: World Bank)
Wages and Poverty Rates. Another indicator of economic health involve wages and poverty levels among citizens. As seen in Figure 4, from 2015 through 2018 the inflation rate in Russia decreased to record lows leading to an increase in real wages for workers. This lead to an increase in real wages as shown in Figure 5, with large growth in the Non-Tradable and Public sectors.
Figure 4: Inflation Rate from 2014 – 2018 (Source: World Bank)
Figure 5: Real Wages Across all Sectors of the Economy (Source: World Bank)
The data on poverty levels is a little less clear. As seen in Figure 6 (Modest Growth Ahead, 2018), while the official poverty rate from 2010 to 2017 decreased very slightly, the number of poor persons was actually higher in 2017, due to a change in the poverty boundary.
Figure 6: Poverty Rate and Number of Poor Persons from 2010 to 2016 (Source: World Bank).
Now that a picture has emerged of the Russian economy in current times it is important to look briefly at the history that brought Russia to this point. Following WWI, two revolutions occurred in Russia, in February and October of 1917. The first revolution saw the end of Tsarist rule with the abdication of Nicholas II. From February through September the government was nominally in the hands of the Provisional government made up of moderate socialists and liberals. However, the real power lay with the Bolshevik’s under the leadership of Vladimir Lenin, and in October 1917 the Bolsheviks took over power of the government without much resistance. After some resistance on the part of former tsarist military leaders aided by the Allied Powers the Bolsheviks, now calling themselves communists, finally triumphed. The new regime now sought to exert control through economic measures (Curtis, 1996).
Communism is both a political and economic construct. The actual economic system that emerged was Marxism, following the writings of Karl Marx and the Frederick Engel, and is now known globally as socialism. Under socialism, ownership of the means of production of wealth is shared by all of the people in a society. Private ownership is not permitted. The new government under Lenin seized control of industry and promptly found himself and his policies unpopular. Factory production began to fall and the ruble became worthless and food became scarce as unhappy peasants rebelled against payments with worthless currency and cut agricultural production. By 1920 strikes by industrial workers and peasant uprisings resulted in famine.
Lenin recognized that the sudden move to communism was not working and took a step backward by introducing the New Economic Policy (NEP) which was, essentially, a temporary compromise with capitalism (Curtis, 1996). Under the NEP, peasants were allowed to sell their produce as they pleased, and service and small scale industry was denationalized. As a result the economy returned to pre-war levels by the late 1920s. It was also during this time that non-Russian Soviet republics such as Belorussia and the Ukraine as well as the republics in Central Asia were formed into the USSR.
It is interesting to note that while Lenin was essentially the power that formed the USSR, it was his willingness to compromise and change his policies to adapt to the realities of his new regime (Zarembka, 2003).
After Lenin’s death in 1924, political turmoil centered on whether global revolution was necessary for socialism to succeed in the USSR. After several years of internal strife Josef Stalin emerged as the new leader of the USSR under the theory of “socialism in one country” which purported that socialism would survive and prosper without global revolution.
One of Stalin’s first actions was the introduction of an intensive socialist program. The NEP of Lenin was no longer a part of the equation. In essence, Stalin’s plan was the same as the global revolution idea he previously defeated, only this time the revolution was contained within the USSR.
One of the hallmarks of Stalin’s road to socialism was the establishment of the Five-Year Plans. The first of these began in 1928 and concentrated on industry. The emphasis of the plan was increasing worker productivity, but the production targets of Stalin were unrealistic and most resources were put into heavy industry (Meek, 1953). As a result there was a widespread shortage of consumer goods and an increase in inflation. To satisfy the need for food, farms were collectivized and peasants restricted to the new state farms, resulting in widespread resistance and starvation (Curtis, 1996). The net result of the plan was a decrease in production of every industry except for heavy industry, as well as a 23% decrease in agricultural output (Meek, 1953). By the end of the third Five-Year Plan the Soviet Union was again in a wartime economy. After the war, the Five-Year plans resumed with the job of repairing and rebuilding the country after the war.
In general the Stalin era saw a forced increase in the pace of shifting resources from other industrial sectors to heavy industry. The Soviet consumers were virtually ignored, and by 1950 had only reached a level slightly higher than that of 1928 (Curtis 1996).
With the death of Stalin in 1953 the emphasis of the economy remained on heavy industry and central control remained strong. From the mid-fifties to 1975 the Soviet GNP appeared to grow at a rate of 5% per year, outpacing that of the United States. However, the numbers in fact had been manipulated and there was extensive corruption on the part of central planners to make it appear that production goals were being met. In addition, the goods being produced were of poor quality. The economy became stagnant as capital and labor supplies diminished (Curtis, 1996). The standard of living of the average Soviet citizen, already far below that of the United States and other modern industrialized countries, declined even further. Suddenly Soviet citizens began to question the economic policies of their country.
In 1986, Mikhail Gorbachev attempted to introduce economic reforms leading toward a market-oriented socialist economy with the twelfth Five-Year Plan (McFaul, 1999). The attempts appeared to be a case of too little, too late, leading up the disintegration and break-up of the Soviet Union.
In 1991, Boris Yeltsin began the move from a centrist, state-owned and run economy toward a global free-market economy. This movement requires both macroeconomic stability and economic restructuring. Macroeconomic stability is a term that describes an economy that is minimally vulnerable to external shocks (Modest Growth Ahead, 2018), while economic restructuring is the movement of an economy from an industrial base to a service oriented sector. Yeltsin began his reform by using a radical approach known as “shock therapy”. The result was a disaster with the GDP falling almost 40% and annual inflation rates rising to 2,250% in 1992 (Gidadhubli, 2007). Although there was recovery over the next few years, in 1994 the annual inflation rate was still 224%. While industry ownership was in fact moved to the private sector the largest and most profitable companies were either retained by the government or sold to a small group of government insiders who promptly invested their wealth outside of the country causing a huge decrease in capital remaining within the country (Curtis, 1998).
By 1995, Yeltsin had dismissed the last economic reform candidates still in a top government position, and in 1998 Russia was in a financial crisis resulting from inability to collect government revenues from companies in the collapsing economy, and dependence on short-term borrowing to fill budget deficits (Economic Growth in the 1990s:, 2005).
The recovery from the 1998 financial crisis was faster than many expected. Although it was the devaluation of the ruble that caused the crisis, in the end it also brought stability to the Russian economy. This occurred because foreign goods became too expensive and the Russian people were forced to rely on and buy domestic goods, thus increasing the development of local industry (Gidadhubli, 2007). As a result inflation slowed to 2% per month, and tax revenues and trade surplus increased (Economy of Russia, n.d.).
Although Russia was hit by the global credit problems in 2008, they did not suffer long-term damage, and in 2013 Russia was labeled a high-income economy by The World Bank (2014).
Although there is clearly still a journey to take Russia seems to be moving towards its objective of a global free-market economy. In order for this to happen successfully change and reform still have to occur. The government has done a good job setting macroeconomic essentials to ensure growth. Switching to a flexible exchange rate with the ruble and keeping inflation rates to targets set have both contributed to macroeconomic stability. There is still however a need for microeconomic requirements to be put in place. Foremost of these is the need to reduce the size of the state’s footprint in the current economy. Currently the Russian state comprises 70% of the GDP. State owned enterprises and conglomerates can dominate the market for certain industries and limit competition (World Bank, 2018). The government also needs to address poverty issues and rates among its citizens. Lastly, the move to decrease the size of the energy sector and increase the size of service and technology sectors needs to be addressed so that dependency on oil prices does not drive the economy (Aziz & Sergi, 2014).
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