Download Russian economic transformation

Russian economic transformation
Svetlana Ledyaeva
Aalto University
School of Business
Conclusions from previous lecture
“Great reforms” of Peters the Great played important role in Russia`s economic
development in 18th century.
“Great reforms” of Alexander II in the second part of 19th century has led to significant
industrialization of the Russian economy.
Bolshevik revolution was in fact inevitable - very low living standards of majority of
population.
Lenin`s state capitalism policy in 1921-1928 – very successful
Stalin terror and achievements – leader of Soviet Union from mid 1920th to 1953.
Almost 30 years! Autocrats always stay long in Russia?
Learning outcomes of this lecture
Political and socio-economic causes of Soviet Union
collapse
Russian economic transformation from central
planning economy to a market one: Economic
reforms and their consequences
Economic development of Russia in recent years:
Overview and comparison with other countries
The end of Brezhnev Era – beginning
of the collapse of Soviet system (4)
Crisis in agriculture continued in the 1980s: Necessity to buy grain in the
international market:
While the price of petroleum was high - financing the purchase of grain from
internal sources was possible.
When the price of petroleum fell in the last 1980's =>
the Soviet Union needed to borrow the funds from Western banks to
purchase the needed grain. =>
This severely restricted the international activities of the Soviet Union.
HYPOTHESIS: The reason for the decline in petroleum prices in the late
1980's: the Soviet Union invasion of Afghanistan. =>
Saudi Arabia increased its production of petroleum drastically (to punish SU)
and consequently the price of petroleum fell.
Collapse of Soviet Union and the world
price of oil (5)
”Last days” of the Soviet Union (6)
1982: Brezhnev dies and is replaced by
KGB chief Yuri Andropov.
1984: Andropov dies and is replaced by
Konstantin Chernenko.
1985: Chernenko dies and is replaced by
Mikhail Gorbachev.
Political causes of the Collapse of
Soviet Union (7)
Eastern European countries (Poland, Hungary, Czechoslovakia)
demanded reforms of communism or even did not want
communism at all.
Nationalism among Soviet satellite states, democratic
opposition movements, and economic crisis.
Mikhail Gorbachev`s role. Although his attempt to reform
communism was rejected, his reformist positions as Soviet
premier/head of government helped open the way for fullfledged political dissidence.
MIKHAIL GORBACHEV (1985-1991) (8)
His reforms hastened the end of communism.
-anti-alcohol campaign.
-the policies of OPENESS (RU: glasnost) and
RESTRUCTURING (RU: perestroika).
-1987: Signs superpower treaty with US to begin
scrapping nuclear warheads.
Collapse of the Soviet Union (9)
In just two years from 1989 to 1991:
 The Berlin Wall fell.
 The Soviet Union disintegrated.
 Marxism-Leninism was dumped unceremoniously on
the ash heap of history.
 Boris Eltsin becomes the first elected president of
Russia in 1991.
Russia in economic transition: from
1991 onwards (10)
Economic Transition of Russia (11)
Yegor Gaidar, the controversial architect of Russia's painful transition
to a post-Soviet market economy.
First actual reform program was made in March 1992
(for IMF loan) => Washington consensus:
Liberalization (price)
Stabilization
Privatization
Structural reforms
Yeltsin Russia (1991-1999)
Putin Russia (2000 – present)
versus
Washington consensus 10
prescriptions (12)
•
•
•
•
•
•
•
•
•
•
Low government borrowing. Avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies (“especially indiscriminate
subsidies”) toward broad-based provision of key pro-growth, pro-poor services like
primary education, primary health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates that are market determined and positive (but moderate) in real
terms;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with particular emphasis on
elimination of quantitative restrictions (licensing, etc.); any trade protection to be
provided by low and relatively uniform tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict
competition, except for those justified on safety, environmental and consumer
protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.
Economic transition: stages (13)
(From Joseph Stiglitz (NOBEL PL), Globalization and its Discontents,
2002 Chapter 5)
1. Shock Therapy (Strongly voiced by US and IMF):
• First round: Instantaneous price liberalization -- prices freed overnight in
1992. Resulting inflation wiped out savings. First mistake. Capital was
used up.
• Prices for natural resources were kept low. People got rich through rent
seeking. – Buying oil in Russia and selling it in the West.
• Second Round: Stabilization to reduce inflation. Tightened monetary
policy by raising interest rates => huge drop in production output; increase
of unemployment.
• Third Round: Privatization – supposed to bring about positive
restructuring of the economy. But this never occurred.
Hyperinflation in Russia, %/year (14)
1000
900
943.76
874.62
822.1
800
700
600
Inflation in producer prices
500
Inflation in consumer prices
Inflation in the wage level
400
337
307.38
300
255.9
200
236.46
197.41
64.8
142.2
47.57
100
51.21
0
1993
1994
1995
1996
Stages of privatization (15)
Pre-privatization (commercialization) stage late 1980s-1992
Mass Privatization (I) 1991-1994
– Voucher privatization
Cash privatization or Loans for Shares (II) 1994-1997
– Sales of larger, high-value enterprises to
financial/industrial groups.
– Loans for shares.
Voucher privatization (16)
Anatoli Chubais – responsible for
Privatization in Russia.
Each voucher nominal value was
10,000 Russian rubles (175 USD):
issued in 1992. Duration: 3 years.
Every Russian citizen –
one voucher for free.
Vouchers could be used to buy shares of enterprises, voucher
investment funds or could be sold.
Cash privatization (17)
Loans for shares:
Government transfers to banks – for temporal control (5 years) – stock
of shares of large companies.
In exchange for low-interest loans to the government due to 2000 (can
be used for budget expenditures).
During 5 years – the government must sell secured shares and return
loans to banks or  Ownership of many important enterprises was
turned over to the banks.
Economic reason – budget crisis.
Privatization (18)
(From Joseph Stiglitz, Globalization and its Discontents, 2002 Chapter 5)
Privatization led to asset stripping/robbing, not
wealth creation:
• Pressured by US, World Bank and IMF to privatize quickly, state
turned over its assets for a pittance and did so before effective
tax system was in place.
• Thereby created a powerful class of oligarchs and businessman
who siphoned off funds and deposited them in Swiss bank
accounts.
• Russian government borrowed billions from IMF, yet, unable to
pay pensions or welfare payments.
Structural reforms (19)
(From Joseph Stiglitz, Globalization and its Discontents, 2002 Chapter 5)
Radical restructuring failure:
• After 1989, GDP in Russia fell year after year.
Recession has lasted over a decade.
• 1990-1999: Russian industrial production fell
by almost 60% and GDP fell 54%.
The failed transition (20)
(From Joseph Stiglitz, Globalization and its Discontents, 2002 Chapter 5)
Russia transformed from industrial country to natural resource
exporter.
Consensus that most people experienced a marked decline in their
basic standards of living.
Though:
Main market institutions have been established.
Public versus private sector (enterprises` statistics):
100
80
60
Private
40
Municipal
State
20
0
1996
2001
2002
2003
2004
2005
2006
August 1998 crisis: background (21)
Reasons:
 Declining productivity;
 Artificially high fixed exchange rate between the rouble and foreign currencies to
avoid public turmoil;
 Chronic fiscal deficit.
Reasons according to the IMF:
(1) weak economic fundamentals, especially in the fiscal area;
(2) unfavorable developments in the external environment, including contagion effects
from the Asian financial crisis and falling prices for key export commodities such as oil;
(3) its “vulnerability to changes in market sentiment arising from the financing of
balance of payments through short-term treasury bills and bonds placed on
international markets”.
August 1998 crisis: Chronicle (22)
August 13th, 1998: The Russian stock, bond and currency markets collapse.
August 17th, 1998:
• A significant devaluation of the ruble;
• A default on short-term Treasury Bills known as GKOs, as well as longerdated ruble denominated bonds named OFZs;
• A 90-day moratorium on payments by commercial banks to foreign
creditors.
September 2nd, 1998 The Russian Central Bank’s removes the currency
corridor and makes the ruble a freely floating currency.  sharp depreciation
of the ruble  high inflation  social unrest.
August 1998 crisis: some data facts
(23)
August 1998 crisis (24)
Video:
https://www.youtube.com/watch?v=GJUArcO18
GM
Part 2: Russia`s recent economics development:
brief overview (25)
Main social and macroeconomic
indicators (26)
Indicator
1992
Population, million
people
Unemployment rate,
%
2000
2005
2009
2010
2011
2012
2013
2014
2015
148,6
146,3
143,2
142,8
142,9
143
143,3
143,7
146,3
(including
Crimea)
146,5
(including
Crimea)
5,2
10,6
7,1
8,3
7,3
6,5
5,5
5,5
5,2
5,6
5,8
(January
2016)
132,7
178,2
213,3
479,8
466,3
488,5
538,9
636,4
728,9
599
515,3
(prelimin
ary)
37
69
28
37
31
27
27
32
57
81
281
564
615
660
756
789
493
Foreign debt, billion
USD
(1 January of the
year)
% of GDP
Average per capita
income of
population, USD
10
1996
2016
Main social and macroeconomic
indicators: cont. (27)
Indicator
1970
1980
1990
Oil mining (incl. gas
condensate), million
tons
285
547
Gas mining, billion
cube meters
83,3
254
2000
2005
2009
2010
2011
2012
2013
2014
2015
516
324
470
495
505
512
519
522
527
(VEDOMOSTI.
RU)
534,08
(RBK.RU)
641
584
641
584
651
671
655
668
640
(INTERFAX.RU)
635
(RBK.RU)
38,3
52,2
149,2
190,2
260,7
346,5
368,9
372
346,1
% of GDP
11
20
20
15
17
19
18
18
27
% of total
43
51
62
63
66
67
70
71
70
Export: Mineral
fuels, lubricants and
related materials,
billion USD
export
1996
GDP in Russia in 1989-2014 (28)
% to previous year (based on
GDP at market prices, current
billion USD)
GDP at market prices (current
billion US$)
50
40
2500
2000
1500
1000
500
0
37
33
30
25
20
18
10
2930 31 28
2525
13
6 3
2 0
0 -1 3
-5 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
1994
-9
-10 1990 1992-11
-11
-20
-26
-28
-30
-33
-40
0
1989199119931995199719992001200320052007200920112013
GDP growth (annual %, constant 2005 USD)
15
10
10
6
5
0
-5
-10
-15
-20
1
5
5
7
7
6
8
9
5
5
4
3
1
1
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-5
-5
-3
-4
-8
-4
-9
-15
-13
Resent economic trends in Russia (29)
• The Russian economy has grown impressively since 1999 and, by some
measures, has been one of the fastest growing economies in the world in
recent decade before 2014.
 1999-2008 – Average growth rates 7% - Russia has never had a decade like
this.
 Dramatic improvement in fighting poverty => explains Putin`s popularity.
• The growth has brought an improvement in the standards of living of the
average Russian citizen and has brought economic stability that Russia
had not experienced in at least a decade.
 Putin centralized government, reduces accountability and limits freedom.
 But public is satisfied with income growth.
What is behind the Russian economy rapid growth in
recent years before 2014? Macroeconomic policy (30)
Conservatism in the area of expenditures
Formation of stabilization/reserve fund
Protection of the Central Bank from lobbyists of
inflationary financing
(Konstantin Sonin livejournal)
Crisis of 2009 (31)
• Oil prices and financial squeeze.
• Plus few policy mistakes (e.g. delayed
devaluation).
• Recovery in 2010-2011 – growth of 5% .
• Stagnation – structural nature or cyclical nature?
Structural nature: External problems – global
slowdown.
(From Sergei Guriev public lecture)
What is behind the Russian economy rapid growth
in recent years? Energy prices (32)
GDP growth rates in 2007 (33)
GDP growth rates in 2009 (34)
GDP growth rates in 2014 (35)
Russian GDP by component, billion
USD (36)
162.6
123.1
475.9
344.9
343.8
146.3
501.3
378.6
123.2
474.4
133.0
378.3
409.0
363.0
285.5
104.6
153.4
128.9
777.7
925.5
1005.8
1089.0
991.1
2011
2012
2013
2014
376.6
2005
2010
Government consumption
Non-profit organizations which serve households
Gross domestic capital formation (Investment)
Net export
Russian GDP by component, % (37)
14
8
9
7
6
20
23
25
25
23
7
20
17
19
18
19
20
20
49
51
49
50
52
53
2005
2010
2011
2012
2013
2014
Net export
Gross domestic capital formation (Investment)
Non-profit organizations which serve households
Government consumption
Household comsumption
GDP by component, country
comparison, % (38)
Russia
(2015
est.)
USA
(2015
est.)
Finland
(2015
est.)
Germany
(2015
est.)
Household consumption
54,1
68,4
55,3
54,1
Government consumption
19,1
17,7
24,4
19,4
Investment in fixed capital
21,7
16,2
20,4
20
Investment in inventories
-3,4
0,6
0,3
1,3
Export of goods and services
29,8
12,6
36,6
46,9
Import of goods and services
-21,2
-15,5
-37,1
-39,1
Doing business indicators (39)
Country
New Zealand
Singapore
Denmark
Hong Kong SAR China
Korea Rep
Norway
United Kingdom
United States
Sweden
Macedonia FYR
Kazakhstan
Romania
Belarus
Armenia
Bulgaria
Russian Federation
Hungary
Belgium
Croatia
Moldova
Cyprus
Haiti
Angola
Afghanistan
Congo Dem Rep
Central African Republic
South Sudan
Venezuela RB
Libya
Eritrea
Somalia
Ease of Doing Business Rank
1
2
3
4
5
6
7
8
9
10
35
36
37
38
39
40
41
42
43
44
45
181
182
183
184
185
186
187
188
189
190
Doing business in Russia (40)
Resolving Insolvency
Enforcing Contracts
Trading across Borders
Paying Taxes
Protecting Minority
Investors
Getting Credit
Registering Property
Getting Electricity
Dealing with Construction
Permits
Starting a Business
Ease of Doing Business
Rank
Country
5345 140 12 51
9 44
115 30
40 26
Russia
Economic freedom index of Heritage
foundation (41)
Country Name
Hong Kong SAR
Singapore
New Zealand
Switzerland
Australia
Canada
Chile
Ireland
Estonia
United Kingdom
United States
Tajikistan
Haiti
Nepal
Lesotho
Russia
Algeria
Lao P.D.R.
Angola
Belarus
Burma
Zimbabwe
Venezuela
Cuba
Korea, North
2016 Score
GDP per Capita (PPP)
88,6
87,8
81,6
81,0
80,3
78,0
77,7
77,3
77,2
76,4
75,4
51,3
51,3
50,9
50,6
50,6
50,1
49,8
48,9
48,8
48,7
38,2
33,7
29,8
2,3
$54 722
$82 762
$35 152
$58 087
$46 433
$44 843
$22 971
$49 195
$26 999
$39 511
$54 597
$2 688
$1 750
$2 376
$2 764
$24 805
$14 259
$4 987
$7 203
$18 161
$4 706
$2 046
$17 695
$11 950
N/A
Economic freedom index of Heritage
foundation, Russia (42)
2016 Score
Property Rights
Freedom from Corruption
Fiscal Freedom
Gov't Spending
Business Freedom
Labor Freedom
Monetary Freedom
Trade Freedom
Investment Freedom
Financial Freedom
20,0
27,0
82,2
56,2
72,2
57,6
62,9
72,4
25
30
Country Name
50,6
Russia
Foreign Direct Investment into Russia
(43)
FDI Inward Flow (million USD)
2013
2014
2015
53,397
29,152
9,825
55
34
% to previous year
FDI Stock (million USD)
471,474
284,1
258,402
Number of Greenfield Investments
328
182
201
FDI Inwards (in % of GFCF*)
FDI Stock (in % of GDP)
11.8
21.1
6.7
14
3.4
19.5
*Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets
Purchased By Business
Russia in the world: developing,
transition or developed? (44)
According to IMF report 2011: Russia belongs to a group of emerging
and developing economies.
BRIC: Brazil, Russia, India, China:
are all deemed to be at a similar
stage of newly advanced
economic development.
Developed: highly educated population; Russia is one of the world's
five officially recognized nuclear powers.
Developing: polarization of wealth and poverty; high dependence on
natural resources.
Russia and other emerging economies (45)
Emerging economies
Developing countries
BRICS: Brazil, Russia,
India, China, South Africa
Transition countries
Post-socialist,
Post-Soviet
republics (Russia)
Open questions
Which type of country is Russia in your opinion?
Developing, transition or something else?
In which aspects you would characterize Russia
as a developing country? As a transition
country?