Written by Martin Russell

Over the past 25 years, Russia has undergone dramatic economic changes, with the difficult reforms and catastrophic economic collapse of the 1990s, the boom years of the new century, the global economic crisis and the current downturn.

Despite all these developments, many of the structural economic challenges faced by Russia remain unchanged since Soviet times. Bountiful natural resources have helped to fuel growth, but at the cost of an unhealthy dependency, as the current situation so clearly illustrates. This problem is acknowledged by the Russian government, which under Dmitri Medvedev’s presidency in particular, declared its intentions to diversify and modernise the economy. However, the continued flow of gas and oil money has removed the incentive to undertake serious economic reforms, and these have faltered as a result.

Many of Russia’s structural problems are inherited from Soviet and even Tsarist times. Large swathes of the economy remain under state control, and there are numerous barriers to both domestic and international competition. Businesses struggle with red tape and ubiquitous corruption. Despite Medvedev’s stated objective of developing an ‘intelligent economy’, and the country’s traditional strengths in research, development, innovation and education, Russia continues to underperform in these areas.

Over the past few years, the Russian government has simplified bureaucratic procedures, launched a high-profile anti-corruption campaign, privatised state-owned companies, overhauled the education system and invested in innovation. However, such initiatives have brought measurable improvements in only a few areas.

Aggravated by these structural issues, falling oil prices and economic sanctions have led to a rapid deterioration in the economic situation. The rouble has lost half its value, inflation has shot up, formerly sound public finances look increasingly shaky, and the economy is forecast to tip into recession in 2015.

How quickly Russia recovers from its current difficulties will depend on whether or not oil prices pick up and sanctions are eased. Regardless of these, however, structural problems are likely to continue hampering the process of economic modernisation for the foreseeable future.

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Education indicators Key dates in Russian economic history in relation to GDP growth/oil price Innovation indicators Labour market and demographic indicators R&D indicators Regulatory environment indicators The rouble and oil prices Russian market liberalisation Russian natural resources