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A Major Sources of Revenue in the Russian Economy

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Russia is considered as having a diversified economy. Energy and commodities sector like oil, natural gas, petroleum, gold, and timber are a major source of revenue in the Russian economy. Industries with major presence in Russia include energy, mining, machinery, chemicals, aerospace, agriculture, defense, space technology and automotive.

ENERGY SECTOR: OIL, GAS & COAL: Russia is a world leader in the energy sector, the most important industry having 59% of its exports. 2nd largest producer of natural gas, 3rd largest in oil and 4th in coal, the energy sector is a primary source of revenue in Russia. Though Russia has vast reserves of natural resources, their accessibility is a challenge due to extreme climate conditions and limitations with aging physical infrastructure and transportation.

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With the fluctuating oil prices, we can only wonder how long will Russia sustain the current economic conditions with its dominance and dependence on oil. Natural gas, a predominant source in Russia, makes them the largest gas exporter after Europe. Though the data shows a steady increase in production numbers, this industry is experiencing challenges with extraction. Russia is ranked 6th in total coal production employing 651,000 people in coal mining or related industries. An estimated population of 1.5 million people is engaged in this industry. Though a lucrative industry, it’s been facing a lot of issues in the domestic market as well as with its exports.

MINNING: METALS AND METAL PRODUCTS: Russia with access to the most significant volume and range on mineral resources, they are a leader and global producer of mineral commodities in the world. A few major subsectors include iron ore, steel, aluminum, gold, diamonds etc. Russia is the 3rd largest exporter of steel and aluminum in the world. The mining industry accounts for 11% and is the best-developed sector in the Russian economy. Lack of standard laws, investments, technology innovations, skilled labor and working with inadequate equipment, are just a few reasons due to which we are seeing a trending decline in this industry.

CHEMICALS: Chemical and petrochemical output in 2017 is equivalent to 3600 billion Roubles, up by 5.6% year-to-year, which equals to 3.7% of Russia’s GDP. The chemical industry engages 650,000 people across 3500 organizations. Another industry that Russia is considering a sustainable economy. Challenges include labor productivity, security standards at different levels and modernization that are impacting the pace of growth.

WEAPONS AND MILITARY MACHINE MANUFACTURING: Defense Industry is a key strategy for Russia. Their diversified products include naval ships, military aircraft, missiles, arms, drones, etc. Being a leader in this industry, Russia is one of the largest suppliers of arms to other nations. To ensure growth, the “Import Substitution program” was set up to reduce their dependency on foreign components. In 2018, a “state-controlled bank” was set up to service the defense industry in Russia, which would address the investment challenge.

FOOD AND AGRICULTURAL MACHINERY PRODUCTION: According to the Food and Agriculture Organization of the United Nations (FAO), Russia could potentially feed up to 2 billion people, as it has access to 20% of the world’s supply of land, which is 220 million hectares. In spite of the potential, only 13% is currently cultivated. Lack of modernized agricultural machinery seems to be a key factor impacting the Russian agricultural industry. And with the food import ban, there is an increased pressure to improve this industry.

AVIATION EQUIPMENT: United Aircraft Corporation (UAC) has major ownership in the companies in this industry in Russia, engaging 248 enterprises and more than 400,000 people. Russia has a competitive advantage with their military aircraft, but are now diversifying into the commercial segments. Russia’s long-term strategy is to increase their global market share in civil aircraft production. Russia’s goal is to be among the world’s top three aircraft manufacturers by 2025. The plans announced by Russia and China, to create wide-body long-range commercial aircraft is part of this goal.

OTHER INDUSTRIES: Space technology, Electric Engineering, Wood, pulp, and paper Industry, Textile, Automotive, and Transportation are few other industries we see in Russia.

IMPACT OF OIL ON RUSSIAN ECONOMY

In 2014, when oil prices dropped from above $100 to $50 per barrel, it had a devastating effect on the Russian economy. The Russian ruble dropped 59% relative to the US dollar, impacting Russian’s purchasing power parity (PPP) and Russia’s trade overall.

With Russia’s dependency on imports, the cost of imports went up with the declining ruble, hitting inflation. Russian government tried to intervene by increasing the interest rates, throwing the country into a recession. As of 2017, 60% of Russian exports still depends on oil and gas, contributing to 30% of their GDP. Even with a 10% drop in oil exports, fluctuating prices can still be a high risk to the Russian economy.

RUSSIAN DEPENDENCE ON OIL

Russia will not stop exporting oil any time soon, but they could minimize the revenue fluctuations with the change in oil prices, as they grow the other sectors with the revenue from oil exports.

Russia’s decision to abolish export duty on oil, which will be replaced by mineral extraction taxes on oil and gas. According to the Russian Prime Minister, Dmitry Medvedev “We have learned from the situation with rising fuel prices. In order to prevent this in the future, a number of serious innovations and mechanisms were proposed. We have decided to temporarily lower excise duties on gasoline and diesel fuel from July 1, and in order to compensate the regions for falling revenues, we will change the structure of the distribution of excise duties between the federal and regional budgets”. This decision will be implemented starting 2019, over 6 years. It may be a while before we get to see if the rationale behind this decision, fulfilled the intent to reduce Russia’s dependency on oil for a sustained positive economy.

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