Russia's Economy: Oil, Gas and the State

How Russia's economy recovered in the 2000s on energy exports, the growing role of the state, and its structural weaknesses.

After the chaos of the 1990s and a financial crisis in 1998, when Russia defaulted on domestic debt and the rouble collapsed, Russia’s economy recovered strongly in the 2000s.

The oil boom

Rising world oil prices in the 2000s brought huge revenues. Russia’s economy grew around 7 percent a year between 1999 and 2008, and real incomes rose substantially. The government paid down foreign debt and built reserves, including a stabilisation fund set up in 2004 to save oil revenue.

Dependence on energy

Oil and gas have made up a large share of Russia’s exports and a major share of federal budget revenue. This makes the economy highly sensitive to energy prices. When oil prices collapsed in 2014, combined with sanctions after Russia’s annexation of Crimea, the rouble lost around half its value and the economy fell into recession.

The role of the state

From the 2000s, the Russian state expanded control over key industries. State-controlled companies like Gazprom, Rosneft and major banks dominate important sectors. Economists describe this as state capitalism. Critics point to corruption, weak property rights and limited competition as barriers to investment and diversification.

Strengths and weaknesses

Strengths: large natural resources, an educated workforce, strong scientific traditions, low public debt and a capable central bank.
Weaknesses: dependence on raw materials, declining working-age population, weak institutions, limited small business growth and brain drain.

Oil price and the rouble

Because oil and gas exports bring in most of Russia's foreign currency, the rouble tends to strengthen when oil prices rise and weaken when they fall. In late 2014, as oil prices dropped sharply, the rouble plunged, and the central bank raised interest rates dramatically to 17 percent to defend it. The economy's fate was tied to a price set in world markets.

Thinking Russia is a small economy

Russia is one of the world's larger economies, especially measured in purchasing power, and a major exporter of energy, grain, metals and weapons. But its economy is much smaller than those of the United States, China or the EU.

Key takeaways

Russia's economy grew around 7 percent a year from 1999 to 2008, driven by oil prices.
Energy exports dominate exports and budget revenue, making the economy price-sensitive.
The state expanded control over key industries, a model called state capitalism.
Corruption, weak institutions and demographic decline are major weaknesses.