Russia (07/08)

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Background Note: Russia

July 2008

Bureau of European and Eurasian Affairs

A full moon rises above a cathedral in St. Petersburg, Russia, June 14, 2006. [© AP Images]

Flag of Russia is three equal horizontal bands of white (top), blue, and red.

PROFILE

OFFICIAL NAME:
Russian Federation

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. 10.4 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 (January 2008): 142 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 2007 Duma elections were contested by United Russia, the Communist Party (KPRF), the Liberal Democratic Party (LDPR), For a Just Russia, the Union of Right Forces (SPS), Yabloko, and four other minor parties. SPS and Yabloko, parties favoring liberal reforms, failed to clear the 7% threshold to enter the Duma as a party.
Subdivisions: 21 autonomous republics, 47 oblasts, 2 federal cities (Moscow and St. Petersburg) and 14 autonomous territories and regions.
Suffrage: Universal at 18 years.

Economy
GDP (2007 estimate): $1.34 trillion.
Growth rate (2007 estimate): 8.1%.
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 (2007): Exports--$355 billion: petroleum and petroleum products, natural gas, woods and wood products, metals, chemicals. Major markets--EU, CIS, China, Japan. Imports--$223 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--$7.4 billion. Principal U.S. exports (2007)--oil/gas equipment, autos/parts, meat, aircraft, electrical machinery, medical equipment, plastics, cosmetics, and chemicals. U.S. imports--$19.4 billion. Principal U.S. imports (2006)--oil, chemicals, aluminum, iron/steel, precious stones, nickel, fish and crustaceans, copper, base metals, and wood.

PEOPLE
Most of the roughly 142 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 7 million students attended Russia's 1,090 institutions of higher education in 2006, 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 aging, 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 labor 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. By the end of the third quarter in 2007, 14.8% of the population lived below the subsistence level, in contrast to 38.1% in 1998.

Moscow is Russia's capital and largest city. 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, Gogol, 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. The situation stabilized after Ramzan Kadyrov was confirmed as Chechen President, although small-scale fighting continues between rebel forces and local law enforcement.

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 terrorist 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 2, 2007, and presidential elections on March 2, 2008. The pro-government party, United Russia, won a constitutional majority (more than two-thirds) of the seats in the Duma. Of the three other parties that won seats in the Duma, two of them--Just Russia and the Liberal Democratic Party--are considered to have a pro-Kremlin orientation. The final party represented in the Duma--the Communist Party--is the only opposition party. The Organization for Security and Cooperation in Europe's (OSCE) Office of Democratic Institutions and Human Rights did not observe the Duma elections because of restrictions placed on the observer mission by the Government of Russia and delays in issuing visas. Parliamentarians of the OSCE and the Council of Europe who observed the elections concluded that they were "not fair and failed to meet many OSCE and Council of Europe commitments and standards for democratic elections." They noted that the elections took place in an atmosphere which seriously limited political competition. Frequent abuses of administrative resources, media coverage strongly in favor of United Russia, and the revised election code combined to hinder political pluralism.

Dmitriy Medvedev, running as United Russia's candidate, was elected to a four-year term as President on March 2, 2008, with 70.28% of the vote. The Russian constitution does not allow presidents to serve more than two consecutive terms. Next elections for the Duma are scheduled to occur in December 2011 and for President in March 2012.

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 84 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. 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 poor in some areas. Despite significant improvements in conditions following the end of the Soviet Union, problem areas remain. In particular, the Russian Government's policy in the North Caucasus has been a cause for international concern. Although the government has recognized 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 not independent, 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, and brutality perpetrated by the prisoners themselves, some of whom are informally granted authority to enforce order within the prisons. Prison conditions fall well below international standards and extreme overcrowding is common. In 2001, President Putin ordered 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 and acts of terrorism. Although the number of kidnappings and disappearances committed by government and rebel forces markedly declined in Chechnya in 2007, similar incidents have been reported in neighboring Ingushetiya and Dagestan. Russian authorities have introduced some improvements, such as requiring the presence of civilian investigators during all large-scale military operations and targeted search and seizure operations. Human rights groups claim that most abuses remain uninvestigated and unpunished and have spread more broadly in the North Caucasus.

The Russian constitution provides for freedom of religion, the equality of all religions before the law, and the separation of church and state. More than 70% of Russians identify themselves as Russian Orthodox. While Muslims, Jews, and other religious minorities 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 Federal Registration Service and some local officials continue to prevent some religious minorities from registering locally or from acquiring property. One legal requirement (namely that religious groups be established at least 15 years before being able to register as a religious organization) continues to prevent the Church of Scientology from registering outside of the city of Moscow.

The constitution provides for freedom of speech and of the press; however, in practice government pressure on the media persists, resulting in numerous infringements of these rights. The government uses direct ownership or ownership by large private companies with links to the government to control or influence the major media outlets, especially television, through direct control and through self-censorship by editors and journalists. The government uses its controlling ownership in major national television and radio stations, as well as the majority of influential regional ones, to restrict access to information about issues deemed sensitive, including coverage of opposition political parties and movements. Unsolved murders of journalists, including the murder of respected investigative reporter Anna Politkovskaya in October 2006, have caused significant international concern and increased the reluctance of journalists to cover controversial subjects.

The 2006 law on non-governmental organizations (NGOs) created a burdensome registration process for all NGOs with stricter requirements for foreign-funded NGOs and more relaxed requirements for religious organizations. The law and implementing regulations impose onerous paperwork reporting burdens on NGOs, which many medium and small NGOs have been unable to meet as evidenced by the fact that only 36% of local NGOs had met their reporting requirements by October 2007. This law was used to close an NGO for the first time in January 2007 on the basis of extremism charges. Most foreign NGOs have successfully re-registered.

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 Soviet-era restrictions. These restrictions, though, are widely circumvented, as evidenced by the large number of undocumented foreign workers in these cities. The freedom to travel abroad and emigrate is respected although restrictions may apply to those who have had access to state secrets, or who have court orders against them for default on debts. 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--Dmitriy Medvedev
Prime Minister--Vladimir Putin

The Russian Federation maintains an embassy at 2650 Wisconsin Ave., NW, Washington, DC 20007 (tel. 202-298-5700) and a consular section at 2641 Tunlaw Road, Washington, DC (tel. 202-939-8907/8913/8918). Russian consulates also are located in Houston, New York, San Francisco, and Seattle.

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 has weathered the crisis well. In the nine years following the financial crisis, GDP growth averaged 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 ($156 billion at the end of 2007), and has the third-largest foreign exchange reserves in the world (close to $476 billion at the end of 2007) which should shelter it from commodity price shocks.

Russia's balance of payments continues to show dynamic growth. The current account balance fell slightly, from $95.3 billion in 2006 to $78.3 billion in 2007, as imports increased rapidly. Large amounts of capital moved into Russia in 2007. The capital account balance was $84.3 billion, compared to $6.1 billion in 2006. In addition, net private capital flows continued to increase in 2007 to $81.2 billion from $40.9 billion in 2006. Foreign direct investment (FDI) flows continued to improve in 2007 to $52.5 billion compared to $32.4 billion in 2006. 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. Russia maintains relatively small amounts of sovereign debt. In 2007, total sovereign foreign debt was $36 billion, or about 3% of GDP, down from $45 billion at the end of 2006. Russia's total public and private foreign debt at the end of 2007 was $460 billion, or 34% of GDP. 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 law defining strategic sectors was passed by the Duma in March 2008). 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 2007 were 8.1% and 6.3%, respectively, relative to 6.7% and 4.8% in 2006. GDP growth is currently derived from non-tradable sectors, but investment remains concentrated in tradables (oil and gas). Construction continued to be the fastest-growing sector of the economy, expanding by 22% in 2007. The main private sector services--wholesale and retail trade, banking and insurance, and transportation and communications--showed strong growth of about 10%. In contrast, public sector services lagged behind in 2007 with only 1.6%-2.4% growth in education and health care, although public administration increased to 7.5%. Recent productivity growth has still been strong in some parts of domestic manufacturing. Real disposable incomes grew by 10.4% in 2007 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 rose to 11.9% in 2007.

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. In 2007 the federal budget surplus was 5.5% of GDP. Despite 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 continues to be uneven and unpredictable.

Population
Russia's population was 142 million as of January 1, 2008. It declined at a lower rate in 2007 than in 2006 and previous years due to a significant (8%) increase in the birth rate and a 5% reduction in the death rate. The improvements may in part be attributed to the implementation of a National Priority Health Project and financial incentives to mothers having two or more children. Life expectancy remains low compared to developed countries but rose to 60.37 years for men and 73.23 for women in 2006. Cardiovascular diseases, cancer, traffic accidents and violence continue to be major causes of death among working age men. Many premature deaths are attributed to excessive alcohol consumption and smoking. To combat the looming demographic crisis, in October 2007 then-President Putin approved the concept of demographic policy for the years 2008-2025. The program aims to increase life expectancy, reduce mortality, increase the birth rate, improve the population's health, and develop a sound migration policy. The government instituted the National Priority Health Project and "mother's capital" in order to slow the population decline. These programs have had short-term success; Russia's population declined by 0.14% compared to 0.42% in 2006. It is unknown if such programs offer a long-term solution. In April 2008, the government approved joining the World Health Organization's Framework Convention on Tobacco Control, which is expected eventually to reduce extremely high smoking rates.

HIV/AIDS
At the end of 2007, there were 403,000 HIV cases officially registered in Russia, though many experts believe the actual number of cases may be two to three times higher (1 million to 1.3 million HIV cases). Prevalence of HIV cases was 270.1 per 100,000 people in 2007, higher than the 2006 indicator of 243 per 100,000. The chief form of transmission continued to be intravenous drug use, which accounted for 65% of new HIV cases in 2007. More than 44% of new HIV cases are identified in females, and transmission through heterosexual sex has grown rapidly. The number of secondary, AIDS-associated diseases has increased more than twofold in 2007. As a result, the number of deaths from AIDS has grown by 10% compared to 2006. The Government of Russia implements HIV treatment and prevention programs through its National Priority Health Project, Federal Targeted Program, and Global Fund Grants. The government currently spends over $250 million per year on HIV/AIDS treatment programs and will spend over $42 million over the next five years to support HIV/AIDS vaccine research. 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 World Trade Organization (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 many of the state-owned enterprises.

Agriculture
Russia has relatively little area for agriculture, but given its massive expanses, the country still accounts for about 9% of the world's arable land. Grain production for export is concentrated in the south of European Russia, with additional grain for domestic consumption grown throughout the rest of non-Arctic Russia west of the Urals as well as western Siberia. Livestock production was in decline from 1990 to 2006, when new government support policies were instituted to stimulate cattle and hog raising. Poultry production has rebounded and is rising at 17% per year. Small plots averaging one acre in size, urban and suburban gardens, and gardening cooperatives produce over half of Russia's food output. Former state and collective farms have been largely privatized, but management quality is uneven and profitability is highly dependent on proximity to major urban markets. Foreigners are not allowed to own farmland, although long-term leases are permitted.

Investment/Banking
Russia attracted $52.5 billion in foreign direct investment (FDI) in 2007 (4.1% of GDP), up from $32.4 billion in FDI in 2006. 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. Retail loans amounted to $132.1 billion at the end of 2007, up from $78.4 billion at the end of 2006. Retail deposits increased to $209.3 billion from $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 2007, accounting for 57% of the private-sector capital inflows in that year. Ruble lending has increased since the October 1998 financial crisis, and in 2007 loans were 66% of total bank assets, with consumer loans posting the fastest growth at 57% 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 35% in 2007. 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 2004, Russia enacted a deposit insurance law to protect deposits up to 100,000 rubles (about $3,700) per depositor. Subsequent amendments to the law increased the Deposit Insurance Agency's coverage for deposits up to 400,000 rubles.

Trade
The U.S. exported $7.4 billion in goods to Russia in 2007, a 57% increase from the previous year. Corresponding U.S. imports from Russia were $19.4 billion, down a slight 2%. Russia is currently the 20th-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, vehicles, meat (mostly poultry), aircraft, electrical equipment, and high-tech products.

Russia's overall trade surplus in 2007 was $132 billion, roughly equal to the $139 billion surplus in 2006. World prices continue to have a major effect on export performance, since commodities--particularly oil, natural gas, metals, and timber--comprise most 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 continued 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 are 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.

DEFENSE
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, defense 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. Such conditions continue to encourage draft evasion and efforts to delay military service. Moreover, military officials complain that new recruit cohorts are plagued by increasing incidences of poor education, communicable diseases, and criminality. HIV infection rates in the Russian army are estimated to be between two and five times higher than in the general population, and tuberculosis is a persistent problem.

The Russian Government has stated a desire to convert to a professional army, but implementation has been progressing slowly. In an effort to make military service more attractive, the tour of duty for conscripts was reduced to one year (from 18 months) beginning in 2008, and the military is offering increased pay and benefits to raise the number of professional servicemen. Current plans envision a transition to a mixed force, in which professional soldiers fill approximately 70%, including in select units, and conscription fills 30%. There is also an effort to develop a non-commissioned officer (NCO) corps, but the military faces difficulties recruiting NCOs, and has done little to develop the mechanisms and capability to sustain such a force.

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 established the Permanent Joint Council (PJC) in 1997, with the NATO-Russia Council superseding the PJC in 2002. Russia, despite misgivings, did not actively oppose enlargement of NATO by members of the former Warsaw Pact and the Baltic states, which had been forcibly integrated into the Soviet Union. However, Russia has recently stressed its strong opposition to the membership aspirations of Ukraine and Georgia.

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 neighbors. 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.

U.S.-RUSSIA RELATIONS
The United States and Russia share common interests on a broad range of issues, including counterterrorism and the drastic reduction of our strategic arsenals. Russia shares our basic goal of stemming the proliferation of weapons of mass destruction and the means to deliver them. The Cooperative Threat Reduction (CTR) program, launched in 1992 to facilitate dismantlement of weapons of mass destruction in the former Soviet Union, was renewed in 2006 until 2013. At the 2006 G8 Summit in St. Petersburg, the U.S. and Russia announced the Global Initiative to Combat Nuclear Terrorism to keep terrorists from acquiring nuclear materials. We are working with Russia to bring Iran's nuclear programs into compliance with International Atomic Energy Agency (IAEA) rules and United Nations Security Council Resolutions 1737, 1747, and 1803. On North Korea, Russia is a participant in the Six-Party Talks aimed at the verifiable denuclearization of the Korean Peninsula. Russia also takes part in the Middle East Peace Process "Quartet" (along with the UN and the EU). Russia now interacts with NATO members as an equal through the NATO-Russia Council but without veto power over NATO decisions. During the past several years, Russia has intensified its efforts to combat trafficking in persons. We are cooperating in the fight against HIV/AIDS.

U.S. Assistance to Russia
For more detailed information on U.S. Government assistance to Russia, please see the annual reports to Congress on U.S. Government Assistance to and Cooperative Activities with Eurasia, which are available in the Bureau of European and Eurasian Affairs section on the State Department's website. A 2008 fact sheet on U.S. assistance to Russia can be found at http://www.state.gov/p/eur/rls/fs/103515.htm.

Principal U.S. Embassy Officials
Ambassador--John Beyrle
Deputy Chief of Mission--Daniel A. Russell
Counselor for Political Affairs--Alice Wells
Counselor for Economic Affairs--Eric Schultz
Counselor for Commercial Affairs--Beryl Blecher
Counselor for Consular Affairs--Kurt E. Amend
Counselor for Management Affairs--James Melville
Counselor for Public Affairs--James J. Kenney
Counselor for Science and Technology--Colin Cleary
Director, U.S. Agency for International Development--Leon Waskin
Legal Attaché--James Treacy
DHS/Citizenship and Immigration Services (CIS)--Suzanne Sinclair-Smith
Department of Energy--James M. Whitney
National Aeronautics and Space Administration (NASA)--Dennis McSweeney

U.S. Department of State

USA.gov