As has been the case with most of the world's economies, the Russian economy has been hit hard by the global financial crisis and resulting recession that became readily apparent in the last quarter of 2008. Even before the financial crisis, Russia was showing signs of economic problems when world oil prices plummeted sharply around the middle of 2008, diminishing a critical source of Russian export revenues and government funding. The crisis brought an abrupt end to about a decade (1999-2008) of impressive Russian economic growth that helped to raise the Russian standard of living and brought economic stability that Russia had not experienced for more than two decades. This success was a major factor in the popular support that former President (now Prime Minister) Putin and the current president, Dmitrij Medvedev enjoyed, and it was also arguably a factor in the boldness with which the Russian leadership reasserted Russia's status as a world power, challenging the United States, Europe, the other former Soviet states, including its military confrontation with Georgia in August 2008. Russia is showing signs of recovery in 2010 because of a government stimulus package and the rise of world oil prices, but that recovery appears to be fragile. Russia has some of the world's largest reserves of oil, natural gas and other raw materials, many of which are critical to industrialized countries. Many European countries and former Soviet states are highly dependent on Russian natural gas. Russia is a significant player on a number of issues critical to the United States, such as nuclear proliferation by Iran and North Korea. Russia's perceived national interests do not always match those of the United States, creating an environment for disagreement if not conflict. Russia is also a member of the G-8 group of highly developed economies and of the larger G-20 which has been the primary forum for the multilateral response to the global economic crisis. While U.S. exports to Russia are still relatively small, Russia is an important market to U.S. exporters of poultry, energy equipment, and technology.. Russia is also an important supplier of a number of raw materials that are critical to U.S. manufacturers. These links have drawn the attention of some Members of Congress. Congress may consider whether to pass legislation to extend permanent normal trade relations (PNTR) status to Russia. Russian economic policies and performance raise important policy questions for the United States and the U.S.-Russian relationship which this report addresses. Might Russia's robust economic growth return? Is an economically strong Russia a threat or benefit to the United States? Is Russia following economic strategies that promote a market economy that underlies the international trade system manifested in the WTO? The first seven years of Russia's transition from the Soviet central planned economy (1991-1998) were not easy. This period, which coincided with most of the regime of President Boris Yeltsin were, by most accounts, a time of economic chaos, if not near collapse and failure. During the period, Russia lost close to 30% of its real gross domestic product (GDP), a decline reminiscent of the Great Depression of the 1930s in the United States. Russia also suffered very high rates of inflation– over 2,000% in 1992 and over 800% in 1993– before it declined to more tolerable, but still high, levels of around 20% by the end of the 1990s. The inflation robbed Russian citizens of their savings as the value of the ruble collapsed, eventually forcing the Russian government to sharply devalue the ruble on January 1, 1998, with 1 new ruble equaling 1,000 old rubles. As a hedge against inflation, some residents, who were in a position to do so, invested in hard assets such as art works, foreign currencies, and real estate. But the greater portion of the population saw their savings evaporate. The disposable income (income available after taxes) of the average Russian declined 25% in real terms between 1993 and 1999. The quality of life of the average Russian deteriorated in other terms. In 1991, the life expectancy of the average Russian male was 64 years and for the average Russian woman it was 74 years. By 1999, the life expectancy had declined to 59 years for males and 72 for females. Russia did not perform much better in the foreign sector. Foreign direct investments (FDI) flows were meager given the size and needs of the Russian economy. Furthermore, Russia was incurring serious capital flight– some $150 billion worth between 1992 and 1999 by one estimate. Russian foreign debt soared in part because Russia had taken on the foreign debts of the entire former Soviet Union in an arrangement made with the other former Soviet states. However, Russia had also incurred its own foreign obligations since the collapse of the Soviet Union. The economic problems were in part a continuation of economic collapse that was a factor in the demise of the Soviet government. The problems were also in part the result of the rapid disintegration of an economic system in which the state, guided by the communist party, maintained complete control and market forces were an anathema. It was a system in which the government emphasized heavy industry production regardless of cost and to the detriment of other sectors, including agriculture, services, and consumer industries. The central planned economy also operated huge production facilities that proved to be inefficient, not very adaptable to change, often producing products of poor quality, and not competitive in world markets. However, the problems were also the product of poorly executed, if not poorly conceived, economic policies of the Yeltsin regime. The regime failed to rein in government spending as it tried to deal with the Soviet legacy of massive subsidies for industry and the population. During the period, the Russian government ran up large budget deficits that reached as high as 9.8% of GDP, forcing the government to finance debt at very high interest rates. The Yeltsin regime was also criticized for employing "shock therapy," or radical macroeconomic measures, as part of its economic reform program, largely attributed to then-Prime Minister Yegor Gaidar. Critics claimed that the measures unnecessarily created inflation and destabilized the economy because market prices were introduced too early in the reform process. The most controversial aspect of the early post-Soviet economic transition was the effort to privatize state-owned and operated production facilities, in particular, the so-called loans for shares program. In 1995, the government auctioned off to local banks shares in 29 of the most potentially lucrative firms, including major oil companies and mineral producers (Yukos, Lukoil, Sufgutneftegas, and Novolietsk Iron and Steel). The banks held the shares as collateral against which they issued loans to the government to finance its ballooning deficits. The auctions were controlled by individuals with close ties to the Yeltsin regime and whose banks won the bids. They obtained the shares at a fraction of their market value and were able to keep them when the government failed to pay back the loans. The government did not challenge their control of these assets because their owners, who became known as "oligarchs," financed Yeltsin's reelection as president in 1996. They used their new wealth to gain control over other interests such as the media. The privatization program also resulted in small and medium-sized firms owned by those who managed them during the Soviet period–the "red directors." Russia's economic problems came to a head in the financial crisis of August 1998. The crisis proved to be a pivotal event in Russia's transition to a market economy. It exposed many of the weaknesses of Russian economic policies and the need for economic reform. The crisis culminated in August 1998, when the government abandoned its defense of a strong ruble. It also defaulted on official domestic debt, forcing its restructuring and imposed a 90-day moratorium on commercial external debt payments. The crisis led to the demise of many Russian banks, owned by "oligarchs," which had held government debt. Symptoms of the crisis developed months before August: Russian interest rates soared; prices on the Russian stock market plummeted; and the value of the Russian ruble sank. (Between the end of July 1998 and the end of September 1998, the ruble lost 60% of its (nominal) value in terms of the dollar. ) In addition, foreign reserves declined sharply–between the end of July 1998 and August 1998. The reserves, including gold, dropped from $18.4 billion to $12.5 billion, and real GDP declined 4.9% in 1998. The immediate cause of the crisis was the accumulation of Russian government short-term debt in the form of Treasury bills (the GKOs) and bonds (OFZs), to finance burgeoning budget deficits. As long as the Russian government could service the debt, it managed to maintain large budget deficits without incurring inflation and was able to keep the ruble stable. But beginning in 1997 and into 1998, a number of forces came into play that placed Russia in a financially vulnerable position: World prices for oil and other commodities, on which Russia depends for much of its foreign currency earnings, plummeted, putting downward pressure on foreign currency reserves and making it more difficult to service the debt and defend the ruble. The Asian financial crisis, which occurred at the same time, made investors much more wary of holding risky short-term securities such as GKOs. Foreign economic shocks that hit a financially vulnerable Russia largely explain the suddenness of the 1998 financial crisis. But Russia became vulnerable because of more fundamental problems associated with its economic policy and economic structure. These included the failure to institute tax reform, property rights, and bankruptcy laws and procedures. Despite the setbacks, Russia made some strides toward economic reform during this period. It jettisoned the centrally planned economic system and introduced market prices for most goods and services, it made the Russian ruble convertible for trade transactions, and the economy was opened to foreign trade and investment.