COUNTRY PROFILE 2000 Russia

Transcription

1 COUNTRY PROFILE 2000 Russia This Country Profile is a reference tool, which provides analysis of historical political, infrastructural and economic trends. It is revised and updated annually. The EIU s quarterly Country Reports analyse current trends and provide a two-year forecast The full publishing schedule for Country Profiles is now available on our website at The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising conferences and roundtables. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) /2 newyork@eiu.com Hong Kong The Economist Intelligence Unit 25/F, Dah Sing Financial Centre 108 Gloucester Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-line databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office London: Jan Frost Tel: (44.20) Fax: (44.20) New York: Alexander Bateman Tel: (1.212) Fax: (1.212) Hong Kong: Amy Ha Tel: (852) / Fax: (852) /7638 Copyright 2000 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN X Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

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4 Russia Comparative economic indicators, 1999 EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

5 Russia 1 July 1st 2000 Contents 3 Basic data 4 Political background 4 Historical background 7 Constitution and institutions 8 Political forces 12 International relations and defence 13 Resources and infrastructure 13 Population 14 Education 15 Health 15 Transport and communications 18 Energy provision 20 The economy 20 Economic structure 22 Economic policy 27 Economic performance 30 Regional trends 33 Economic sectors 33 Agriculture, forestry and fishing 35 Mining and semi-processing 36 Manufacturing 37 Construction 37 Financial services 39 Other services 40 Tourism 40 The external sector 40 Trade in goods 43 Invisibles and the current account 43 Capital flows and foreign debt 47 Appendices 47 Sources of information 48 Reference tables 48 Population 49 Employment by sector 49 Unemployment 49 Transport statistics 50 National energy statistics 50 Enlarged budget 50 Money supply 51 Interest rates EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

6 2 Russia 51 Gross domestic product 51 Gross domestic product by expenditure 52 Gross domestic product by expenditure 52 Prices and earnings 53 Agricultural production 53 Livestock numbers 53 Industrial production 54 Housing completions 54 Banking statistics 54 Key exports 55 Key imports 56 Main trading partners, Main trading partners of the former Soviet Union 57 Direction and composition of trade, Balance of payments, IMF series 59 External debt, World Bank series 60 Foreign reserves 60 Exchange rates EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

7 Russia 3 Russia Basic data Total area Population Main towns 17,075,400 sq km 145.9m (estimate; January 1st 2000) Population ( 000; January 1st 2000) Moscow (capital) 8,630 St Petersburg 4,694 Nizhny Novgorod 2,868 Novosibirsk 2,030 Yekaterinburg 1,274 Weather in Moscow (altitude 156 metres) Languages Weights and measures Currency Time Fiscal year Public holidays Hottest month, July, C (average daily minimum and maximum); coldest month, January, 16 C to 9 C; driest month, March, 36 mm average rainfall; wettest month, July, 88 mm average rainfall Russian and local languages Metric system since 1927 (Western calendar since 1917) 1 rouble (Rb)=100 kopeks. Market exchange rate on June 30th 2000: Rb28.07:US$1. The rouble was redenominated on January 1st 1998 at 1 new rouble=1,000 old roubles 3 hours ahead of GMT in Moscow and St Petersburg; 10 hours ahead of GMT in Vladivostok Calendar year January 1st, 2nd, 7th and 8th; March 8th; May 1st, 2nd and 9th; June 12th; November 7th; December 12th The Economist Intelligence Unit Limited 2000 EIU Country Profile

8 4 Russia Political background The resignation of President Boris Yeltsin on December 31st 1999 paved the way for the succession of his chosen heir and sixth prime minister, Vladimir Putin. After just under three months as acting president, Mr Putin won the election to the presidency in his own right, taking office on May 7th His first government, headed by the prime minister, Mikhail Kasyanov, is broadly reformist but contains many familiar faces from the Yeltsin years, prompting concern about its links to the business clans that played a prominent role in Russian high politics during the 1990s. While advancing liberal reformers to senior posts (including some individuals far more radical than Mr Kasyanov), Mr Putin has not initially taken a direct role in economic policymaking, concentrating his attention instead on foreign affairs and the reassertion of federal authority over the regions. Historical background An autocratic Westernising tradition The Soviet Union recreated the Tsarist empire The relative backwardness of the vast Russian state, which had developed in the centuries following the end of Tatar domination, became evident only in the late 17th and early 18th centuries. Tsar Peter I, recognising that his realm was falling behind its Western neighbours in technical development, military capabilities and social organisation, embarked on a policy of Westernisation by autocratic means. His approach to modernisation the imposition from above of radical and often disruptive change set a pattern that Russian rulers have followed at intervals for three centuries. In the aftermath of the Crimean war, which exposed military and economic weaknesses ignored after successful campaigns against Napoleon in , Tsar Alexander II inaugurated a range of domestic reforms intended to put right those weaknesses. The most significant was the abolition of serfdom in 1861, but the regime also undertook reforms of finance, education, the legal system, the military and local government. However, Alexander s early reform had lost momentum by the end of the 1860s, and his assassination in March 1881 ushered in a period of political reaction. The refusal of the last Romanov Tsars to complement economic development initiatives with political liberalisation created social tensions, which hastened the old regime s collapse in Eight months of confusion and instability following the overthrow of the Romanovs in March 1917 culminated in the seizure of power in the capital, Petrograd, by the Bolsheviks, a radical communist splinter of the Russian Social Democratic Labour Party. Over the next five years the Bolsheviks consolidated their claim to rule all of Russia, losing Finland, Poland and the Baltic provinces but reassembling the rest of the former empire. Russia assumed federal form in 1922 as the Union of Soviet Socialist Republics (the USSR or Soviet Union), although in reality power was highly centralised in Moscow. EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

9 Russia 5 and underwent rapid industrialisation but failed to sustain an alternative development model Mr Yeltsin dominated the first post-soviet decade and secured the succession for his chosen heir Under Joseph Stalin, the Georgian-born dictator who succeeded Vladimir Lenin as leader of the Communist Party in 1924, the country s immense natural and human resources were harnessed to a sustained industrialisation drive under the highly centralised institutions of the planned economy. Agriculture was forcibly collectivised. The human costs of Stalinist industrialisation were enormous. Its achievements included a rapid expansion of basic industrial output, the defeat of Nazi Germany and the emergence of the Soviet Union as the world s second superpower. The Soviet system failed to keep pace with Western rivals in either living standards or geopolitical strength. Central planning, despite numerous attempts to decentralise decision-making and introduce limited price signals, discouraged innovation and productivity growth while encouraging public corruption and private, informal marketeering. Economic and political decay took hold in the 1970s, exacerbating social and nationalist tensions, which led to the disintegration of the Soviet Union in late Russia emerged as one of the 15 newly independent former Soviet republics, and Boris Yeltsin became its first elected president in June Mr Yeltsin s role in the break-up of the Soviet Union and his economic reform plans provoked opposition from the communist old guard in the Congress of People s Deputies (CPD), which enjoyed supreme law-making power under the old constitution. To resolve the issue, Mr Yeltsin announced direct presidential rule and the dissolution of the CPD (and its executive arm, the Supreme Soviet) on September 21st Opposition supporters staged their last stand on October 3rd, which Mr Yeltsin forcibly suppressed. The adoption of a new constitution and the election of a new parliament followed in December The new constitution enshrined strong presidential powers, the new parliament acting as little more than a safety valve. The December 1995 parliamentary election produced an opposition-dominated State Duma (the lower house), in which the Communist Party of the Russian Federation (CPRF) and its allies commanded a near-majority. Six months later, however, Mr Yeltsin won re-election in a second-round run-off against the leader of the CPRF, Gennady Zyuganov, helped by money and media support from the country s emerging business elite. The renewed commitment to economic reform that Mr Yeltsin exhibited in the two years following his re-election was undermined by his increasingly poor health. In August 1998 the collapse of the government s macroeconomic policies destroyed what remained of his authority. Although he remained both unwell and unpopular until the end of his presidency, Mr Yeltsin nevertheless managed to bounce back and win his final political battle, securing the presidency for his chosen successor, Vladimir Putin. Important recent events August-December 1991: A failed putsch by Communist hardliners speeds up the collapse of the Soviet Union. Russia and other Soviet republics become independent states. The USSR formally ceases to exist on December 25th. The Economist Intelligence Unit Limited 2000 EIU Country Profile

10 6 Russia January 1992: The government launches radical market-oriented reforms and a stabilisation programme, to which it proves unable to adhere. December 1992: Viktor Chernomyrdin is appointed prime minister. December 1993: Russia s first fully free parliamentary election produces a highly fragmented State Duma (lower house) with large blocs of leftists and ultra-nationalists. A new constitution is approved by nationwide referendum. December 1994: The government launches a military campaign to subdue separatists in the ethnic republic of Chechnya. December 1995: A parliamentary election gives the Communists and their allies a large plurality in the State Duma. June-July 1996: Boris Yeltsin is re-elected president in two rounds of voting. March-April 1998: Mr Yeltsin dismisses the government and appoints Sergei Kiriyenko, a reforming industrialist and aide to Boris Nemtsov, as prime minister. A month-long cabinet crisis undermines investor confidence and pressure on the rouble is renewed almost immediately after Mr Kiriyenko s confirmation by the State Duma. August 1998: Mounting financial pressure forces a devaluation of the rouble, a default on the government s domestic debt and the imposition of capital controls. The Kiriyenko cabinet is dismissed and a three-week political crisis follows. September 1998: The crisis is resolved with the appointment of the foreign minister, Yevgeny Primakov, as prime minister and the return of Viktor Gerashchenko to the post of governor of the Russian Central Bank, which he had previously held in Mr Primakov s cabinet includes a number of representatives of the Communist Party and its allies in the Duma. May 1999: Mr Yeltsin, in a counterattack to the Duma s attempt to impeach him, sacks Mr Primakov and appoints the interior minister, Sergei Stepashin, in his place. The Duma, fearing dissolution, fails to impeach the president and confirms Mr Stepashin in office. August 1999: Mr Yeltsin removes Mr Stepashin, whose relations with the president and the Kremlin inner circle are by this time strained, and appoints the head of the Federal Security Service, Vladimir Putin, as prime minister. Mr Putin wins easy confirmation by the Duma. An incursion of Chechen militants into Dagestan triggers a substantial and successful federal military operation there. September 1999: The bombing of two Moscow housing blocks and a number of other terrorists acts are blamed on Chechens, triggering a renewed federal attempt to subdue Chechnya. The operation goes well and Mr Putin s poll ratings rise accordingly. December 1999: Mr Yeltsin resigns on New Year s Eve, leaving Mr Putin, his designated heir, as acting president. March 2000: Mr Putin wins the election to the presidency. EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

11 Russia 7 Constitution and institutions A strong executive Under the 1993 constitution, the president wields sweeping executive powers, heading the armed forces and Security Council, and having wide powers of appointment. Apart from the positions of prime minister, Central Bank governor and chairman of the Constitutional Court, few senior presidential appointments require parliamentary confirmation. The president may dissolve the State Duma (lower house of parliament) if it repeatedly rejects his choice of prime minister or passes two no-confidence motions in the government within three months. The president may also issue decrees without the support of the Duma. The president serves a four-year term and is limited to two consecutive terms. Boris Yeltsin never realised the full potential of his office. He was temperamentally disinclined to involve himself too much in day-to-day governance and, over time, his ill health increasingly limited his activities. His sweeping powers of decree were used remarkably little. The presidency has now passed to a younger, more energetic man, who appears likely to involve himself much more deeply in policymaking. Under Vladimir Putin, therefore, Russia may become an even more presidential republic than it was under Mr Yeltsin. A weak legislature The 450-member State Duma can really challenge the president only when it is able to muster a two-thirds majority. The fractious chamber has rarely been able to achieve this. The powers of the upper house, the 178-member Federation Council, are also fairly weak. Hitherto, the ex officio presence of elected regional governors and heads of regional assemblies has assured it of political influence. However, backed by the Duma, Mr Putin launched his presidency with a drive to curtail the powers of regional leaders and deprive them of their membership of the Federation Council. Despite their power to act independently, the president and government have tended to proceed with the consent of parliament where possible, for legitimacy and to spread the blame for unpopular measures. Nevertheless, the bargaining in such situations has generally been conditioned by both sides awareness that the executive can act on its own if parliament proves unco-operative. The judiciary The most important ministries The independence of the judiciary was severely compromised under communism, and its authority is still comparatively weak. At its apex is the Constitutional Court, comprising 19 judges, whose functions include passing judgement on cases regarding compliance with federal laws, the constitution, statutes and state treaties. It settles disputes over the respective competence of different state bodies. The Supreme Court is the highest authority on civil, criminal and administrative law. Most business disputes are heard before arbitration courts headed by a Supreme Arbitration Court. Judges of these courts and the prosecutor-general (who appoints other prosecutors) are also nominated by the president, subject to the approval of the Federation Council. The Ministry of Finance has emerged in recent years as the power base of economic reformers and the driving force behind Russia s stabilisation programme. However, it has strong political counterweights in the three power ministries interior, defence and the Federal Security Service. The The Economist Intelligence Unit Limited 2000 EIU Country Profile

12 8 Russia Ministry of Foreign Affairs, powerful during the Soviet period, has lost ground as Russia s military strength and global influence have diminished. It frequently clashes with the Ministry of Energy, which oversees the country s most important export sector. Assertive regions Power struggles in Moscow and the weakening of central institutions facilitated a substantial devolution of power to Russia s provinces, republics and territories in the 1990s. Regional authorities played an important part in federal-level struggles, a position that they frequently used to win concessions from the centre. These centrifugal tendencies reached a peak following the August 1998 financial collapse, when the central government was paralysed for weeks and many regional governments took matters into their own hands. However, Vladimir Putin made the recentralisation of power his first priority on taking office, unveiling proposals for federal reform that would seriously reduce regional power. Political forces Parties tend to be weak and poorly institutionalised The party political scene in Russia was highly volatile and fragmented throughout the 1990s but has begun to settle. Some 43 parties were included on the ballot for the 1995 election to the State Duma (lower house of parliament). Of these, only four crossed the 5% threshold for obtaining seats in the party-list voting, in which their combined total vote was just 50.5%. In 1999, 26 were on the ballot, and the 5% threshold was crossed by six parties, accounting for 81.4% of the vote. Nevertheless, most parties are very small, often organised around one prominent personality. Moreover, the second largest party in the new Duma, Unity, was nothing more than a collection of pro-putin regional notables formed just weeks before the poll. Only the Communist Party of the Russian Federation can boast a substantial nationwide organisation. Main political figures Vladimir Putin: President of the Russian Federation since May 2000, replacing his patron, Boris Yeltsin. His career background is dominated by service in the KGB and its successor organs, in the St Petersburg city government and in the presidential administration under Mr Yeltsin. Mikhail Kasyanov: Prime minister since May Prior to his appointment as premier, he served for a number of years in the finance ministry, where he was chiefly responsible for external debt issues, culminating in his appointment as finance minister in May 1999 and as first deputy prime minister in January Aleksei Kudrin: Finance Minister since May A protégé of the former first deputy prime minister Anatoly Chubais, and a long-serving finance ministry official (at deputy minister-first deputy minister level), he is more liberal than Mr Kasyanov and is seen as a potential rival to the prime minister. Yevgeny Primakov: Former prime minister and leader of the Fatherland-All Russia faction in the State Duma (lower house of parliament). Although EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

13 Russia 9 expectations that he would succeed to the presidency proved unfounded, he remains one of Russia s most popular and trusted political figures. Yuri Luzhkov: Mayor of Moscow since 1992 (re-elected in 1999). Mr Luzhkov has built a substantial financial, media and industrial grouping centred on the Moscow municipal government. Once a Yeltsin ally, he became an increasingly vocal critic of the Kremlin towards the end of the Yeltsin years, but he has sought to patch up relations with the Kremlin under Mr Putin. Viktor Gerashchenko: Chairman of the Russian Central Bank since September 1998, a post that he previously held from July 1992 to October Mr Gerashchenko has defended the Central Bank s independence against parliamentary attack since the August crisis. A sharp critic of his predecessor s monetarist approach, he has presided over a marked easing in monetary policy, but has resisted pressures for even greater Central Bank financing of government expenditure. Grigory Yavlinsky: Economist, former deputy prime minister and adviser to Mikhail Gorbachev, he leads the pragmatic pro-reform Yabloko faction in the Duma. He performed disappointingly in the 1996 presidential election. In the presidential campaign of 2000 he campaigned more effectively and thereby became the focus of fierce attacks from the Putin camp. Gennady Zyuganov: Heads the Communist Party of the Russian Federation, which under his leadership has veered from socialism towards nationalism and accepted democratisation. A relatively colourless figure defeated by Mr Yeltsin in the 1996 presidential contest and by Mr Putin in 2000, but with considerable political and organisational skills. Since he has been the Kremlin s opposition of choice, incapable of winning election to the presidency himself but capable of drawing off support from other challengers. Presidential election results, 2000 (% of votes) Candidate 1st round (Mar 26th) Vladimir Putin (independent) 52.9 Gennady Zyuganov (CPRF) 29.2 Grigory Yavlinsky (Yabloko) 5.8 Aman Tuleyev (independent) 3.0 Vladimir Zhirinovsky (LDPR) 2.7 Others 3.5 Against all 1.9 Note. Figures do not tally to 100 owing to spoiled ballots. Source: Electoral Commission. The Communist Party The Communist Party of the Russian Federation (CPRF), successor to the Soviet-era Communist Party, was launched in February With more than 500,000 members and 20,000 primary organisations, it is easily the largest and best organised party in Russia. However, the CPRF has become an ideologically incoherent coalition of social democrats, Stalinists and nationalists, with very different views on accounting for the past and planning for the future. The The Economist Intelligence Unit Limited 2000 EIU Country Profile

14 10 Russia Communists have done little to dissociate themselves from the old order. Nevertheless, the CPRF won 24.3% of the total vote in the party-list system in 1999 (compared with 12.4% in 1993 and 22% in 1995). The CPRF bloc in the new Duma commands 129 votes (90 CPRF deputies and 39 members of its satellite, the Agro-Industrial grouping). The Liberal Democratic Party Yabloko The Union of Right Forces Fatherland-All Russia Ultra-nationalist Vladimir Zhirinovsky s misleadingly named Liberal Democratic Party of Russia (LDPR) stunned Russia and the world when it headed the party-list vote in December 1993, with nearly 23% of the total. However, the party is very much a one-man band built around Mr Zhirinovsky. Only one provincial governor (in Pskov) and a handful of Duma deputies have been elected under its colours in single-member districts. In 1995 its party-list vote fell to under 12% (51 seats) and in 1999 to 5.98% (17 seats). Its noisy populist rhetoric notwithstanding, the LDPR in the Duma has been a consistent supporter of the Kremlin on key issues. Yabloko is a liberal party created in 1993 by Grigory Yavlinsky, the ambitious former economic adviser to the Soviet president, Mikhail Gorbachev. Although generally reformist in outlook, Yabloko often criticised the governments of Yegor Gaidar, Viktor Chernomyrdin and Sergei Kiriyenko. It has often been less willing to make compromises with the Kremlin and the government than the left opposition has been. Yabloko polled just under 6% of the party-list vote in the 1999 parliamentary election, winning just 21 Duma seats. This was down from just under 7% of the party-list vote, with 45 Duma seats, in the 1995 parliamentary election. The Union of Right Forces (URF) was formed by a coalition of liberal parties in 1999, when liberal political fortunes were at a low ebb. Its aim was to overcome the divisions on the right that had cost it so dearly in 1995, when Yabloko was the only liberal party to cross the 5% barrier. This new-found unity was rewarded with 8.52% of the list vote and a parliamentary faction of 32. However, the future of the URF remains uncertain, as evident tensions among its leaders and constituent organisations have raised questions about its longterm cohesion. Many in the URF wish to transform it from an umbrella organisation into a real political party, but this will prove difficult. The dominant party on the centre-left of Russian politics is Fatherland-All Russia (OVR), formed in mid-1999 on the basis of the Otechestvo (Fatherland) movement of the mayor of Moscow, Yuri Luzhkov, and the grouping of regional leaders known as Vsya Rossiya (All Russia). Led by the former prime minister Yevgeny Primakov, OVR was initially expected to compete with the Communists for first position in the party-list voting. However, it fell victim to a ferocious media campaign orchestrated by the Kremlin and finished a poor third. The Kremlin assault, moreover, brought to the surface tensions between OVR s two wings, raising doubts about how durable the alliance would be in the third State Duma. EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

15 Russia 11 Unity The latest entrant into the Duma campaign, Unity was organised with the active involvement of the Kremlin and, reportedly, of the tycoon-turnedpolitician Boris Berezovsky. Despite these origins, Unity was able to present itself as a new force, largely thanks to the fact that there were few major national politicians in its ranks. It identified itself strongly with the popular then prime minister, Vladimir Putin, and rose rapidly in the polls after Mr Putin endorsed it. Unity consists mainly of second-rank regional officials and has no clearly formulated ideology other than support for Mr Putin. Nevertheless, Mr Putin s coat-tails, and the enormous financial and media backing engineered by the Kremlin, secured it second place in the party-list voting, with 23.3% of the vote. The subsequent adherence of many singlemandate deputies to Unity meant that, together with its newly created satellite faction, People s Deputy, it had 139 deputies in the State Duma. Parliamentary election results List List List Party voting (%) List seats SMD a seats voting (%) List seats SMD a seats voting (%) List seats SMD a seats Russia s Choice n/a n/a n/a Liberal Democrats b (LDPR) Communist Party (CPRF) Agrarian Party (APR) n/a n/a 0 Yabloko Our Home is Russia (OHR) n/a n/a n/a Women of Russia Party of Russian Unity & Accord n/a n/a n/a Democratic Party of Russia n/a n/a 0 n/a n/a n/a Unity n/a n/a n/a n/a n/a n/a Fatherland-All Russia n/a n/a n/a n/a n/a n/a Union of Right Forces n/a n/a n/a n/a n/a n/a Others Independents n/a n/a 141 n/a n/a 78 n/a n/a 112 Postponed n/a n/a 6 n/a 0 n/a n/a 1 1 Note. Figures for party-list voting may not tally to 100 owing to spoiled ballots and ballots cast against all. Figures for seats won do not match faction sizes in the text above, owing to the post-election affiliation of independents to factions and the lending of deputies among allied factions. a Single-mandate district. b On the ballot papers in 1999 as Zhirinovsky s Bloc. Source: Electoral Commission. Business groupings Broad-based business organisations and trade unions have been slow to develop and wield relatively little influence. However, in a number of business empires emerged on a scale that enabled them, individually or in ad hoc coalitions, to exercise substantial influence at national level. These groupings were generally dominated by large banks or energy companies or both, and reinforced their political influence by acquiring media interests (see Economic sectors: Financial services). The 1998 financial collapse dealt many of them a severe blow, but their political links helped keep them afloat in the months following the collapse, while rapidly rising oil prices in 1999 ensured The Economist Intelligence Unit Limited 2000 EIU Country Profile

16 12 Russia that those groupings with substantial oil sector assets were able to recover quickly. They remain a force to be reckoned with in the Putin era. International relations and defence Balancing competition and co-operation with the West After the collapse of the Soviet Union, Russia moved steadily away from its initial strongly pro-western foreign policy towards one that combined elements of co-operation with the West (especially on economic issues) and a reassertion of Russia s status as a great power with distinctive geopolitical interests. Vladimir Putin appears set to continue with this balanced pragmatic nationalist approach. There have been recurring tensions over enlargement of NATO and Western policies towards Iran, Iraq and Serbia. NATO s bombardment of Serbia in 1999 brought relations between Russia and the West to their worst level since the collapse of the Soviet Union, but Russia played a critical role in the resolution of the conflict, and Mr Putin, while taking a robust stance on sensitive issues such as Chechnya, NATO and missile defence, has clearly signalled that good relations with the West remain a priority. More generally, Russia has avoided serious argument with the US, while seeking to diversify its links in Asia and Europe and courting traditional friends in the Middle East. The need for multilateral support and debt restructuring remains high on the agenda for Russia s relations with the G7 countries, especially the US. Trade and investment are the main priorities in most of its bilateral relations, and the country is especially anxious to secure the free-trade advantages offered by membership of the World Trade Organisation (WTO). Relations with the former Soviet republics Rapprochement is under way with China and Japan Russia continues to take a special interest in the territories of the former Soviet Union, but fears of renewed imperialist tendencies have not been realised. The Commonwealth of Independent States (CIS) has achieved some technical and trade reintegration among former Soviet republics (excluding the Baltic states), but failed in its early ambitions for defence and foreign policy co-operation and a general customs union. Apart from with Belarus, there is little prospect of much deeper reintegration. This reflects both Russia s reluctance to assume the costs of integration and the concern of CIS partners to defend their newly won sovereignty. Relations with the Baltic states and Ukraine (the least integrationist CIS member) have at times been tense, although improvement has been evident as Russia has come to realise that a heavy-handed approach is counterproductive. Russia and China have made heavy political and economic investments in improving their bilateral ties. However, their relationship is largely intended to provide additional leverage over the US, and its long-term outlook is uncertain. Economic ties have been disappointingly slow to develop, and many in Moscow acknowledge that past conflicts could be renewed as Russia recovers economically and China grows more powerful and assertive. In economic terms, Russia may have at least as much to gain by improving its relations with Japan, and Mr Putin has signalled clearly that he attaches a higher priority to relations with Japan than did his predecessor. EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

17 Russia 13 Defence forces Although Russia remains the world s second major nuclear power, its military capability has shrunk greatly since the Soviet era. Its active armed forces totalled 1m in 1999, compared with 2.7m in June However, the military has been a major beneficiary of Russia s improved fiscal position since 1998: the 2000 defence budget was 57% higher than in Moreover, the proportion of budgeted spending on procurement that was actually disbursed rose from 20% in 1998 to 80% in 1999, and was running close to 100% in early However, the priorities reflected in the breakdown of the 2000 defence budget cast doubt on the government s commitment to replacing conscript forces with a smaller, better equipped and better trained professional army. The long-term future of military reform remains as uncertain as ever. Military forces, 1999 ( 000) Active Army 348 Navy 172 Air force a 185 Strategic nuclear forces 149 Total incl others 1,004 Paramilitary 478 Reserves 20,000 a Air force and air defence forces (the air defence troops and air force were amalgamated under one command in March 1998). Source: International Institute for Strategic Studies, The Military Balance, 1999/2000. Resources and infrastructure Population The population is declining but partly for temporary economic reasons Russia s population has been falling for the past eight years, reaching an estimated 145.9m at the beginning of 2000, compared with 148.7m at the end of In 1992 the death rate exceeded the birth rate for the first time in modern history; it has continued to do so since, although the gap began to close slightly after The decline in the natural population has to a considerable extent been offset by immigration, mainly of ethnic Russians from the former Soviet republics. This trend peaked in 1994, when more than 1.1m settled in Russia, but has since declined. (See Reference table 1 for historical population data.) The Russian mortality crisis is not a purely post-communist phenomenon: death rates for all age groups except those aged began to rise in the 1960s. Male life expectancy peaked at 70 in , and began to fall thereafter an unprecedented development in an industrialised country in peacetime. Infant mortality, comparable with Austrian and Italian rates in 1960, was above those of Jamaica and Fiji by the mid-1980s. These longstanding Soviet-era trends became far more pronounced in the 1990s, when The Economist Intelligence Unit Limited 2000 EIU Country Profile

18 14 Russia death rates and infant mortality rates rose rapidly. Although the former peaked in 1994 and the latter in 1993, Russia s average life expectancy in 1997 was still only 61 years for men (up from its low point of 57.6 years) and 73.1 years for women. However, the trend of improvement was arrested by the August 1998 crisis, and male life expectancy is estimated to have again declined to below 60, and female life expectancy to 72, in Sharp falls in the birth rate primarily reflect depressed household incomes and economic uncertainty. The rising death rates are a product of environmental degradation, stress, malnutrition, a deteriorating healthcare system, the reappearance of epidemic diseases such as diphtheria and cholera (linked to declining housing and public health standards), and high alcohol consumption, especially among men. An ageing population Despite the sharp fall in male life expectancy, the population is ageing, in common with those of most higher-income industrialised economies. The proportion of citizens aged below 15 years fell from 22.9% in 1991 to 19% in 1999, while the proportion of the population aged above 64 years rose from 10.2% to 12.5% over the same period. Moreover, increasing numbers are drawing pensions before reaching normal pensionable age, mainly because of unemployment. As a result, the total number of pensioners per 1,000 population rose from 228 in 1990 to 259 in 1997, a 13.6% increase. (This ratio peaked at 262 pensioners per 1,000 population in 1996.) Education Student numbers continue to rise even as education remains severely underfunded The Soviet industrialisation drive created the need for mass education, which the state provided generously, especially in engineering and science. Education is compulsory and free of charge for all children between the ages of seven and 17. In there were 3.6m students in Russia, studying at 914 institutions of higher education. Numbers of both students and institutions are well above the levels of With demand for commercially oriented qualifications outstripping the modest growth in state higher education places, private schools offering courses in economics, business, accountancy and law have expanded rapidly. By 1999 the private higher education sector accounted for 20% of the total number of students in higher education. At the same time the state continues to expand the number of funded students (175 per 10,000 population). Attempts to insulate education from the budget cuts of recent years have failed. Teachers have been among those hardest hit by budget sector wage arrears, although the situation with respect to arrears has improved dramatically since Given a much reduced state budget for education, the expansion of state-funded student numbers has been achieved mainly by holding down student grants and faculty salaries, and undertaking little structural maintenance or investment. More broadly, the income and status of the intellectual elite have altered sharply, affecting both its motivation to pass on its skills to students and students motivation to acquire them. Many previously privileged professions EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

19 Russia 15 have lost their social and economic status to the emerging class of entrepreneurs. Unable to beat the new businesspeople, a large number have chosen to join them: up to half of the new entrepreneurs are former professionals, such as engineers and teachers. Anecdotal evidence suggests that some of these returned to their original professions after losing jobs in the services sector in the wake of the 1998 financial collapse, but the numbers involved are not great. (See Reference tables 2 and 3 for historical data on employment by sector and unemployment.) Health Another casualty of Soviet collapse State-funded healthcare has also been seriously affected by budget cuts, forcing many households to turn from underfunded state facilities to private provision. State expenditure on healthcare rose as a share of GDP in the 1990s, from 2.5% in 1992 to around 4% in 1999, but this chiefly reflected the decline in recorded output. A system of mandatory insurance payments, introduced in 1994, now accounts for about 20% of healthcare expenditure. Staff in the state medical services are poorly paid and unmotivated, and patients frequently need to offer bribes to get attention. Private healthcare accounts for just 10-15% of total provision but is growing rapidly. The ratio of medical personnel to population still compares favourably with that of Western countries: in 1998, for example, there were 46.7 doctors per 10,000 inhabitants, compared with 42.6 in The total number of doctors rose from 632,000 in 1991 to 680,000 in 1998, even as the population declined. However, health infrastructure was already deteriorating in the final years of the Soviet era, and all but the new rich must now endure long waits for treatment in severely run-down hospitals. As many as one hospital in five still lacks hot water and sewerage facilities. Moreover, this infrastructure is overstretched, as Russian healthcare relies too much on hospitalisation: 15-20% of patients under care at any given time are in hospital, compared with 8-10% in most Western countries, but around one-third of those occupying hospital beds are receiving what is in effect out-patient care. The country needs fewer hospital beds and more small local clinics. Transport and communications The road network is underdeveloped The transport infrastructure remains underdeveloped. Although at the end of 1998 there were 752,000 km of roads with a hard surface, about 40% of villages still cannot be reached on tarmac roads. This reflects both neglect by Soviet planners and the difficulty of building hard-surface roads over permafrost. The country has no Western-style motorways, but a motorway network linking St Petersburg, Moscow, Minsk and Rostov is envisaged. The government is committed to a major investment programme, but this will not move forward until the fiscal crisis is resolved and clearer rules are set out for private-sector involvement in capital projects. The Economist Intelligence Unit Limited 2000 EIU Country Profile

20 16 Russia and freight haulage has fallen sharply Total freight haulage fell by 46.6% to 3.15trn tonne-km in Every form of cargo transport except pipelines and air transport (the latter is insignificant as a form of freight haulage) recorded declines of more than 50%. Railways remain the dominant form of cargo transport, but the 1.02trn tonne-km moved in 1998 was down by 59.6% on Road haulage registered a mere 21bn tonne-km in 1998, just 32.3% of its 1990 level. The technical state of railways and roads is very poor and has worsened in recent years owing to a lack of investment, with the result that an estimated 10% of all railways are defective in some respect. At the end of 1998 Russia had 86,000 km of railways, of which 46.5% were electrified. Six cities have underground transport networks (Moscow, St Petersburg, Yekaterinburg, Nizhny Novgorod, Novosibirsk and Samara). Buses are the leading form of passenger transport in terms of passenger-km, overtaking the railways in This largely reflects the rise in charges for long-distance passenger rail travel. (See Reference table 4 for a breakdown of transport statistics.) River transport accounted for just 2.1% of haulage (in tonne-km) in 1998, down from 3.6% in Russia has a number of major rivers, but the longest of these are in Siberia and flow into the Arctic Ocean. The north-south orientation of most major rivers limits the potential for development of river transport, as freight haulage tends to be predominantly east-west. The aviation sector faces consolidation Ports are under pressure to expand Air transport plays a comparatively large role in internal transport. In 1998 it accounted for about 11.5% of passenger-km, down from 12% in 1997 and 20% in Impressive growth in the 1980s raised air passenger transport from 10.2bn passenger-km in 1980 to a peak of 159.5bn in Air traffic has fallen sharply since then, falling to 55.5bn passenger-km in 1998, as price rises put air travel beyond the budgets of ordinary Russians. Russian airline fleets are generally obsolescent, with 50% of civil aircraft already more than 15 years old, leading to increasing fears about operational safety. The sector s future development will depend on two factors: success in the development of leasing and other arrangements for financing the renewal of the fleet, and the speed of consolidation in the sector. Since the national carrier, Aeroflot, lost its monopoly in the early 1990s, some 420 companies have been spun off from it, many with only one or two aircraft at their disposal. The consolidation of the sector through mergers, acquisitions and bankruptcies is therefore inevitable. The Russian Federation has 43 sea ports, the major ones being St Petersburg and Kaliningrad on the Baltic, Novorossiisk and Sochi on the Black Sea, and Vladivostok, Nakhodka, Madagan and Petropavlovsk on the Pacific. The construction of a planned new oil terminal at Primorsk, in Leningrad Oblast, is the most important port development issue facing Russia. The Primorsk terminal will reduce reliance on oil export routes through the Baltic states and make it easier to negotiate lower transit tariffs for oil crossing Latvia, Lithuania and Ukraine. Primorsk will be only the second specialised oil terminal in Russia and will be located far closer to EU markets than the existing terminal at Novorossiisk. Further development of Novorossiisk is also a priority: the demand for exports via the Novorossiisk terminal far exceeds its capacity. EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000

21 Russia 17 Timely completion of plans to upgrade the terminal and the pipelines serving it will be crucial to the development of a number of Caspian basin oil projects. The telecommunications sector continues to grow rapidly It needs massive investment to modernise and expand but politics has impeded progress The Russian telecommunications system is undersized and very outdated. There were only 30m telephones at January 1st 1999, of which 22.4m were private, amounting to just 20.4 telephone lines per 100 inhabitants (compared with 36 in Spain, 44 in Belgium and 69 in Switzerland). Demand for connections has risen rapidly despite the post-communist slump in production and income. The number of private fixed-line telephones rose by 53.1% between end-1990 and end-1998, but the long delays involved in being allocated a line have fuelled explosive growth in the number of cellular phones, which jumped from 27,700 at the end of 1994 to an estimated 600,000 in mid Fax machine connections have multiplied almost as rapidly, from 2,100 in 1990 to 89,200 by end It is estimated that up to US$40bn needs to be invested in the network over the next decade to remedy past deficiencies and meet new subscriber needs. Some 2m new lines are to be installed annually (in part replacing obsolete ones) until So far, around 90% of newly installed telephone exchanges are imported digital systems. The sector has attracted major foreign investment. Among equipment suppliers, Siemens (Germany) and NEC (Japan) have been especially active in the modernisation programme. Among network operators, a consortium including France Telecom, Deutsche Telekom and US West is heavily involved. Investor interest (and fierce political controversy) has centred on the privatisation of Svyazinvest, the state holding company that controls almost all segments of Russia s telecommunications market. It holds controlling stakes in the country s 89 largest regional communications companies and in the longdistance telephone monopoly, Rostelekom. It also holds the largest stakes in the city telephone networks of Moscow City (MGTS) and St Petersburg (PTS), and a number of other communications companies including Tsentralny Telegraf and the Yekaterinburg City telephone network. In some cases, control over these companies ensures control of enterprises in which they themselves have stakes. By this route, Svyazinvest has also gained a substantial share of the rapidly expanding cellular communications market, and of companies that own the cable and broadcasting infrastructures for distributing television signals. The part-privatisation of Svyazinvest that took place in was intended to help speed up its expansion and modernisation plans. However, the fierce political controversy surrounding the deal and the financial crisis of August 1998 put these plans on hold. The sale of a further stake in Svyazinvest has repeatedly been postponed. The sale was originally to have taken place in 1998, but the company itself suggested in early 2000 that no sale was likely before The Economist Intelligence Unit Limited 2000 EIU Country Profile

22 18 Russia Energy provision Fuels are a traditional hard-currency earner Russia s export of fossil fuel energy has withstood the recent declines in domestic production, and mineral fuels are now the country s main hardcurrency earner, accounting for more than 41.9% of export revenue in Domestically, natural gas has become the dominant energy source. In 1999 it accounted for 51.2% of the total supply of primary energy, while oil contributed 19.7% and coal just under 17.1%, according to Energy Data Associates. (Reference table 5 gives national data on the production of fuels and electricity.) Russia s production, distribution and consumption of energy are extremely wasteful by OECD standards a legacy of subsidised prices, plentiful supplies and lax environmental regulation under communism. In the 1980s the consumption of energy per unit of GDP was several times higher than in the West, and the discharge of pollutants was similarly excessive. Oil output has stabilised at a level well below its Soviet-era peak but may fall further in the coming years Gas output may also decline Crude oil output rose dramatically in the late Soviet period, from 49m tonnes in 1955 to a peak of 570m tonnes in Since then the industry has been constrained both by collapsing industrial demand after 1992 and lack of funds to develop supply. Output bottomed out at 301m tonnes in It has since fluctuated between 301m tonnes and 306m tonnes; production in 1999 amounted to 304.8m tonnes. Exports, by contrast, have grown steadily, reaching 117.9m tonnes in The decline in production since 1990 has been attributable mainly to the depletion of existing oilfields, the deterioration in transport infrastructure and an acute shortage of investment, which was aggravated by sharp cuts in capital expenditure plans announced by a number of oil companies in late Further declines in oil production are expected in the coming years unless these trends can be reversed. Russia is currently producing around 100m tonnes more crude oil per year than it is discovering in new reserves. In 1999 the volume of exploratory drilling fell to just 1.16m metres, compared with a average of 1.4m metres, and 5.3m metres in New capital is needed not only to develop the massive new fields that have recently been the focus of press and multinational interest, but also to extend the productive lives of existing fields. The full potential of many fields was not realised owing to poor Soviet oilfield practice and lack of access to the latest extraction technology. Substantial changes to the legislative framework will be required if investors are to feel secure making the sort of long-term investments in new fields on which the industry s future depends. Natural gas production also rose impressively under communism, from 115bn cu metres in 1975 to a peak of 643bn cu metres in 1991, and has fared better than oil during the transition, falling to a low of 571bn cu metres in 1997 before rising slightly 591bn cu metres in Here again, low investment has fuelled concerns about future production levels: production in the established West Siberian fields that account for 76% of Russian gas output is declining, while the planned development of new fields continues to be EIU Country Profile 2000 The Economist Intelligence Unit Limited 2000