Russia’s uneven economic development

Russia’s regions vary widely in terms of their economic and social structures. There are five broad clusters of development, from the rich big cities to the poor rural areas. One thing unites them, however: the central authorities’ increasing control over their affairs.

An oil worker in the Yamalo-Nenets autonomous district
An oil worker turns a control wheel on a cluster well in the Yamalo-Nenets autonomous district. Such sparsely populated areas of Russia account for immense economic output due to their valuable resources. © Getty Images

In a nutshell

  • Russia’s geographic differences lead to economic variations
  • There are five distinct “development clusters”
  • The variations are exacerbated by government policies

As the largest country in the world by area and one of the furthest north, Russia is a land of extremes. That maxim holds true not only for its geography, but also for its economy and society. This tendency toward huge variation is a crucial factor to keep in mind when comparing Russia to other countries.

Geographic differences

Some 60-65 percent of Russia’s land area lies in a permafrost zone, where people need generous provisions from the state just to survive. These parts of the country are sparsely populated, and small settlements within them can be separated by hundreds of kilometers of tundra or taiga. For example, the population density in the Republic of Sakha (Yakutia), whose area is 3 million square kilometers (twice that of Western Europe), is only 0.3 people per square kilometer. For comparison, the population density of Norway – a comparably cold, northern European country – is 14 people per square kilometer.

Economic activity in these places is extremely difficult, but they are also the major production hubs for raw materials like oil, gas, nonferrous metals and wood. The huge infrastructure investments required to do business in these areas increases production and transportation costs. There are also plenty of environmental problems that come with industrial activity in the fragile Far North biomes.

The entrepreneurial climate is favorable for large companies affiliated with the state.

Russia’s southern regions have favorable living conditions. Some of them, located along the Black Sea coast of the Caucasus, are within a subtropical zone. But this is a narrow coastal strip, only about 450 kilometers long. The rest of the territory is generally considered a “zone of risky agriculture,” where the costs for heating and other infrastructure are high, and expensive provisions must be made for natural disasters such as droughts, extreme cold and floods.


Facts & figures

Map of Russia
Russia’s largest cities and far-flung but resource-rich regions drive its economy. The rest of the country is dependent on subsidies from the central government. © macpixxel for GIS

Socioeconomic differences

Gross regional product (GRP) per capita offers insight into the peculiarities of regional economic development in Russia. According to official statistics, in 2018, the per capita GRP of the oil-producing Nenets Autonomous Okrug in the Far North was 62 times larger than the agrarian Republic of Ingushetia in the southwest. Of course, this immense disparity reflects these regions’ different economic specializations. But in the United States, another large, diverse country, the gap is nowhere near as wide: the District of Columbia’s GRP per capita is only 5.2 times larger than Mississippi’s. The entrepreneurial climate is favorable for large companies affiliated with the state in Russia but does not support the development of small and medium-sized non-resource businesses. This situation reinforces the disparate levels of economic development.

Because of the extreme unevenness of economic development, only five regions provided more than 70 percent of the federal budget revenues in 2019: the oil- and gas-producing Khanty-Mansi and Yamalo-Nenets autonomous districts, the federal cities of Moscow and St. Petersburg, and the industrially developed Republic of Tatarstan. In turn, the federal budget distributes subsidies to those regions that cannot collect enough taxes to ensure at least minimal local administrative functions. In 2020, 72 out of Russia’s 85 federal subjects were recipients of such payouts. The most dependent on federal subsidies are the national republics, like Tyva (subsidies account for 54 percent of the region’s budget revenues); Dagestan (52 percent); Chechnya (50 percent); Ingushetia (49 percent) and Altai (45 percent).

Although subsidies from the federal budget slightly smooth out regional differences, the divergences remain vast. For example, government spending on healthcare (including mandatory medical insurance) per person in the hydrocarbon-rich Sakhalin Region in 2019 was 24 times more than in the Zabaykalsky Krai. All these economic and budgetary peculiarities lead to radical regional differences in people’s incomes. In the Yamalo-Nenets district, per capita real incomes were five times higher than in Tyva in 2019. In the U.S., the largest interregional difference in real household income (between the District of Colombia and West Virginia) is less than twofold.

Five clusters

Taken together, all of this data gives us a view of five “development clusters” that differ tremendously in terms of both economy and society. The first is the federal cities of Moscow and St. Petersburg, as well as cities with a population of about a million people – Novosibirsk, Nizhny Novgorod, Rostov-on-Don, Yekaterinburg, Perm, Krasnoyarsk, Chelyabinsk, Kazan, Samara, Ufa, Omsk and Volgograd. These cities are home to more than 21 percent of the country’s population and are gradually ceasing to be industrial. The employment structure is changing: the share of highly skilled white-collar workers has increased, and more people work for small businesses.

Migration within Russia is flowing toward the big cities.

The consumer behavior seen in Moscow is quickly being adopted throughout these cities, even though earnings can be more than two times lower than in the capital. It is in these large urban areas that the Russian middle class is concentrated. Migration within Russia is also flowing to these big cities and their share of the country’s population is growing. Some cities with a population of 500,000 or more can also be included in this cluster. Tomsk, a center of learning and scientific research, is one of these, with every fifth resident a student.

The second cluster comprises the Russian oil and gas regions, which are mainly located in the north and east of the country: the Nenets, Yamalo-Nenets and Khanty-Mansi Autonomous Okrugs, and the Sakhalin Oblast. Though these have the highest local budgets and household incomes, they are very sparsely populated, accounting for only 2 percent of the Russian population. Most people who grow up in these areas decide to pursue careers in regions of the country with more favorable climates.

The third cluster consists of old industrial cities. These can have populations as small as 20,000 or as big as 500,000, but typically tend to have between 30,000 and 250,000 people. These cities include Cherepovets, Nizhny Tagil, Magnitogorsk and Naberezhnye Chelny. Even Tolyatti, with a population of more than 700,000, can be included here.

Even though not all of these medium-sized cities retained their industrial specializations after the fall of the Soviet Union, the blue-collar spirit remains strong. Employment in industry remains significant, while many people also work for the state in various bureaucratic positions. Qualifications tend to be low. Small firms find that in these cities, the more modest incomes tamp down demand, and the institutional barriers to doing business are high. Entrepreneurs with close ties to the state are nearly the only ones that can find success.

The lack of prospects for change causes a sense of malaise.

About 25 percent of the country’s population lives in this cluster. Development is limited because of archaic employment practices, low salaries and large, lumbering industrial enterprises that are inefficient and losing relevance even on the Russian market. Many of these companies are unprofitable and should have gone out of business long ago. The population of these industrial cities is rapidly declining; young people are moving to the cities in the first cluster.

The fourth development cluster consists of towns and villages on the peripheries of the more urban areas. About a third of Russians live here – though their population is heavily skewed toward the elderly and is shrinking fast. These areas are scattered throughout the country, but there are especially many of them in central and northwestern Russia, as well as in the industrial regions of the Urals and Siberia. This cluster also includes the rural populations of southern Russia.

The fifth cluster includes the national republics of the North Caucasus and southern Siberia (Tyva, Altai), in which less than 6 percent of the country’s population lives. They have both large and small cities, but there are almost no industrial ones. The urban educated middle class from these regions migrates to other areas.

In each of these clusters, people behave differently in relation to power. The first cluster is the main center of opposition activity. It is in Moscow and St. Petersburg that the largest public protests take place. In recent years, these have been severely suppressed by the authorities. Independent politicians are most active in these cities, and have even been elected to local legislative assemblies and municipal governments. In the 2019 elections to the Moscow City Duma (the city parliament), forces opposing the ruling United Russia party won 20 out of 45 seats.

In the second, oil- and gas-reliant cluster, the population is politically passive. The people there are satisfied with the socioeconomic status quo. The third, fourth and (especially) fifth clusters are places where, despite numerous social problems, the authorities hold tight control. The lack of any prospect for change causes a sense of malaise among adults and drives young people out and toward the cities of the first cluster, where they hope to find high-paying jobs and a rich cultural life.

Is Russia a federation?

According to its constitution, Russia is a federal state. However, over the past 20 years, the various parts of the federation have lost power to the central government. Some 60 percent of all collected taxes flow into the federal budget, giving the Kremlin powerful levers to exert influence, especially in those regions that depend on subsidies.

The Kremlin also has political levers it can pull. In 2004, it eliminated direct elections of regional governors. It has also pressed regions to cancel mayoral elections for major cities.

The result is a unitary state, not a federal one. The suppression of local independence has intensified the toxicity of Russia’s entrepreneurial and investment climate. Moreover, for the national authorities to manage such a huge country directly is a wildly inefficient way to govern. It has done nothing to encourage Russia’s economic clusters to converge into a common economic and social space.



If Russia continues to develop along its current political path of increasing authoritarianism, the differences described above will continue to become more pronounced. People in both large cities and rural areas will become poorer, and their quality of life will decrease. Discontent with the authorities will rise, potentially leading to a political crisis. Separatist sentiment could increase in the North Caucasus and even in the Far East, which will want to reorient itself politically and economically toward the fast-growing Asia-Pacific region.

That scenario can be avoided, but only if institutional reforms are undertaken. In particular, federalism would have to make a comeback, allowing people in Russia’s regions to have more self-determination and form their own local governments. More of the taxes collected in a particular region would need to stay there, giving local authorities the tools to implement their policies. 

Finally, it would require ensuring freedom of entrepreneurial initiative – through the decentralization of power, the reduction of corruption and relieving administrative pressure on businesses. That scenario seems less likely – but it is between these two that Russia must choose, determining its future for decades to come.

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