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Macro economic outlook

at the Russian Republic  

August 2020


Russian GDP was 1.6999 trillion US dollars in 2019, according to official data from the World Bank. The country’s GDP represents 1.42 percent of the world economy which ranks Russia as the 11th largest economy in the world. According to International Monetary Fund (IMF), Russian GDP has shrunk by 5.5% as of April 2020, driven by declining energy exports and internal market fluctuations.  

Russia is not merely the largest country in the world, geographically; it also possesses one of the world’s largest repositories of crude oil, petroleum and other precious metals. Russia is ranked among the world's leading producers of a large number of mineral commodities including some of the largest reserves of diamonds, gold, platinum, palladium, coal and iron ore. Russia is the third largest producer of crude oil in the world, pumping out up to 10.95 million bpd as per. However, despite these rich resources, Russia’s exports lack diversification: about half the value of all Russian exports may be attributed to oil and natural gas exports. Indeed, despite having one of the largest arms industries in world, producing high tech military equipment including air defense systems, combat aircraft, submarines and warships for export, even this industry is dwarfed by oil and gas.

Unsurprisingly, therefore, the value of the Russian ruble has been historically highly dependent on crude oil prices. For example, in 2014 when oil prices fell, so did the ruble. However, in the wake of sanctions imposed by the US against Russia for its alleged interference in the U.S. presidential election of 2016, the ruble and the oil price were finally decoupled with the ruble suffering massive fluctuations and heightened inflation. 

Russia as the Largest Energy Supplier to Europe

30% of Europe’s oil and 40% of its natural gas demand is met by Russia. The Russian government owns its oil and gas industries. Gazprom, the state-owned gas company, owns the world’s largest gas reserves and the industries account for the 30% of the state’s total employment. Russia’s economy is therefore highly dependent on the export of oil and petroleum products. It has the strongest backing from the European Union, as the EU cannot afford to lose Russian energy supply. This was evidenced most starkly in 2006, when Russian president, Vladimir Putin cut off gas supply through Ukraine, effectively holding EU gas supply hostage in a bid to charge higher prices. 

In similar moves, Russia has compelled many foreign energy contractors to increase its share of profit. Historically, it has arbitrarily changed the agreement with ExxonMobil and Royal Dutch Shell, granting license to Russian-owned oil company, Rosneft, to operate in the Exxon mobile area and revoking Shell’s license for the $20 billion LNG project at Sakhalin 2 Island. Similarly, in 2008, using peacekeeping troops in Georgia, Russia took control of one the oil pipelines owned by British Petroleum to force a deal with BP. 

Despite these bullying tactics, there are very real fears in the EU that Russia’s infrastructure is not sufficient to meet its future needs and the EU has forecasted that an investment of $738 billion is required in 2020 to build additional infrastructure. Failure to scale its infrastructure could represent a very real threat to the Russian economy in future, 

Russian Economy Determinants

According to most Russia experts, a small circle of powerful oligarchs controls the Russian economy. The most important Russian businesses are owned or managed by these wealthy insiders. Contrary to popular opinion, President Putin does not control the oligarchy but rather mediates their competing interests. It is a system of control which began as early as the 1400s during the expansion of the Grand Duchy of Moscow and has operated successfully through both Czars and the Soviet era.

This Oligarchy contributes to Russia being one of the least democratic countries in the world, with corruption is deeply rooted within the system. Russia was ranked 135 out of 180 countries in the Corruption Perceptions Index (CPI) of Transparency International in February 2019. The Financial sector, for example is dominated by five large banks, all controlled by the state. Due to lack of transparent  investment framework, any growth in foreign direct investment remains unsurprisingly elusive.

New Horizons for Russian Economy

While Russia’s dependence on oil and gas may have been sufficient up until now, it is clear that diversification is urgently required as volatility of internal markets and geopolitical uncertainties cause havoc with Russia’s internal economy and the strength of its currency. The old model of Russian development has been exhausted and a new one must emerge; the choices it makes at this juncture will determine the future of its economic development for many years to come.

Russia in the Global Economy

Russia is at an historic crossroads: its future economic development will be dependent on its choices now. In an increasingly globalized world, Vladimir Putin now seems more focused on interacting constructively with other countries and bringing Russia’s into international markets, particularly in the technology sector, thus strengthening Russia’s overall position globally. 

In 2018, Putin outlined the set of concrete objectives for the Russian economy to prepare Russia for active participation in globalization and confront its internal economic, institutional, structural and technological challenges. Russia’s acknowledgment of these challenges to technological advancement, economic performance shows an awareness of the widening gap between itself and other economies. 

However, it is the emergence of the digital economy globally which represents a major challenge to the Russian status quo: in order to be competitive in this market, Russia must steer a new course that will include more engagement and greater flexibility in its international economic relations. A misstep at this juncture could see Russia’s relegation to an economic backwater. 


The Russian economy requires diversification away from its historical reliance on the oil and gas industries. Its economy has seen the greatest contraction in 2020 since the recession of 2009. Lockdown measures at home and abroad have dented exports and productivity compounded by low oil prices and depressed oil production. While fiscal and monetary stimulus combined with solid buffers thanks to Russia’s low debt and ample international reserves should help to soften the blow, economists are predicting a 5.0% decline in GDP this year and weak growth of 3.4% in 2021. However, without significant internal changes, it is unlikely that these fundamentals will change any time soon.  


About the author(s)


Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.

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