From Russia With Love
The history of Russia goes as far back to the 12th Century where the country gained its independence from the Mongol. For the purpose of this paper, we’ll concentrate on the modern history, which is from 1917 to present day. In 1917, the country became a republic after the Russian Revolution. The Communist party, headed by Vladimir Lenin came to power and established a foundation for what will eventually became the Union of Soviet Socialist Republic (USSR).
In 1990 Boris Yeltsin became president of the Russian republic and was officially re-elected to the position in 1991. In March 1992 Russia signed a treaty with most of the remaining Soviet republics, establishing the Russian Federation. Boris Yeltsin attempted to carry forward the economic policy that was initiated by Mikhail Gorbachev. This was the idea of free market economy and a movement toward democracy. Today, the country has been under the leadership of Vladimir Putin who came to power in 2000.
Russian Population
Since the collapse of the Soviet Union, Russia has experienced a steady decline in population. This is due in part to the difficult economic conditions the nation has endured, which has led to a very low birth rate, and to a reduced male life expectancy. The population dropped has been slowed somewhat by immigration consisting mainly of ethnic Russians from other areas of the former Soviet Union. In 2004, the estimated population of Russian is 143,782,338.
There are at least 60 different recognized ethnic groups in Russia. The majority of the populations are Russians (83%). There are also Ukrainians (3%) and such non-Slavic linguistic and ethnic groups as Tatars (3%), Bashkirs, Chuvash, Komi, Komi-Permyaks, Udmurts, Mari, Mordovians, Jews, Germans, Armenians, and numerous groups in the Far North and in the Caucasus. Administratively, the Federation has relied on regional divisions inherited from the Stalin and Brezhnev constitutions of 1936 and 1977. Each area with a predominantly Russian population is constituted as a territory or region; non-Russian nationalities are constituted, in descending order of importance, as republics, autonomous regions (oblasts), and autonomous areas (okrugs).
The majority of Russia's population has no religious affiliation due to the antireligious ideology of the Soviet Union. The Russian Orthodox Church, headquartered in Moscow, has about 60 million adherents; the numbers have grown rapidly since the end of Soviet rule. There are also large communities of Old Believers, a group that broke with the Orthodox Church in the 17th century. Other religions include other Christian churches, various sects of Islam, Lamaist Buddhism, Judaism, and tribal religions.
Russian Economy
The Russian economy for the most part of the 20th century was a Marxist-Leninist command economy. The economy was totally run by the state. Absent was any private ownership or productive capital. All farmland was also state-owned and all economic planning was done by the government officials based in Moscow. Market forces played little or no part in their decision making process.
During the Mikhail Gorbachev era the command economy started to loosen as a result of the policies of glasnost and perestroika. The government started to experiment with limited private ownership of businesses, land was granted and prices were allowed to rise in accordance with market forces.
In August of 1991, the Communist party attempted to seize control of the government, but failed. This failed coup weakened the Communist party control. A new era of a market-based economy was proclaimed in 1991. The market-based economy allowed companies to be private entities. Although, enterprises employing more than 10,000 workers that provides gas, oil or pharmaceuticals was still state owned. Also, that year Russia joined with other countries of the Commonwealth of Independent States (CIS) in a loose affiliation aimed in part at establishing a coordinated economic policy.
The rapid change from a command controlled system to the beginnings of a market economy created chaotic conditions; some Russians profited greatly, but most suffered economic hardship as privatization and other economic reforms progressed. By late 1997, inflation appeared to have been brought under control and industrial production had begun to slowly increase. The country was once again plunged into economic upheaval, however, when the ruble plummeted in May, 1998, following a crisis in Asian financial markets. Unable to pay its foreign debts, Russia struggled to restructure loans and keep its new financial services sector from collapsing.
By 2001, however, the Russian economy recovered and benefited from economic reforms under Putin. In July, 2003, a law permitting the sale of farmland was passed by the parliament; foreigners are banned from purchasing agricultural land but may lease it.
Russia ended 2003 with its fifth straight year of growth, averaging 6.5% annually since the financial crisis of 1998. High oil prices and relatively cheap rubles are important drivers of this economic rebound. Since 2000 investment and consumer-driven demand have also played a noticeably increasing role. Russia has also improved its international financial position since the 1998 financial crisis, with its foreign debt declining from 90% of GDP to around 28%. Strong oil export earnings have allowed Russia to increase its foreign reserves from only $12 billion to some $80 billion.
These achievements, along with a renewed government effort to advance structural reforms, have raised business and investor confidence in Russia's economic prospects. Nevertheless, serious problems persist. Oil, natural gas, metals, and timber account for more than 80% of exports, leaving the country vulnerable to swings in world prices. Russia's manufacturing is old and must be replaced or modernized if the country is to achieve broad-based economic growth. Other problems include a weak banking system, a poor business climate that discourages domestic and foreign investors, corruption, local and regional government intervention in the courts, and widespread lack of trust in institutions.
In addition, a string of investigations launched against a major Russian oil company, culminating with the arrest of its CEO in the fall of 2003, have raised concerns by some observers the government is taking steps to reassert state control over the economy.
Russian Stock Market
There are currently 3 active stock exchanges in Russia: Moscow Interbank Stock Exchange (MICEX), Moscow Stock Exchange (MSE) and United Trading Floors of RTS stock exchange and Saint Petersburg Stock Exchange. There are other smaller trading floors, but the lack of volume has made them insignificant. Some exchanges have suspended trading.
The MICEX is a leader in corporate bonds, ruble marginal and internet trading. The main trading members on the MICEX are the Russian companies with level of capitalization. The RTS is a leader in derivatives trades. The main companies operating on RTS are the large universal houses with western clients. The trades on the RTS are much larger than MICEX.
Although the Russian stock market has come a long way compared to the command control days of the Communist regime, the long term development of the Russian stock market will mainly be determined by internal factors such as economic policy pursued by the Government and changes in legislation that is relevant to the financial market.
Russia Economic Prospects
Currently, the Russian stock market and economy could be characterized as slow in development of private security market. From the outside, the Russian economy is still seen as closed by western standard. The country’s political systems are still seen as unstable. The continuing conflict with Chechnya is bleeding the economy and causing uncertainly.
Russian must prove to the world that they have what it takes to thrive in a free market economy. One of the elements that are needed is a stronger middle class. Currently, the gap between the rich and the poor is still large. The people that were in a position to take advantage of the changes during the fall of communism are extremely wealthy today. However, a large number of the population was so used to having basic needed being provided by the government that they’re left behind in the new economy.
In the face of uncertainty, most experts today are actually bullish about the Russian economy. It is seen as one of emerging markets that could potentially reap great rewards. Russian is seen as one of several countries having the greatest prospects for long-term economic growth among big emerging-market countries, in the view of many analysts. Expert points to Russia’s growing middle class and improving domestic infrastructures are likely to play dominant roles in the global economy.
While the Russian market is now relatively inexpensive, the short-term outlook for stocks and securities is very uncertain. Observer sited the battle between Vladimir V. Putin, the Russian president, and Yukos, the nation's largest oil company. Yukos is seeking bankruptcy protection in federal court in Houston, while the Russian government is trying to liquidate it.
According to economic journal and news publications from various sources, the short-term outlook for economic growth in September 2005 looks better than perhaps at any time since the Russian Federation was established. Putin's overwhelming priority is to restore Russia's position in the world as a leading power. For this to happen, the Russian economy must grow at a sustained high rate which, in turn, requires a substantial increase in domestic and foreign direct investment. The president has repeatedly acknowledged that the current investment environment is poor, largely to the loss of confidence after the devaluation and defaults of August 1998 and the lack of corporate governance, but he has vowed to improve that climate substantially.
Economic challenges
After more than a decade of virtually uninterrupted decline, the Russian economy started to recover in 1999 with a 3.2 percent growth in GDP. This upturn is attributable mainly to the August 1998 devaluation and subsequent import substitution effect; continuing high world prices for oil and for some other Russian export items; to the statistical base effect; to some restructuring, notably an appreciable increase in the share of cash transactions between enterprises
An increasing problem today is the lack of records. Today, it is evident to any visitor to Moscow or any other Russian city that a great deal of economic activity goes unrecorded (and untaxed). The official Russian authority is aware of this problem and estimates it to be as high as 40 percent of all transactions goes unaccounted. Other estimates go as high as 50 percent. Yet countering this understatement of the size of the economy is the fact that up to 70 percent of transactions within it are, it is reported, conducted in the form of barter, the value of which is notoriously overstated. As a rough estimate, experts believe the true size of the Russian economy is about the same size as Spain.
The Russian manufacturing industry is quite old. The Institute for Macroeconomic Research has established that over 50 percent of fixed assets in 1998 were more than 15 years old and only 4 percent were less than 5 years old. The only Russian manufactured products that are competitive on the world market are military hardware, nuclear power plants, and space engineering. The domestic demand for these products is severely restricted by budgetary constraints, and the overseas market is limited. After decades of neglect, the infrastructure-roads, railways, pipelines, power lines, water supply, sewers, television tower must needs investment attention. Russian pipelines-virtually all of which are older than the projected life--lose about 20 million tons of oil into the ground and into rivers each year.
Russia is currently attracting less than one percent of the world's Foreign Direct Investment (FDI). In 1999, FDI in Russia amounted to $3 billion; out of a global total of $827 billion. In comparison, China drew nearly $40 billion. The reasons are well known. They include political instability, virtual absence of corporate governance, capricious and exorbitant taxes, the lack of commercial infrastructure, and poor protection of property rights, pervasive corruption, and the increase of organized crime. This hostile environment will take many years to correct, and thus FDI in Russian manufacturing capacity is unlikely to grow substantially in the near future.
The scale of capital required for the massive reequipping and replacement of
Russia's manufacturing industry and infrastructure is daunting. With its vast natural resources and its highly educated workforce, Russia's economy may well experience the boom predicted by some informed observers. When will this boom take place is anyone’s guess. However, for FDI to be at par with other countries such as China, the Russian government has a lot of work ahead.
Russian Political System
The current constitution of the Russian Federation was approved in Dec., 1993. It provides for a republic whose government has separate and independent executive, legislative, and judicial branches. The head of state is a popularly elected president whose powers were substantially increased under the new constitution. The president appoints the prime minister and can dissolve the legislature if it three times refuses to approve his choice for that post. The legislature, or Federal Assembly, is divided into an upper house, the Federation Council, and a lower house, the State Duma. The Federation Council has 178 members, consisting of two representatives from the governments of each republic, territory, region, and area. The State Duma has 450 members. Half are elected from districts; the rest of the seats are distributed proportionally among those parties whose national vote exceeds 7%.
In the elections of Mar., 2000, Putin won election as Russia's president. Putin introduced several measures designed to increase central government control over the various Russian administrative units, including grouping them in seven large regional districts, ending the right of the units' executives to serve in the Federation Council, and suspending a number of laws that conflicted with federal law. He also won the authority to remove governors and dissolve legislatures that enact laws that conflict with the national constitution
Under Putin, Russia also has revived its ties with many former Soviet client states, and used its economic leverage to reassert its sway over the more independent-minded former Soviet republics, particularly Georgia. The country has continued to maintain warmer ties with the West than the old Soviet Union did. Putin was an earlier supporter of the U.S. “war on terrorism”, and in 2001 Russia began to explore establishing closer ties with NATO, which culminated in the establishment (2002) of a NATO-Russia Council through which Russia could participate in NATO discussions on many nondefense issues. Russia even returned to Afghanistan, providing aid in the aftermath of the overthrow of the Taliban. Russia did, however, resist the idea of resorting to military intervention in Iraq in order to eliminate weapons of mass destruction, and as the United States pressed in 2003 for a Security Council resolution supporting the use of force, Russia joined France in vowing to veto such a resolution.
Conclusion
Russia was once a country the United States referred to as “the evil empire”. Not so long ago the USSR was a major world power that fought to spread socialism throughout the world. The situation has changed. The once mighty Soviet empire is no more. The free market economy appears to be the direction of Russia.
No doubt the road towards capitalism and democracy will be an interesting one. As with other countries that have walked these roads, there will be winners and losers. The citizens that seize the opportunity and take advantage of the emerging markets will yield great wealth. On the flip side, the citizens that is unable to participate in the new economy for various reasons will observe the ugly side of Capitalism.
The success of Russia greatly depends on its commitment toward democracy, the internal economic policies, education and infrastructure investment. Russia must continue to open its market and finds ways to attract new investments if it is to be successful in the free market economy. Changes will not happen over night. The people of Russia appear to have decided to embrace the social and economic changes that are sweeping across the country. These changes should yield great rewards; there are no limits for the potential of Russia.
Bibliography
Barany, Zoltan., and Moser, Robert G. Russian Politics: Challenge of Democratization.Madrid, Spain, 2001.
Gustafson, Thane. Capitalism Russian-Style. Madrid, Spain, 2001
Fabrikant, Geraldine "Four Strong Emerging Markets" New York Times 20 January 2005
World Fact Book <http://www.cia.gov/cia/publications/factbook/geos/rs.html>
