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After the Russian gross domestic product (GDP) was estimated to have grown in 2014 by 0.6 percent, the Russian government expects a deflationary tendency in 2015. Also, the IMF anticipates for 2015 a decrease of 3.4 percent in the Russian GDP. Inflation also remains high; for the full year 2015, the World Bank expects an inflation rate of just over 15 percent. Many companies have reduced their presence in the country due to the economic downturn, the workforce. Consequently, a significant portion of the Russian labor force is facing reduced wages, reduced working hours, unpaid leaves or even lay-offs. During the year of 2014, the ruble has depreciated against the euro by about 40 percent. Against the US dollar, the exchange rate loss in the same period is close to 50 percent. The outflow of capital in 2014 was estimated at a record level of 151.5 billion USD. Much of this plight is based on Russia’s annexation of Crimea in 2014 and the economic sanctions that ensued after this move.
Despite all the recent negatives, Russia remains as one of the largest energy producers in the world with its 16.8 percent of world gas reserves, 5.5 percent of world oil reserves and the second largest coal reserves (17.6 percent). Consequently, the Russian economy is largely dependent on the development of revenue from the oil and gas business. And overcoming the loss in revenue from the recent low oil prices continues to be a challenge.
Since many of the long-term gas supply contracts are linked to oil prices, gas revenues are also falling gradually. In addition, Gazprom continues to lose market share in Europe. Overall, the Russian gas supplies to Europe have reached the lowest level in 20 years in 2014 with a decline of 13.8 percent.
In terms of economic structure, trade and services contribute about 51.3 percent to the Russian GDP. This is followed by the processing industry with about 15.6 percent of GDP, the mining industry at about 10.1 percent, construction and real estate taxes add approximately 18.8 percent. The contribution of agriculture, forestry and fishing industry stands at 4.2 percent of GDP. A significant part of agricultural goods is however produced on private fields. It warrants mentioning that in all economic sectors of Russia there is a considerable need for modernization as the economy is very closed and asynchronous.
Why invest in Russia?
- Russia is isolated at the moment which contributes towards falling investment costs. Therefore, investors who are looking to play the waiting game in Russia can contribute capital to the forex starved country.
- Russia is also working to decrease its dependency on the central and eastern European energy market. Since 2014, the Russian government has started working on several alternate gas supply channels, most of them supplying to China. These include the likes of South Stream, East Stream and Nord Stream.