What are the key drivers behind the Russian economic recovery?

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Answered by: Maxwell, An Expert in the Russia and Eastern Europe Category
Russia quickly recovered from its sovereign default in 1998 and, in retrospect, the ruble’s subsequent collapse in value was a boon to domestic exporters. Additionally, owing to its wealth of primary materials and hydrocarbons, Russia benefited from spiraling commodity prices for the better part of the last decade. The political turmoil and hyperinflation of the 1990s faded into memory as the Putin administration oversaw an unprecedented period of relative peace, stability and prosperity. With steadily rising commodity prices, Russia’s overdependence on raw-material export and the absence of competitive, value-added manufacturing was temporarily overlooked.

In the beginning, the subprime mortgage crisis in the US seemed to be of little relevance to Russia. In fact, Prime Minister Vladimir Putin announced in 2008 that Russia was a “quiet harbor” from the coming financial storm. In retrospect, such predictions were not entirely accurate.

The Russian economy is heavily dependent on energy and extraction. According to the Russian Federal Statistics Service, Russia exported USD 228 billion dollars of primary commodities in 2007, which makes up 64.7% of Russia’s total exports. This proved to be a boon while oil prices were rising, however, Russia was hit heavily by the financial crisis as the demand for primary commodities dried up and oil prices collapsed from their historical high in 2008. In terms of the socio-economic cost, Russian unemployment spiked at 9.4% in February 2009 and averaged 8.4% for the year.

Despite the very real impact of the financial crisis and the pullback in commodity prices, the Russia's economic recovery was remarkably quick. After suffering a 7.9% contraction in 2009, the economy is expected to expand by an estimated 5.5% in 2010.5 Additionally, commodity prices have rebounded sharply and the mid-term economic outlook for Russia seems relatively bright.

Russian economic recovery will be helped along by high oil prices. According to the World Bank, benchmark oil prices should average USD 74.6 per barrel in 2011 and USD 73.9 in 2012. This is roughly the same level of world oil prices in 2007, when the Russian economy grew by 8.1%. Russian real income is expected to recover in step with the economy. Higher real income means higher consumer discretionary spending, which should makes post-crisis Russia attractive for retailers and restaurant chains.

While birth rates plunged immediately after the collapse of the Soviet Union and during the chaotic 1990s, Russia’s demographic situation recently stabilized. In the relative calm years of the past decade, Russia even enjoyed a baby boom. The government, in an effort to encourage larger families, declared 2008 the Year of the Family and offered a number of economic incentives to families for having more children. Officials see boosting demographic trends as key to the Russian economic recovery.

While strollers are now common on the streets of Russian cities, the country faces a serious lack of “youth infrastructure.” The Pioneer organizations, sports clubs, summer camps and childcare facilities that the Soviet state provided free-of-charge no longer exist and there is even an acute shortage of kindergartens in large cities. Furthermore, most entertainment venues lack basic facilities for children, for example, kids’ menus are exceedingly rare in Russian restaurants. Additionally, there is a noticeably lack of family-entertainment venues.

Following the collapse of the Soviet Union and the liberalization of its centrally planned economy, Russia enjoyed a boom in consumer spending. A variety of newly legalized, private-sector companies sprung up to cater to the increasingly sophisticated tasted of Russian consumers. Despite falling during the onset of the credit crisis, Russian real income is making a strong comeback in 2009.

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