Russia country guide

28 August 2006
by eub2 -- last modified 04 January 2008

Russia is the EU's largest neighbour, brought even closer to the EU by the 2004 enlargement. It is still struggling to establish a modern market economy and achieve strong economic growth.

Russia

Geography
Area: 17 million sq. km. (6.5 million sq. mi.); about 1.8 times the size of the United States.
Cities: Capital--Moscow (pop. 8.3 million). Other cities--St. Petersburg (4.6 million), Novosibirsk (1.4 million), Nizhniy Novgorod (1.3 million).
Terrain: Broad plain with low hills west of Urals; vast coniferous forest and tundra in Siberia; uplands and mountains (Caucasus range) along southern borders.
Climate: Northern continental.

People
Nationality: Noun and adjective--Russian(s).
Population (2007 est.): 141.4 million.
Annual growth rate (2007 est.): -0.484% (population declining).
Ethnic groups: Russian 79.8%, Tatar 3.8%, Ukrainian 2%, other 14.4%.
Religion: Russian Orthodox, Islam, Judaism, Roman Catholicism, Protestant, Buddhist, other.
Language: Russian (official); more than 140 other languages and dialects.
Education (total pop.): Literacy--99.4%.
Health: Life expectancy (2007 est.)--59.12 yrs. men, 73.03 yrs. women.
Work force (73.88 million) (2006 est.): Production and economic services--84%; government--16%.

Government
Type: Federation.
Independence: August 24, 1991.
Constitution: December 12, 1993.
Branches: Executive--president, prime minister (chairman of the government). Legislative--Federal Assembly (Federation Council, State Duma). Judicial--Constitutional Court, Supreme Court, Supreme Court of Arbitration, Office of Procurator General.
Political parties: The December 2003 Duma elections were contested by United Russia, the Communist Party (KPRF), the Liberal Democratic Party (LDPR), the Homeland (Rodina) bloc, the Union of Right Forces (SPS) and Yabloko. SPS and Yabloko, parties favoring liberal reforms, failed to clear the 5% threshold to enter the Duma as a party.
Subdivisions: 21 autonomous republics and 68 autonomous territories and regions .
Suffrage: Universal at 18 years.

Economy
GDP (2006): $989 billion.
Growth rate (2006): 6.7%.
Natural resources: Petroleum, natural gas, timber, furs, precious and nonferrous metals.
Agriculture: Products--Grain, sugar beets, sunflower seeds, meat, dairy products.
Industry: Types--Complete range of manufactures: automobiles, trucks, trains, agricultural equipment, advanced aircraft, aerospace, machine and equipment products; mining and extractive industry; medical and scientific instruments; construction equipment.
Trade (2006): Exports--$304 billion: petroleum and petroleum products, natural gas, woods and wood products, metals, chemicals. Major markets--EU, CIS, China, Japan. Imports--$165 billion: machinery and equipment, chemicals, consumer goods, medicines, meat, sugar, semi-finished metal products. Major partners--EU, U.S., NIS, Japan, China. U.S. exports--$4.7 billion. Principal U.S. exports (2006)--oil/gas equipment, meat, inorganic chemicals, tobacco, aircraft, medical equipment, autos/parts. U.S. imports--$19.8 billion. Principal U.S. imports (2006)--oil, aluminum, chemicals, platinum, iron/steel, fish and crustaceans, nickel, wood, and copper.

PEOPLE
Most of the roughly 141 million Russians derive from the Eastern Slavic family of peoples, whose original homeland was probably present-day Poland. Russian is the official language of Russia and is one of the six official languages of the United Nations. Russian is also the language of such giants of world literature as Pushkin, Tolstoy, Dostoevsky, Chekhov, Pasternak and Solzhenitsyn.

Russia's educational system has produced nearly 100% literacy. About 3 million students attend Russia's 519 institutions of higher education and 48 universities, but continued reform is critical to producing students with skills to adapt to a market economy. Because great emphasis is placed on science and technology in education, Russian medical, mathematical, scientific, and space and aviation research is still generally of a high order. The number of doctors in relation to the population is high by American standards, although medical care in Russia, even in major cities, is generally far below Western standards. The unraveling of the Soviet state in its last decades and the physical and psychological traumas of transition during the 1990s resulted in a steady decline in the health of the Russian people. Currently Russia faces a demographic crisis as births lag far behind deaths. While its population is ageing, skyrocketing deaths of working-age males due to cardiovascular disease is a major cause of Russia's demographic woes. A rapid increase in HIV/AIDS infections and tuberculosis compounds the problem. In 2007, life expectancy at birth was 59 for men and 73 for women. The large annual excess of deaths over births is expected to cut Russia's population by 30% over the next 50 years.

The Russian labour force is undergoing tremendous changes. Although well educated and skilled, it is largely mismatched to the rapidly changing needs of the Russian economy. Official unemployment has dropped in recent years to 6.9%, and labor shortages have started to appear in some high-skilled job markets. Nonetheless, pockets of high unemployment remain and many Russian workers are underemployed. Unemployment is highest among women and young people. Following the 1991 collapse of the Soviet Union and the economic dislocation it engendered, the standard of living fell dramatically. However, real disposable incomes have doubled since 1999, and experts estimate that the middle class ranges from one-fifth to one-third of the population.  In 2006, 15.8% of the population lived below the subsistence level, in contrast to 38.1% in 1998.

Moscow is Russia's capital and largest city (population 8.3 million). Moscow is also increasingly important as an economic and business center; it has become Russia's principal magnet for foreign investment and business presence. Its cultural tradition is rich, and there are many museums devoted to art, literature, music, dance, history, and science, as well as hundreds of churches and dozens of notable cathedrals.

The second-largest city in Russia is St. Petersburg, which was established by Peter the Great in 1703 to be the capital of the Russian Empire as part of his Western-looking reforms. The city was called Petrograd during World War I and Leningrad after 1924. In 1991, as the result of a city referendum, it was renamed St. Petersburg. Under the tsars, the city was Russia's cultural, intellectual, commercial, financial, and industrial center. After Lenin moved the capital back to Moscow in 1918, the city's political significance declined, but it remained a cultural, scientific, and military-industrial center. The Hermitage, formerly the Winter Palace of the tsars, is one of the world's great fine arts museums.

Russia has an area of about 17 million square kilometers (6.5 million sq. mi.); in geographic terms, this makes Russia the largest country in the world by more than 2.5 million square miles. But with a population density of about 22 persons per square mile (9 per sq. km.), it is sparsely populated, and most of its residents live in urban areas.

HISTORY
Although human experience on the territory of present-day Russia dates back to Paleolithic times, the first lineal predecessor of the modern Russian state was founded in 862. The political entity known as Kievan Rus was established in Kiev in 962 and lasted until the 12th century. In the 10th century, Christianity became the state religion under Vladimir, who adopted Greek Orthodox rites. Consequently, Byzantine culture predominated, as is evident in much of Russia's architectural, musical, and artistic heritage. Over the next centuries, various invaders assaulted the Kievan state and, finally, Mongols under Batu Khan destroyed the main population centers except for Novgorod and Pskov in the 13th century and prevailed over the region until 1480. Some historians believe that the Mongol period had a lasting impact on Russian political culture.

In the post-Mongol period, Muscovy gradually became the dominant principality and was able, through diplomacy and conquest, to establish suzerainty over European Russia. Ivan III (1462-1505) referred to his empire as "the Third Rome" and considered it heir to the Byzantine tradition. Ivan IV (the Terrible) (1530-1584) was the first Russian ruler to call himself tsar. He pushed Russian eastward with his conquests but his later reign was marked by the cruelty that earned him his familiar epithet. He was succeeded by Boris Godunov, whose reign commenced the so-called Time of Troubles. Relative stability was achieved when Michael Romanov established the dynasty that bore his name in 1613.

During the reign of Peter the Great (1689-1725), modernization and European influences spread in Russia. Peter created Western-style military forces, subordinated the Russian Orthodox Church hierarchy to the tsar, reformed the entire governmental structure, and established the beginnings of a Western-style education system. He moved the capital westward from Moscow to St. Petersburg, his newly-established city on the Baltic. His introduction of European customs generated nationalistic resentments in society and spawned the philosophical rivalry between "Westernizers" and nationalistic "Slavophiles" that remains a key dynamic of current Russian social and political thought.

Catherine the Great continued Peter's expansionist policies and established Russia as a European power. During her reign (1762-96), power was centralized in the monarchy, and administrative reforms concentrated great wealth and privilege in the hands of the Russian nobility. Catherine was also known as an enthusiastic patron of art, literature and education and for her correspondence with Voltaire and other Enlightenment figures. Catherine also engaged in a territorial resettlement of Jews into what became known as "The Pale of Settlement," where great numbers of Jews were concentrated and later subject to vicious attacks known as pogroms.

Alexander I (1801-1825) began his reign as a reformer, but after defeating Napoleon's 1812 attempt to conquer Russia, he became much more conservative and rolled back many of his early reforms. During this era, Russia gained control of Georgia and much of the Caucasus. Throughout the 19^th century, the Russian Government sought to suppress repeated attempts at reform and attempts at liberation by various national movements, particularly under the reign of Nicholas I (1825-1855). Its economy failed to compete with those of Western countries. Russian cities were growing without an industrial base to generate employment, although emancipation of the serfs in 1861 foreshadowed urbanization and rapid industrialization late in the century. At the same time, Russia expanded into the rest of the Caucasus, Central Asia and across Siberia. The port of Vladivostok was opened on the Pacific coast in 1860. The Trans-Siberian Railroad opened vast frontiers to development late in the century. In the 19th century, Russian culture flourished as Russian artists made significant contributions to world literature, visual arts, dance, and music. The names of Dostoyevsky, Tolstoy, Gogal, Repin, and Tchaikovsky became known to the world.

Alexander II (1855-1881), a relatively liberal tsar, emancipated the serfs. His 1881 assassination, however, prompted the reactionary rule of Alexander III (1881-1894). At the turn of the century, imperial decline became evident. Russia was defeated in the unpopular Russo-Japanese war in 1905. The Russian Revolution of 1905 forced Tsar Nicholas II (1894-1917) to grant a constitution and introduce limited democratic reforms. The government suppressed opposition and manipulated popular anger into anti-Semitic pogroms. Attempts at economic change, such as land reform, were incomplete.

1917 Revolution and the U.S.S.R.
The ruinous effects of World War I, combined with internal pressures, sparked the March 1917 uprising that led Tsar Nicholas II to abdicate the throne. A provisional government came to power, headed by Aleksandr Kerenskiy. On November 7, 1917, the Bolshevik Party, led by Vladimir Lenin, seized control and established the Russian Soviet Federated Socialist Republic. Civil war broke out in 1918 between Lenin's "Red" army and various "White" forces and lasted until 1920, when, despite foreign interventions and a war with Poland, the Bolsheviks triumphed. After the Red army conquered Ukraine, Belarus, Azerbaijan, Georgia, and Armenia, a new nation, the Union of Soviet Socialist Republics (U.S.S.R.), was formed in 1922.

First among its political figures was Lenin, leader of the Bolshevik Party and head of the first Soviet Government, who died in 1924. In the late 1920s, Josef Stalin emerged as General Secretary of the Communist Party of the Soviet Union (CPSU) amidst intra-party rivalries; he maintained complete control over Soviet domestic and international policy until his death in 1953. In the 1930s, Stalin oversaw the forced collectivization of tens of millions of its citizens in state agricultural and industrial enterprises. Millions died in the process. Millions more died in political purges, the vast penal and labor system, and in state-created famines. Initially allied to Nazi Germany, which resulted in significant territorial additions on its western border, the U.S.S.R. was attacked by the Axis on June 22, 1941. Twenty million Soviet citizens died during World War II in the successful effort to defeat the Axis, in addition to over two million Soviet Jews who perished in the Holocaust. After the war, the U.S.S.R. became one of the Permanent Members of the UN Security Council. In 1949, the U.S.S.R. developed its own nuclear arsenal.

Stalin's successor, Nikita Khrushchev, served as Communist Party leader until he was ousted in 1964. Aleksey Kosygin became Chairman of the Council of Ministers, and Leonid Brezhnev was made First Secretary of the CPSU Central Committee in 1964. In 1971, Brezhnev rose to become "first among equals" in a collective leadership. Brezhnev died in 1982 and was succeeded by Yuriy Andropov (1982-84) and Konstantin Chernenko (1984-85). In 1985, Mikhail Gorbachev became the next (and last) General Secretary of the CPSU. Gorbachev introduced policies of perestroika (restructuring) and glasnost (openness). But his efforts to reform the creaky Communist system from within failed. The people of the Soviet Union were not content with half-freedoms granted by Moscow; they demanded more and the system collapsed. Boris Yeltsin was elected the first president of the Russian Federation in 1991. Russia, Ukraine and Belarus formed the Commonwealth of Independent States in December 1991. Gorbachev resigned as Soviet President on December 25, 1991. Eleven days later, the U.S.S.R. was formally dissolved.

The Russian Federation
After the December 1991 dissolution of the Soviet Union, the Russian Federation became its successor state, inheriting its permanent seat on the UN Security Council, as well as the bulk of its foreign assets and debt. By the fall of 1993, politics in Russia reached a stalemate between President Yeltsin and the parliament. The parliament had succeeded in blocking, overturning, or ignoring the President's initiatives on drafting a new constitution, conducting new elections, and making further progress on democratic and economic reforms.

In a dramatic speech in September 1993, President Yeltsin dissolved the Russian parliament and called for new national elections and a new constitution. The standoff between the executive branch and opponents in the legislature turned violent in October after supporters of the parliament tried to instigate an armed insurrection. Yeltsin ordered the army to respond with force to capture the parliament building and crush the insurrection. In December 1993, voters elected a new parliament and approved a new constitution that had been drafted by the Yeltsin government. Yeltsin remained the dominant political figure, although a broad array of parties, including ultra-nationalists, liberals, agrarians, and communists, had substantial representation in the parliament and competed actively in elections at all levels of government.

In late 1994, the Russian security forces launched a brutal operation in the Republic of Chechnya against rebels who were intent on separation from Russia. Along with their opponents, Russian forces committed numerous violations of human rights. The protracted conflict, which received close scrutiny in the Russian media, raised serious human rights and humanitarian concerns abroad as well as within Russia. After numerous unsuccessful attempts to institute a cease-fire, in August 1996 the Russian and Chechen authorities negotiated a settlement that resulted in a complete withdrawal of Russian troops and the holding of elections in January 1997. A peace treaty was concluded in May 1997. Following a number of terrorist incidents blamed on Chechen separatists, the Russian government launched a new military campaign into Chechnya. By spring 2000, federal forces claimed control over Chechen territory, but fighting continues as rebel fighters regularly ambush Russian forces in the region. Throughout 2002 and 2003, the ability of Chechen separatists to battle the Russian forces waned but they claimed responsibility for numerous terrorist acts. In 2005 and 2006, key separatist leaders were killed by Russian forces.

On December 31, 1999 Boris Yeltsin resigned, and Vladimir Putin was named Acting President. In March 2000, he won election in his own right as Russia's second president with 53% of the vote. Putin moved quickly to reassert Moscow's control over the regions, whose governors had confidently ignored edicts from Boris Yeltsin. He sent his own "plenipotentiary representatives" (commonly called ‘polpred' in Russian) to ensure that Moscow's policies were followed in recalcitrant regions and republics. He won enactment of liberal economic reforms that rescued a faltering economy and stopped a spiral of hyperinflation. Putin achieved wide popularity by stabilizing the government, especially in marked contrast to what many Russians saw as the chaos of the latter Yeltsin years. The economy grew, both because of rising oil prices and in part because Putin was able to achieve reforms in banking, labor, and private property. During this time, Russia also moved closer to the U.S., especially after the terror attacks of September 11, 2001. In 2002, the NATO-Russia Council was established, giving Russia a voice in NATO discussions.

GOVERNMENT AND POLITICAL CONDITIONS
In the political system established by the 1993 constitution, the president wields considerable executive power. There is no vice president, and the legislative branch is far weaker than the executive. The bicameral legislature consists of the lower house (State Duma) and the upper house (the Federation Council). The president nominates the highest state officials, including the prime minister, who must be approved by the Duma. The president can pass decrees without consent from the Duma. He also is head of the armed forces and of the Security Council.

Duma elections were held most recently on December 7, 2003, and presidential elections on March 14, 2004. The pro-government party, United Russia, won close to half of the seats in the Duma. Combined with its allies, United Russia commands a two-thirds majority. The OSCE judged the Duma elections as failing to meet international standards for fairness, due largely to extensive slanted media bias in the campaign. Vladimir Putin was re-elected to a second four-year term with 71% of the vote in March 2004. The Russian constitution does not allow presidents to serve more than two consecutive terms. Next elections for the Duma occur in December 2007, and for President in March 2008.

Russia is a federation, but the precise distribution of powers between the central government and the regional and local authorities is still evolving. The Russian Federation consists of 89 regional administrative units, including two federal cities, Moscow and St. Petersburg. The constitution explicitly defines the federal government's exclusive powers, but it also describes most key regional issues as the joint responsibility of the federal government and the regional administrative units. In 2000, President Putin grouped the regions into seven federal districts, with presidential appointees established in Moscow and six provincial capitals. In March 2004, the Constitution was amended to permit the merger of some regional administrative units. A law enacted in December 2004 eliminated the direct election of the country's regional leaders. Governors are now nominated by the president and subject to confirmation by regional legislatures.

Judicial System
The Russian judicial system consists of the Constitutional Court, courts of general jurisdiction, military courts, and arbitrage courts (which hear commercial disputes). The Constitutional Court of the Russian Federation is a court of limited subject matter jurisdiction. The 1993 constitution empowers the Constitutional Court to arbitrate disputes between the executive and legislative branches and between Moscow and the regional and local governments. The court also is authorized to rule on violations of constitutional rights, to examine appeals from various bodies, and to participate in impeachment proceedings against the president. The July 1994 Law on the Constitutional Court prohibits the court from examining cases on its own initiative and limits the scope of issues the court can hear. The system of general jurisdiction courts includes the Supreme Court of the Russian Federation, regional level courts, district level courts and justices of the peace.

The Duma passed a Criminal Procedure Code and other judicial reforms during its 2001 session. These reforms help make the Russian judicial system more compatible with its Western counterparts and are seen by most as an accomplishment in human rights. The reforms have reintroduced jury trials in certain criminal cases and created a more adversarial system of criminal trials that protect the rights of defendants more adequately. In 2002, the introduction of the new code led to significant reductions in time spent in detention for new detainees, and the number of suspects placed in pretrial detention declined by 30%. Another significant advance in the new Code is the transfer from the Procuracy to the courts of the authority to issue search and arrest warrants. There are rising concerns, however, that prosecutors have selectively targeted individuals for political reasons, as in the prosecution of Yukos Oil CEO Mikhail Khodorkovskiy.

In spite of the general tendency to increase judicial independence (for example, by recent considerable salary raise to judges), many judges still see their role not as of impartial and independent arbiters, but as of government officials protecting state interests. See below for more information on the commercial court/business law.

Human Rights
Russia's human rights record remains uneven and has worsened in some areas in recent years. Despite significant improvements in conditions following the end of the Soviet Union, problem areas remain. In particular, the Russian Government's policy in Chechnya has been a cause for international concern. Although the government has made progress in recognizing the legitimacy of international human rights standards, the institutionalization of procedures to safeguard these rights has lagged. There are, however, some indications that the law is becoming an increasingly important tool for those seeking to protect human rights.

The judiciary is often subject to manipulation by political authorities and is plagued by large case backlogs and trial delays. Lengthy pretrial detention remains a serious problem. Russia has one of the highest prison population rates in the world, at 685 per 100,000. There are credible reports of beating and torture of inmates and detainees by law enforcement and correctional officials. Prison conditions fall well below international standards. In 2001, President Putin pronounced a moratorium on the death penalty. There are reports that the Russian Government might still be violating promises they made upon entering the European Council, especially in terms of prison control and conditions.

In Chechnya, there have been credible allegations of violations of international human rights and humanitarian law committed by Russian and pro-Moscow Chechen forces. Chechen rebels also have committed abuses as well as acts of terrorism. Human rights groups have criticized Russian officials concerning cases of Chechens disappearing while in custody. Chechen rebels have similarly been responsible for politically motivated disappearances. Russian authorities have introduced some improvements, including better access to complaint mechanisms, the formal opening of investigations in most cases, and the introduction of two decrees requiring the presence of civilian investigators and other nonmilitary personnel during all large-scale military operations and targeted search and seizure operations. Human rights groups welcome these changes but claim that most abuses remain uninvestigated and unpunished and may be spreading more broadly in the North Caucasus.

The Russian constitution provides for freedom of religion and the equality of all religions before the law, as well as the separation of church and state. Although Jews and Muslims continue to encounter prejudice and societal discrimination, they have not been inhibited by the government in the free practice of their religion. High-ranking federal officials have condemned anti-Semitic hate crimes, but law enforcement bodies have not always effectively prosecuted those responsible. The influx of foreign missionaries has led to pressure by groups in Russia, specifically nationalists and the Russian Orthodox Church, to limit the activities of these "nontraditional" religious groups. In response, the Duma passed a restrictive and potentially discriminatory law on religion in October 1997. The law is complex, with many ambiguous and contradictory provisions. The law's most controversial provisions distinguish between religious "groups" and "organizations" and introduce a 15-year rule, which allows groups that have been in existence for 15 years or longer to obtain accredited status. Senior Russian officials have pledged to implement the 1997 law on religion in a manner that is not in conflict with Russia's international human rights obligations. Some local officials, however, have used the law as a pretext to restrict religious liberty.

Government pressure continued to weaken freedom of expression and the independence and freedom of some media, particularly major national television networks and regional electronic media outlets. A government decision resulted in the elimination of the last major non-state television network in 2003. National press is also increasingly in government hands or owned by government officials, narrowing the scope of opinion available. Self-censorship is a growing press problem. Unsolved murders of journalists, including the killing of respected investigative reporter Anna Politkovskaya in October 2006, have caused significant international concern and increased pressure on journalists to avoid subjects considered sensitive. In August 2007, authorities arrested several suspects in connection with the Politkovksaya case.

Enactment of a new law on foreign non-governmental organizations (NGOs) in 2006 was criticized in many quarters as a device to control civil society. Implementing regulations appear to impose onerous paperwork reporting burdens on NGOs that could be used to limit or even suppress some of them. This law was used to shut down an NGO for the first time in January 2007 on the basis of extremism charges; however, most foreign NGOs have successfully re-registered. Domestic NGOs were not required to re-register, but are required to meeting new reporting requirements.

The constitution guarantees citizens the right to choose their place of residence and to travel abroad. Some big-city governments, however, have restricted this right through residential registration rules that closely resemble the Soviet-era "propiska" regulations. Although the rules were touted as a notification device rather than a control system, their implementation has produced many of the same results as the propiska system. The freedom to travel abroad and emigrate is respected although restrictions may apply to those who have had access to state secrets. Recognizing this progress, since 1994, the U.S. President has found Russia to be in full compliance with the provisions of the Jackson-Vanik Amendment.

Principal Government Officials
President--Vladimir Putin
Prime Minister--Viktor Zubkov

ECONOMY
The Russian economy underwent tremendous stress in the 1990s as it moved from a centrally planned economy to a free market system. Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998. Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid and steep decline (60%) in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.

Still, Russia weathered the crisis well. In the 8 years following the financial crisis, GDP growth averaged just under 7% due to a devalued ruble, implementation of key economic reforms (tax, banking, labor and land codes), tight fiscal policy, and favorable commodities prices. Household consumption and fixed capital investments have both grown by about 10 percent per year since 1999 and have replaced net exports as the main drivers of demand growth. Inflation and exchange rates have stabilized due to a prudent fiscal policy (Russia has run a budget surplus since 2003). The government created a stabilization/rainy day fund ($127 billion in mid-2007), and has the third-largest foreign exchange reserves in the world (close to $420 billion in mid-2007) which should shelter it from commodity price shocks.

Russia's balance of payments moves from strength to strength. The current account balance grew from $58.6 billion in 2004 to $95.3 billion in 2006, almost entirely due to oil price increases. The capital account turned positive in 2006, with net inflow of $6.1 billion. In addition, net private capital flows in 2006 increased significantly to $40.9 billion, compared to an inflow of $0.1 billion in 2005 due to liberalization of the capital account in mid-2006. Foreign direct investment (FDI) flows dramatically improved in 2006 to an estimated $31 billion (inflows totaled $15.4 billion and $14.6 billion in 2004 and 2005, respectively). As of July 1, 2006, the ruble is convertible for both current and capital transactions. Russia prepaid its entire Soviet-era Paris Club debt of $22 billion in late 2006, pushing Russia's sovereign foreign debt down to $45 billion at the end of 2006, or about 5 percent of GDP. Russia's total public and private foreign debt at the end of 2006 was $310 billion, or 31 percent of GDP. Such a dramatic reversal to the macroeconomic situation is truly remarkable. Russia currently has a sovereign investment-grade rating from Standard and Poor's of BBB+.

Although the economy has begun to diversify, the government budget remains dependent on oil and gas revenues; consumption and investment are, however, contributing to an increasing share to GDP growth. While currently sheltered from external price shocks, the government realizes the need to intensify reforms that will promote new investment in aging infrastructure and continued productivity gains. The government believes it can do this by creating state-sponsored investment funds, special economic zones, and by exercising control of strategic enterprises (a draft law defining strategic sectors was submitted to the Duma in August 2007). Although investors are returning to Russia, excessive bureaucracy, corruption, insufficient and insufficiently enforced legislation, selective interpretation of laws (particularly tax laws), unclear limits and conditions on foreign investment, obsolete infrastructure, and stalled economic reforms still remain a problem. In 2005, the government announced reform programs in four priority areas (health, education, housing, and agriculture), but further work is needed on them as well as in financial regulation, civil service reform, and reform of government monopolies, such as railroads, gas, and electricity.

Gross Domestic Product
A strong expansion in domestic demand continues to drive GDP growth, despite a slowdown in manufacturing. GDP growth and industrial production for 2006 were 6.7% and 4.8%, respectively, relative to 6.4% and 5.7% in 2005. GDP growth is currently derived from non-tradable sectors, but investment remains concentrated in tradables (oil and gas). Construction was the fastest growing sector of the economy, expanding by 14% in 2006. The main private sector services--wholesale & retail trade, banking & insurance, and transportation & communications--showed strong growth of about 10%. In contrast, public sector services--education, health care, and public administration--lagged behind with only 2-4% growth in 2006. Recent productivity growth has still been strong in some parts of domestic manufacturing. Real disposable incomes grew by 10.2% in 2006, spurring considerable growth in private consumption.

Monetary Policy
Large balance of payments surpluses have complicated monetary policy for Russia. The Central Bank has followed a policy of managed appreciation to ease the impact on domestic producers and has sterilized capital inflows with its large budget surpluses. However, the Central Bank also has been buying back dollars, pumping additional ruble liquidity into the system. Given the rising demand for money, this has softened the inflationary impact, but these policy choices have complicated the government's efforts to lower inflation to the single digits. Consumer Price Index (CPI) inflation was 9% in 2006 and 10.9% in 2005, having steadily decreased from 20.2% in 2000, due primarily to prudent fiscal policy and in 2006 lower world oil prices.

Government Spending/Taxation
The Russian federal budget has run growing surpluses since 2001, as the government has taxed and saved much of the rapidly increasing oil revenues. According to preliminary figures, the 2006 budget surplus was 7.4% of GDP on a cash basis. Although there are strong pressures to relax spending ahead of elections, the government has loosened its spending gradually, as the economy is running at near capacity and there are dangers of increasing inflation and rapid exchange rate appreciation. Spending increases to date have mostly been for increased salaries of government employees and pensions, but some money is also being dedicated to special investment funds and tax breaks to develop new industries in special economic zones. The government overhauled its tax system for both corporations and individuals in 2000-01, introducing a 13% flat tax for individuals and a unified tax for corporations, which improved overall collection. Business has put pressure on the government to reduce value added taxes (VAT) on oil and gas, but the government has postponed this discussion. Tax enforcement of disputes, particularly following the Yukos case, continues to be uneven and unpredictable.

Population
Russia's population of 142.9 million (2006) is falling. Lower birth rates and higher death rates have reduced Russia's population at a nearly 0.5% annual rate since the early 1990s. Russia is one of few countries with a declining population (although birth rates in many developed countries have dropped below the long-term population replacement). Population decline is particularly drastic in Russia due to higher death rates, especially among working-age males. Cardiovascular disease, cancer, traffic injuries, suicide, alcohol poisoning, and violence are major causes of death. In a June 2006 speech to the Russian National Security Council, President Putin declared that Russia is facing a demographic crisis and called for measures to improve birth and mortality rates and increase population through immigration, primarily the return of Russian-speaking foreigners.

HIV/AIDS
Russia and Ukraine are said to have the highest growth rates of HIV infection in the world. In Russia HIV seems to be transmitted mostly by intravenous drug users sharing needles, although data is very uncertain. Data from the Federal AIDS Center shows that the number of registered cases is doubling every 12 months and is currently at 300,000 persons. When projections are made which allow for people in high-risk groups who have not been tested for the disease, estimates of the actual number of HIV-infected persons are approximately 3 million. The high growth rate of AIDS cases, if unchecked, will have negative economic consequences. Investment will suffer from the diversion of private and government funds to AIDS treatment. The effect on the labor force may be acute since about 80% of infected individuals in Russia are under 30 years of age. At the September 2003 Camp David Summit, and again at the Bratislava meeting in February 2005, Presidents Bush and Putin pledged to deepen ongoing cooperation between the two countries to fight HIV/AIDS.

Commercial Law
Russia has a body of conflicting, overlapping and rapidly changing laws, decrees and regulations, which has resulted in an ad hoc and unpredictable approach to doing business. In this environment, negotiations and contracts from commercial transactions are complex and protracted. Uneven implementation of laws creates further complications. Regional and local courts are often subject to political pressure, and corruption is widespread. However, more and more small and medium businesses in recent years have reported fewer difficulties in this regard, especially in the Moscow region. In addition, Russian businesses are increasingly turning to the courts to resolve disputes. Russia's WTO accession process is also helping to bring the country's legal and regulatory regime in line with internationally accepted practices.

Natural Resources
The mineral-packed Ural Mountains and the vast oil, gas, coal, and timber reserves of Siberia and the Russian Far East make Russia rich in natural resources. However, most such resources are located in remote and climatically unfavorable areas that are difficult to develop and far from Russian ports. Nevertheless, Russia is a leading producer and exporter of minerals, gold, and all major fuels. Natural resources, especially energy, dominate Russian exports. Ninety percent of Russian exports to the United States are minerals or other raw materials.

Industry
Russia is one of the most industrialized of the former Soviet republics. However, years of very low investment have left much of Russian industry antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in metals, food products, and transport equipment. Russia is now the world's third-largest exporter of steel and primary aluminum. Russia inherited most of the defense industrial base of the Soviet Union, so armaments remain an important export category for Russia. Efforts have been made with varying success over the past few years to convert defense industries to civilian use, and the Russian Government is engaged in an ongoing process to privatize the remaining 9,222 state-owned enterprises, 33% of which are in the industrial manufacturing sector.

Agriculture
For its great size, Russia has relatively little area suited for agriculture because of its arid climate and inconsistent rainfall. Northern areas concentrate mainly on livestock, and the southern parts and western Siberia produce grain. Restructuring of former state farms has been an extremely slow process. Foreigners are not allowed to own farmland in Russia although long-term leases are permitted. Private farms and garden plots of individuals account for over one-half of all agricultural production.

Investment/Banking
Russia attracted an estimated $31 billion in FDI in 2006 (3.2% of GDP), up from $13 billion in foreign direct investment (FDI) in 2005.Russia's annual FDI figures are now in line with those of China, India, and Brazil. However, Russia's per capita cumulative FDI still lags far behind such countries as Hungary, Poland, and the Czech Republic. The paradox is that Russia's challenging business climate, lack of transparency, and weak rule of law/corruption has taken a back seat to Russia's extraordinary macroeconomic fundamentals and the consumer and retail boom, which is providing double digit returns to investors and attracting new flows. Russian domestic investment is also returning home, as the foreign investment coming into Russia from havens like Cyprus and Gibraltar, is actually returning Russian capital . As of the end of 2006, loans to the financial sector were 57.2% of total banking sector assets. Retail loans amounted to $78.4 billion at the end of 2006, up from $41 billion at the end of 2005. Retail deposits increased to $144.1 billion from $95.7 billion over the same period. Also, currently deposits are fully insured up to $4,000 and an additional $12,000 is insured at 90%.

Although still small by international standards, the Russian banking sector is growing fast and is becoming a larger source of investment funds. To meet a growing demand for loans, which they were unable to cover with domestic deposits, Russian banks borrowed heavily abroad in 2006, accounting for two-thirds of the private-sector capital inflows in that year. Ruble lending has increased since the October 1998 financial crisis, and in 2006 loans were 63% of total bank assets, with consumer loans posting the fastest growth at 74% that same year. Fewer Russians prefer to keep their money outside the banking sector, the recent appreciation of the ruble against the dollar has persuaded many Russians to keep their money in rubles or other currencies such as the euro, and retail deposits grew by 65% in 2006. Despite recent growth, the poorly developed banking system, along with contradictory regulations across banking, bond, and equity markets, still makes it difficult for entrepreneurs to raise capital as well as to permit capital transfer from a capital-rich sector such as energy to capital-poor sectors such as agriculture and manufacturing and to diversify risk. Banks still perceive small and medium commercial lending as risky, and some banks are inexperienced with assessing credit risk, though the situation is improving. In 2003, Russia enacted a deposit insurance law to protect deposits up to 100,000 rubles (about $3,700) per depositor, and a bill is currently in the Duma, which if passed will increase this coverage to 190,000 rubles (about $7,000) per depositor.

Trade
The U.S. exported $4.7 billion in goods to Russia in 2006, a 21% increase from the previous year. Corresponding U.S. imports from Russia were $19.8 billion, up 29%. Russia is currently the 33rd-largest export market for U.S. goods. Russian exports to the U.S. were fuel oil, inorganic chemicals, aluminum, and precious stones. U.S. exports to Russia were machinery, meat (mostly poultry), electrical equipment, and high-tech products.

Russia's overall trade surplus in 2006 was $139 billion, up from $118 billion in 2005. World prices continue to have a major effect on export performance, since commodities--particularly oil, natural gas, metals, and timber--comprise 80% of Russian exports. Russian GDP growth and the surplus/deficit in the Russian Federation state budget are closely linked to world oil prices.

Russia is in the process of negotiating terms of accession to the World Trade Organization (WTO). The U.S. and Russia concluded a bilateral WTO accession agreement in late 2006, and negotiations continue in 2007 on meeting WTO requirements for accession. Russia reports that it has yet to conclude bilateral agreements with Saudi Arabia and Georgia.

According to the 2005 U.S. Trade Representative's National Trade Estimate, Russia continues to maintain a number of barriers with respect to imports, including tariffs and tariff-rate quotas; discriminatory and prohibitive charges and fees; and discriminatory licensing, registration, and certification regimes. Discussions continue within the context of Russia's WTO accession to eliminate these measures or modify them to be consistent with internationally accepted trade policy practices. Non-tariff barriers are frequently used to restrict foreign access to the market and are also a significant topic in Russia's WTO negotiations. In addition, large losses to U.S. audiovisual and other companies in Russia owing to poor enforcement of intellectual property rights in Russia is an ongoing irritant in U.S.-Russia trade relations. Russia continues to work to bring its technical regulations, including those related to product and food safety, into conformity with international standards.

DEFENCE
Russia's efforts to transform its Soviet-legacy military into a smaller, lighter and more mobile force continue to be hampered by an ossified military leadership, discipline problems and human rights violations, limited funding and demographics. Recent steps by the Government of Russia suggest a desire to reform. There has been an increased emphasis on practical training, and the government is introducing bills to improve the organization of the military.

Despite recent increases in the budget, however, defence spending is still unable to sustain Russia's oversized military. Current troop strength, estimated at 1.1 million, is large in comparison to Russia's GDP and military budget, which continues to make the process of transformation to a professional army difficult. This is the result of the Soviet legacy and military thinking that has changed little since the Cold War. Senior Russian leaders continue to emphasize a reliance on a large strategic nuclear force capable of deterring a massive nuclear attack.

Russian military salaries are low. Theoretically, the army provides all necessities, but housing and food shortages continue to plague the armed forces. Problems with both discipline and brutal hazing are common as well. HIV infection rates in the Russian army are estimated to be between two to five times higher than in the general population, and tuberculosis is a persistent problem.

Such conditions continue to encourage draft evasion and efforts to delay military service. Although the available manpower (males 15-49) for the Russian Armed Forces was projected at 35.2 million in 2005, only approximately 11% of eligible males do military service. Moreover, military officials complain that new recruit cohorts are plagued by increasing incidences of poor education, communicable diseases and criminality.

The Russian Government has stated a desire to convert to a professional army, but implementation has been delayed repeatedly. Current plans envision a transition to a mixed force, in which professional soldiers fill the ranks of select units and conscription is gradually phased out. Some officials have talked of developing a non-commissioned officer corps to lead the professional army, but the military has yet to make any concrete investments in training or facilities that would begin this process.

FOREIGN RELATIONS
In the years after the dissolution of the Soviet Union, Russia took important steps to become a full partner in the world's principal political groupings. On December 27, 1991, Russia assumed the permanent UN Security Council seat formerly held by the Soviet Union. Russia also is a member of the Organization for Security and Cooperation in Europe (OSCE) and the Euro-Atlantic Partnership Council (EAPC). Russia and the European Union (EU) signed a Partnership and Cooperation Agreement. It signed the North Atlantic Treaty Organization (NATO) Partnership for Peace initiative in 1994. The NATO-Russia Founding Act in 1997 and the NATO-Russia Council superseded that in 2002. Russia acquiesced (despite misgivings) in enlargement of NATO by members first of the former Warsaw Pact and most recently by the Baltic states that had been forcibly integrated into the Soviet Union.

Over the past several years Russia has increased its international profile, played an increasing role in regional issues, and been more assertive in dealing with its neighbours. The rise in energy prices has given it leverage over countries which are dependent on Russian sources. Russia continues to support separatist regimes in Georgia and Moldova.

EU relations with Russia

Source: U.S. State Dept.