Russia's GDP Components
Russia's gross domestic product (GDP) is mainly composed of three sectors, namely agriculture, industry, and services. Agriculture contributes approximately 5.6% to the GDP, while industry and services make up 26.6% and 67.8%, respectively. Russia had a GDP growth rate of 4.7% in 2021, its highest since 2008. However, for 2022, the GDP growth rate was -2.1%, as, in February 2022, the United States and some other countries imposed new sanctions on Russia due to its invasion of Ukraine.
Basics
Exploring broader investment horizons or aiming to access rapidly evolving global sectors might lead investors to contemplate emerging economies like Brazil, Russia, India, and China. Among these, Russia holds the distinction of being the largest in land area. Yet, it occupies the 11th position in the global gross domestic product rankings—lagging significantly behind China (2nd) and India (5th) and narrowly edging out South Korea (12th). In contrast to the United States, which claims the mantle of the world's most substantial economy with a GDP of $26 trillion, Russia's nominal GDP stands at $2 trillion.
Russia: Evolution Through Time
The aftermath of the Soviet Union's collapse in 1991 thrust Russia into a challenging transition era, marked by the inheritance of a devastated industrial and agricultural landscape and the remnants of a centrally planned economy. Despite introducing various reforms that fostered increased economic openness, a notable concentration of wealth persisted.
Throughout the majority of the 1990s, Russia grappled with negative economic growth, only to pave the way for a subsequent golden era. From 1999 to 2008, the country's GDP surged by a minimum of 4.7% annually, establishing Russia as one of the globe's swiftest-growing economies. This surge, however, hinged predominantly on soaring commodity prices, particularly oil. The Russian economic engine faced a shock when oil prices plunged due to the 2008-09 global financial crisis, uncovering Russia's heavy reliance on oil. In due course, the economy convalesced as oil prices stabilized.
After that, Russia maintained a reasonable growth trajectory in 2011 and 2012, yet latent structural issues precipitated a deceleration in 2013. The nation faced a continued downturn in subsequent years due to various challenges, including dwindling oil prices, geopolitical tensions, and Western sanctions resulting from its 2014 incursion into Ukraine. In 2015, its GDP contracted by 2%. Russia managed successive annual GDP growth from 2016 to 2018 before encountering a slowdown, culminating in a 2.7% contraction in 2020.
In 2021, Russia experienced its most robust GDP growth since 2008, recording a 4.7% expansion. However, the scenario took a drastic turn in February 2022 when Russia once again entered Ukrainian territory. In February 2022, U.S. President Joe Biden issued sanctions against Russia as a countermeasure to its military incursion into Ukraine, including advancing Russian forces into two separatist regions in the east. This time, the sanctions marked an unprecedented scope, extending beyond the 2014 Ukrainian invasion, and were jointly enacted with EU member states, the United Kingdom, Canada, Japan, and Australia. These sanctions primarily assume an economic form, encompassing the blockade of two state-owned Russian financial entities, namely Vnesheconombank and Promsvyazbank, along with their subsidiaries, which provide financial backing to the Russian military, thereby barring their access to the U.S. financial system. Additional measures involve the U.S. Treasury's prohibition on acquiring new Russian sovereign debt and the embargo on U.S. entities and individuals from purchasing sovereign debt in the secondary market. Furthermore, sanctions have singled out five Russian elites and their families. As a result, in 2022, Russia's gross domestic product dropped by 2.1%.
Russia's GDP Composition
The economic structure of Russia's GDP can be categorized into three primary sectors, each playing a distinct role. These sectors encompass a modest agricultural segment, accounting for approximately 5.6% of GDP, followed by industry and services, contributing 26.6% and 67.8%, respectively.
Agricultural
The challenging climate and geographical limitations confine agricultural activities to select regions within the nation. This geographical constraint largely explains the modest role of agriculture in Russia's economic framework.
The agricultural sector exhibits a dual nature, with both a formal facet comprising major commercial producers and an informal facet characterized by small-scale landholders catering to self-sufficiency. This sector encompasses not only crop cultivation and livestock production but also forestry, hunting, and fishing.
Despite being a noteworthy exporter of specific food items, Russia stands as a net importer of agricultural products and food. Factors such as domestic scarcity and inflation dynamics, which render foreign imports more competitive, have driven this trend. In the years of robust economic growth, notably between 2000 and 2008, rising income levels amplified consumer demand for food, resulting in elevated imports.
In 2014, responding to Western food embargoes, Russia imposed bans on imports of various food categories, including dairy, meat, and produce, originating from countries such as the U.S. and the European Union. Consequently, Russia's reliance on food imports underwent a substantial reduction.
Industrial
Over the previous decade, Russia's industrial sector has consistently contributed around 30% to its GDP, showcasing stability. By comparison, the U.S. derives roughly 18% of its GDP from industry. The sphere of industry encompasses mining, manufacturing, and construction, as well as electricity, water, and gas. Russia boasts a rich array of natural resources, prominently featuring oil, natural gas, timber, and diverse mineral deposits, including tungsten, iron, diamonds, gold, platinum, tin, copper, and titanium.
Key industries in Russia have harnessed its abundant natural resources. Notably, the machinery building sector, though adversely impacted following the Soviet Union's dissolution due to capital shortages, has since regained prominence. It serves as a vital supplier of machinery and equipment to other industries within the economy.
The Fuel and Energy Complex (FEC) holds significant sway in Russia's economic fabric, ranking among its pivotal sectors. Despite adopting certain market-oriented practices, Russia exercises substantial control over its energy sector, in stark contrast to more liberalized energy markets like the U.S.
Energy domains, encompassing oil, natural gas, and electricity, are subject to de facto governmental control. The FEC contains resource extraction, processing, distribution, and consumption, supporting various sectors and serving as a cornerstone of Russia's exports. Russia, the world's third-largest oil producer after the U.S. and Saudi Arabia, contributes 11% of global oil production.
Dominant Service Sector
The service sector currently commands over 56% of Russia's GDP and constitutes the primary employment sector for more than 67% of the population. This sector encompasses diverse segments, including hospitality, construction, culture, entertainment, and trade. The post-Soviet turmoil that impacted agriculture and industry allowed the service sector to flourish, emerging as a notable contributor to Russia's economic narrative.
Conclusion
To establish a more balanced economy that is less vulnerable to commodity price fluctuations, it is likely that Russia will need to diversify its industries further. Prioritizing its manufacturing and service sectors may help achieve long-term sustainable growth. Despite the increasing significance of services in its GDP composition, the majority of Russia's economy is still driven by oil exports.