Five myths about the Russian economy

newsletter 05/12/2019

Stereotypes about the Russian economy spread by some media and analysts in our country and abroad make us hostage of the strong myths. The number of especially rooted of them do not allow to objectively assess the situation in the domestic economy, and lead to biased interpretation of ongoing processes and erroneous conclusions.

Let’s examine five major opinions using objective data. Myth or reality?

Myth Number 1. Russia has undeveloped raw material mono-economy based on the sale of oil and gas

According to the data of the Ministry of Finance of Russia for the 1st half of 2019, the share of oil and gas revenues in the consolidated budget reached 4,1 trillion RUB or slightly over 22%. Incomes not related to the production and sale of oil and gas for the same period amounted to 14,5 trillion RUB, that is almost 3,5 times more.

Information is confirmed by the Federal State Statistics Service (hereinafter “Rosstat”) data. In the 1st half of 2019, the mining industry accumulated only 13,5% of the GDP produced, wholesale and retail trade - 14,3%, manufacturing – 13,5%, real estate business – 9,7% (see Picture 1).

Picture 1. Russia's GDP produced for the 1st half of 2019 at the industry level, % of total monetary value Picture 1. Russia's GDP produced for the 1st half of 2019 at the industry level, % of total monetary value

Source: Rosstat

Myth Number 2. Russia produces practically nothing and is critically dependent on imports

Among G20 members, Russia's imports in relation to its nominal GDP do not exceed 14%. The higher the share, the more the country depends on the supply of goods and services from abroad. The relatively low level of imports may mean that the state produces a significant part of what it consumes and invests. For comparison, the share of imports in Germany's GDP reaches 34%, which is almost 2,5 times more than in Russia (see Picture 2).

Our country has leading technologies and competencies in nuclear energy, space, icebreaker building, and high-tech weaponry. The lag in production of consumer goods largely determines the reason for the appearance of such a myth.

G20 is a union of countries representing about 90% of global GDP, 80% of global trade and two-thirds of the world population.

Picture 2. Imports of G20 members to the GDP for 2018, % Picture 2. Imports of G20 members to the GDP for 2018, %

Source: International Monetary Fund, IMF

Myth Number 3. It is impossible to develop small business in Russia, small companies are closing

The myth that small business in Russia is about to disappear as a subject of economic relations has been circulating since the beginning of market transformations. Leaving the Federal Tax Service combating shell companies aside, the increase in the number of liquidated enterprises in 2018-2019 is explained by the unsatisfactory economic situation in the country. Objective reasons were thoroughly examined in the Credinform Newsletter for August 2018; the publication is available on the website.

The verity is different: over the past 5 years turnover of small companies, including microenterprises, has increased 2,1 times: from 24,8 trillion RUB in 2013 to 53,3 trillion RUB in 2018. Investment in fixed assets increased 1,8 times: to 1,1 trillion RUB. (see Picture 3).

During the quinquennium, the growth of costs for the production and sale of products increased 1,5 times in the economy in general - these are material costs, labor costs, insurance contributions to the Federal Compulsory Medical Insurance Fund, Pension Fund, Social Insurance Fund, depreciation and other expenses. Thus, the real increase in the turnover of small businesses over 5 years amounted to 60%, which is averagely about 12% per year.

Picture 3. Turnover and capital investment of small enterprises, including microenterprises Picture 3. Turnover and capital investment of small enterprises, including microenterprises

Source: Rosstat

Myth Number 4. Due to the poor socio-economic situation in the country, millions of Russians leave for the West, and the problem is worsening every year

Migration flows are also a fertile ground for myth-making: difficult living conditions, inability to realize oneself and open a business lead to ever-increasing migration from the country. At the same time, it is failed to mention that Russia is among Top-5 countries with a positive migration rate: the number of arrivals exceeds the number of those who left the country. Moreover, 90% leaved for the CIS.

Migration to the West is low. According to the US Department of Homeland Security, the number of migrants from Russia over the past few years has remained at approximately the same level - about 9 thousand people a year and tends to decrease (see Picture 4).

Picture 4. Emigration from Russia to the USA, thousand people Picture 4. Emigration from Russia to the USA, thousand people

Source: Department of Homeland Security

Myth Number 5. Russia is not attractive for foreign investment; the capital is flowing out

Do foreign investors keep away from Russia? Not at all. According to the UN Conference on Trade and Development, Russia is ranked 9th in terms of total accumulated foreign direct investment from 2000 to 2018 among G20 members, being ahead of France, India, Italy, Japan, etc. Total investment accumulated over 18 years amounted to 512 billion dollars (see Picture 5).

UN Conference on Trade and Development (UNCTAD) is an intergovernmental body established in 1964; it is responsible for dealing with development issues, particularly international t rade, finance and technologies.

Picture 5. Accumulated foreign direct investment of G20 for 2000-2018, billion US dollars Picture 5. Accumulated foreign direct investment of G20 for 2000-2018, billion US dollars

Source: United Nations Conference on Trade and Development, UNCTAD

Conclusion

The Russian economy does have difficulties. There is an artificial restriction for the domestic business to foreign markets, including capital markets, in the form of more protective than political ongoing sanctions policy, as well as in the introduction of customs barriers and direct legislative prohibitions. Another problem is low consumer demand due to the stagnation of cash incomes of the population. High taxes hinder business development. The impressive budgetary funds allocated for National projects are inefficiently used. There is a natural population decline and a reduction in professional personnel.

In addition to difficulties, the following strong myths hinder from changing the situation in the economy: the country's unattractiveness for foreign investment, inability to conduct small business, and large-scale emigration. Spread of misconceptions makes the overcoming of challenges in the economy much more difficult.