Russian revelation
Vital intelligence on the world’s largest country
Find out more about Russia's creative industries
Russia
Area 17m sq km
Population 142.3m
GDP $1,289.6bn
(PPP: $2,087bn)
GDP growth 7.2%
Inflation 15%
Literacy rate 99.4%
Internet users 30m
Unemployment 6%
Foreign direct investment (2007) £24.2bn
Briefing
The world’s largest country by area (ninth by population), has the world’s greatest energy and mineral stores. Oil, natural gas, metals and timber make up more than 80% of Russia’s exports. Despite having reserves equalling less than 10% of the Middle East’s total, Russia is the world’s largest oil producer and second-largest exporter. It is also responsible for 30% of global weapons sales.
In 2006, the ratio of R&D spend to GDP was 1.08%, well below the 2005 OECD average of 2.25%. The government aims to increase this to 2.5% by 2015 and boost private R&D spend to 70% of the total. About 9% of Russian R&D is financed by foreign companies.
Earlier this year, Russia introduced legislation to target intellectual property pirates, but the US has warned it must toughen up its enforcement if it is to join the World Trade Organisation. Last year, US copyright industries lost $1.4bn to Russian piracy.
Strengths
Russia is home to more billionaires (101) than anywhere except the US.
Thanks to oil profits and fiscal prudence, Russia has paid off most of its foreign debt and amassed foreign reserves of £254bn – the world’s third-largest total.
Part state-owned company RusHydro, the world’s largest listed renewable power firm, is set to double its production.
Manufacturing (especially machine-building) and construction are booming domestically, although many firms in these sectors are not yet globally competitive.
Corporate taxation has fallen to 24% and is expected to decrease further.
Economic growth has been concentrated mainly in Moscow, yet national quality of life is improving. Just 14% of Russians lived below the poverty line in 2007, down from 40% in 1998. Real disposable income has nearly doubled in the past five years and is growing by more than 10% a year. The average salary in 2008 was $640 per month. The number of unemployed Russians has roughly halved since 1999.
Decades of dispute over the Russian-Chinese border ended in July when the countries settled the final details of a treaty.
Government schemes to boost the waning population (which the UN warned could fall by a third come 2050) are finally paying off. In 2007, the birth rate was the highest since the USSR’s collapse.
Space agency Roscosmos is collaborating with the European Space Agency on a manned craft.
The film industry, finally recovering from the demise of the old state-funded system, has begun to make a real impact abroad. At the 2008 Oscars, two Russian movies received nominations for best foreign film.
Although only 18% of the population has direct internet access, most Russians are technically highly literate. Many people access the web at work, university or college. Russian internet usage is growing at a faster rate than anywhere else in Europe.
Bettered only by China and India, Russia is already the world’s third largest supplier of offshore software development, thanks in part to state aid. Russia’s share of this market will be worth £6bn by 2010.
‘Intelligentsia’ is a Russian word and the country has one of the most educated workforces in the world.
Weaknesses
Economic growth is slowing as industry approaches full capacity. Rising energy and labour costs are threatening Russia’s competitive edge, with skills shortages restricting company growth.
Inflation – now more than 15% – has nearly doubled in the past year, and food prices are rising even faster.
Moscow has been rated the world’s most expensive city for the past three years. The average cup of coffee costs £5.19 (compared to £2.57 in Tokyo and £2.20 in London).
Poor regulation, lack of investment in infrastructure and heavy taxes when oil prices soar, have caused oil production to fall. Further stagnation is predicted. After BP’s troubled joint venture with TNK, foreign investment in oil won’t be easy to attract.
Publicity over the BP-TNK affair – and other high-profile legal disputes with business – have persuaded many private equity firms that Poland is a more appetising market.
Growing domestic demand is increasingly met by imports. Despite helpful government legislation, domestic car-makers have not profited from the booming market R&D spend has increased in recent years, but it has been outpaced by GDP growth.
A 2007 EU-funded study of national innovation ranked Russia 27th out of 36 nations.
The government is pouring billions into nanotechnology and space science, however most private businesses have no R&D or innovation strategy. There is also no official government policy to support the growth of the creative economy.
Russia boasts many researchers (13.5 per 1,000 employees in 2006), but their productivity, as indicated by patent filings and journal contributions, is poor. Russia only files half as many triadic patents (registered in the EU, US and Japan) as Singapore.
IT is booming but needs more private investment to follow metals and banking tycoon Mikhail Prokhorov, who has created a £9bn holding company to invest in high-tech ventures.
Corruption remains a big problem in Russia. Twelve of its 101 billionaires are MPs, mostly from Putin’s United Russia party. Earlier this year, £124m was stolen from the Russian Treasury following a fraudulent legal claim. Bribery is considered an everyday part of business, while in the education system alone more than £500m a year is spent on bribes.
Corruption isn’t the only problem afflicting Russian entrepreneurs. Red tape is so bad that it typically takes 29 days to start a company. This partly explains why Russia has only one-fifth as many SMEs as other developed economies.
Russia’s war with Georgia has been politically and strategically successful in the short term, but it has reinforced international unease about its global role.
The uncertainty over whether Putin or his successor Dmitry Medvedev really runs Russia has unsettled potential investors. For example, Putin’s criticism in July of the taxes paid by metals and mining company Mechel sent the Russian stock market into a nosedive.
Health remains a concern. The average life expectancy of a Russian male is only 58 and the infant mortality rate is twice as high as in the US.
| Top five cities by population (2006) |
|
| Moscow |
 10,425,075 |
| St Petersburg |
4,580,620 |
| Novosibirsk |
1,397,015 |
| Yekaterinburg |
1,308,441 |
| Nizhny Novgorod |
1,283,553 |
Source: www.citypopulation.de
Gross regional product per capita:
Top five regions
Tyumen Oblast (Urals) $234,989
Chukotka autonomous Okrug (far east) $177,478
Moscow city (central) $155,712
Sakhalin Oblast (far east) $94,955
Sakha (Yakutia) Republic (far east) $91,741
Bottom five regions
Dagestan Republic (south) $12,233
Ingush Republic (south) $12,267
Adygeya Republic (south) $14,194
Tuva Republic (Siberia) $14,859
Karachaevo-Cherkess Republic (south) $16,220
Source: World Bank
| Forecast FDI inflow 2008 |
% |
| USA |
$235bn |
| China |
$84.1bn |
| Russia |
$29bn |
| Brazil |
$27bn |
| India |
$18bn |
Source: The Economist
Article first published in Design Council Magazine, Issue 5, Winter 2008