The outlook for Russia’s economy in the coming decade—and its subsequent position in the world market—are among the more interesting and unknown phenomena surrounding the country’s near-future. On the one hand, Russia’s recent economic history is tumultuous, having hit tremendous lows in its period of transition from a Communist infrastructure to a market economy. On the other hand, today’s Russia is home to the 7th largest GDP in the world (in purchasing power parity, at an estimated US$2.076 trillion), as well as the most rapidly growing economy of all G8 nations. In April of 2008, the International Monetary Fund predicted that Russia’s nominal GDP will undergo a 168% increase in the next five years (by 2013), at which time Russia may very well find itself in possession of the second largest European economy.

Russia’s contemporary economy can only be understood in terms of its 20th century political history. From 1922 until 1991, Russia (as part of the Union of Soviet Socialist Republics, or the Soviet Union) operated on the foundation of a centrally planned economy, in which the state owned and controlled all means of production, investment, and consumption. Under the command of Joseph Stalin, Russia rapidly transformed during the early phases of this Soviet era from an agrarian economy to an increasingly industrialized, urbanized powerhouse.

Following the collapse of the Soviet Union in 1991, however, Russia found itself needing to transition once more—this time to a market (or capitalist) economy with a stable currency, sustainable trade policy, and a competitive place in the global marketplace. Russia’s strategy for achieving this goal as quickly as possible was one of “shock therapy,” an approach recommended by both the United States and the International Monetary Fund. The privatization of state enterprises took place immediately, with extensive foreign investment following closely behind over the first few years. Within a decade, however, this “shock therapy” approach had resulted in the near-total economic collapse of the country (due in large measure to a lack of commercial banking, the absence of comprehensive commercial laws, and the presence of wide-spread corruption), leaving millions in poverty. Hyperinflation followed the most severe moment of the financial crisis in 1998, with enormous rates of unemployment and crippling delays in wage payments making the situation far worse for Russian citizens.

Since the turn of the last century, however, Russia has managed to right this economic ship. Changes in laws and policies, greater political stability, rising oil prices, and increased foreign investment (followed by increased domestic consumption) all worked to bolster the country’s economy. By the end of 2007, Russia had realized its 9th straight year of economic growth (averaging 7% per year since 1998) and personal incomes had achieved gains of more than 12% per year. By 2007, foreign investment had reached US$60.3 billion. Yet most experts give a large measure of credit to activity in non-traded services and goods in the domestic market. Booms in capital investment were even greater between early 2007 and the spring of 2008, with capital investment showing record growth in June of this year, rising by more than 27% from the same time the year before. Recent years have seen a stable Russian currency (the ruble currently trading at 1RUB per US$.04), moderate inflation, and even greater rates of foreign investment, leading the World Bank to declare Russia as a country of "unprecedented macroeconomic stability.” Due primarily to its massive oil reserves (see Industry and Trade below), Russia has also been able to substantially reduce its once-massive levels of foreign debt, and revenues from the Stabilization Fund of the Russian Federation have allowed the country to repay all Soviet-era sovereign debt to Paris Club creditors and the International Monetary Fund. Oil export earnings have also allowed Russia to increase its foreign reserves from $12 billion (seen prior to 2000) to today’s levels of approximately US$470 billion, giving it the third largest foreign reserves in the world. Currently, only 14% of Russians live below the poverty (down from a high of more than 40% just ten years earlier) and unemployment has declined to an impressively low 6%. Given Russia’s reliance on a flat personal income tax of 13%, experts have declared the nation to have the second most attractive personal tax system in the world (behind only the United Arab Emirates). This system, combined with the huge number of improvements in micro- and macroeconomic policy noted above, has finally allowed Russia’s financial situation to stabilize, and are among the main drivers of a strong and expanding Russian middle class.