Download Gaddy, Dean, “Russian oil major Yukos implements western

Macroeconomic Growth in the
Aftermath of Sovereign Debt Default:
Neoliberal Financial Infrastructure and Emerging Market Investment in
Russia, 1999 – 2005
Sona Mkrttchian
Source: Reuters
Primary Thesis Advisor: Professor Jonathan Eaton
Department of Economics, Director of Rhodes Center for International Finance
Secondary Thesis Advisor: Professor Linda Cook
Departments of Political Science and Slavic Studies
Honors Seminar Instructor: Professor Claudia Elliott
Watson Institute for International Studies
Senior Thesis
Submitted in partial fulfillment of the requirements for the Degree of Bachelor of Arts with
Honors in International Relations
BROWN UNIVERSITY
PROVIDENCE, RHODE ISLAND
MAY 2015
© Copyright 2015 by Sona Mkrttchian
This thesis by Sona Mkrttchian is accepted in its present form
by the International Relations Program as partial fulfillment
of the requirements for the degree of Bachelor of Arts with Honors.
Date
Jonathan Eaton, Thesis Advisor
Date
Linda Cook, Second Reader
Approved by the International Relations Program
Date
Claudia Elliott,
Associate Director,
International Relations Program
ii
iii
ABSTRACT
This thesis explores whether there should be greater regulation and supervision of
international capital flows given an increase in the prevalence of financial crises in socalled “emerging” economies. To answer this question, I process trace a case study of the
Russian Federation’s 1998 debt default to determine the variables that led to the
macroeconomic growth recorded in the aftermath of the decision to default on debt
accumulated in the GKO-OFZ market. Traditional explanations of the aftermath of
sovereign default explain market mechanisms through which restructured payments are
enforced given a lack of international legal infrastructure. But these models do not test
well across the “emerging market” economies of the 1980s and 90s. In the “emerging
market” model, global capital flows stimulate economic growth—defined through output,
borrowing costs, and trade flows—that offset projected penalty losses. I process trace the
Russian case empirically from 1999 to 2005 in order to prove my argumentative
framework that three critical junctures fused to create a political-industrial complex under
the Putin administration that generated foreign investment above and beyond the
potential market penalties. My findings suggest the international system should
incorporate formal architecture to protect global lenders and diffuse the quantity of debt
defaults.
Keywords: Emerging Markets, Sovereign Debt Default, Market Transition, Russia,
Neoliberalism
iv
ACKNOWLEDGMENTS
First and foremost, I would like to thank my advisors, Professor Jonathon Eaton and
Professor Linda Cook, for investing their time and energy in this project. Your
commentary and guidance proved extremely valuable over this past year as I endeavored
to take a rough idea and turn it into a full thesis.
Thank you to Dr. Claudia Elliott, Mrs. Carina Courneyer at the Brown University
Library, and Mr. Hugh Truslow at the Davis Center for Russian and Eurasian Studies at
Harvard University for your help as I crafted and implemented my research design. I
learned a significant amount about methodology in the social sciences through working
with you all.
And finally, thank you to my family and friends for sticking by me as I navigated my way
through to the end of this project. I particularly want to thank my parents, who allowed
me the time and space to think through this project, and so many others, during my time
at Brown.
v
CONTENTS
Abstract………………………………………………………………………………….. iv
Acknowledgments……………………………………………………………………….. v
Figures…………………………………………………………………………...……... vii
Tables………………………………………………………………………………….. viii
Glossary…………………………………………………………………………………. ix
Chapter One: THE EMERGED ORDER………………………………………………... 1
Chapter Two: WHAT IS SOVEREIGN DEBT DEFAULT?…...…………………….... 27
Chapter Three: RUSSIA’S MARKET TRANSITION…………………………………. 49
Chapter Four: THE AFTERMATH OF CRISIS……………………….………………. 74
Chapter Five: COUNTERFACTUAL ANALYSIS……………….………..……….... 120
Chapter Six: CONCLUSION………………………………………………………..... 139
vi
FIGURES
Figure
Page
1.1 — Credit Market Activity in Brazil, Russia, India, and China, 2007 – 2012;
Asian Credit Markets, Global Credit Markets
2
1.2 — Russian GDP, 1995 – 2007
4
1.3 — Russia’s Post-Default Framework
6
1.4 — Research Method
18
3.1 — Federal Tax Arrears, 1995 – 1998
61
4.1 — Average Monthly GKO Yields, 1997 – 1998
76
4.2 — Process Tracing Default Outcomes
81
4.3 — Levels 1 and 2 of Post-Default Framework
81
4.4 — Total Oil Production, 1992 – 2012
114
4.5 — Total Oil Reserves, 1992 – 2012
115
5.1 — Counterfactual GDP, 1998 – 2005
133
5.2 — Russian Imports and Exports (Counterfactual), 1998 – 2005
134
5.3 — GKO Yields, 1996 – 1997
138
vii
TABLES
Table
Page
1.1 — Research Sources
22
2.1 — Categorizing Financial Crises
28
2.2 — Potential Costs of Sovereign Debt Default
40
3.1 — Money Supply and Price Level in Russia, 1993 – 1998
56
3.2 — Exchange Rate (Ruble-Dollar), 1991 – 1998
58
3.3 — GKO Market Revenues, 1994 – 1998
65
3.4 — Russian Oil Industry Organization
68
3.5 — FDI in Russia, 1995
71
4.1 — 1998 Macroeconomic Overview
79
4.2 — Prime Ministers of the Yeltsin Administration
84
4.3 — 1999 Macroeconomic Overview
95
4.4 — Russia’s Reformed Tax Code
102
4.5 — Macroeconomic Summary, 2000 – 2002
103
4.6 — Yukos Financial Summary
109
4.7 — Sibneft Financial Growth, 2000 – 2002
110
4.8 — Rosneft Financial Summary, 2000 – 2003
112
4.9 — Brent Oil Spot Prices, 1997 - 2005
114
4.10 — Macroeconomic Summary, 2003 – 2005
118
4.11 — International Investment, 1997 – 2004
119
5.1 — OECD Projections, December 1998
122
5.2 — OECD Projections, December 1999
122
5.3 — Yeltsin’s Fiscal Regime
128
5.4 — Counterfactual GDP Calculation
130
5.5 — Calculated Magnitude of Output Cost
132
viii
5.6 — Calculating Trade Flows
133
5.7 — Russian Foreign Trade (Counterfactual)
134
5.8 — Calculating Borrowing Costs
136
GLOSSARY
Macroeconomic indicators of output1
Gross domestic product (GDP) — total value of production of all new goods and services
in an economy over a fixed period of time and is most often measured per year
Exchange rate (FX) — ratio between the values of two currencies and is determined on
the international exchange market
Purchasing power parity (PPP) — measures the equality of values for goods in two
countries and can be used to construct a PPP exchange rate, which is calculated as a
compliment to FX rates and provides a better perspective on real spending — the
purchasing power of one unit of currency rather than its nominal value — in an economy.
Rate of exports to imports — ratio between goods traded out of a country to goods traded
into a country
Value of exports over time — cumulative nominal worth, adjusted for inflation, of a
country’s exports over a stated span of time
Current Account— a record of a country’s balance of payments in terms of trade and
foreign investment capital
1
Nigar Hashimzade, Gareth Donald Myles, and John Black, A Dictionary of Economics, OUP
Catalogue (Oxford University Press, 2012).
ix
CHAPTER ONE
THE EMERGED ORDER
Over the next few decades, the growth generated by the large developing
countries, particularly the BRIC’s (Brazil, Russia, India, and China) could become
a much larger force in the world economy than it is now—and much larger than
many investors currently expect.
— Goldman Sachs, “Dreaming with the BRICs: the Path to 2050”
Flows of private investment to the emerging market economies (EMEs) were
projected to exceed $1 trillion for the year by the end of 2014.1 These capital flows —
even accounting for the Great Recession — are rising,2 following a trend that began in
the 1980s. Figure 1.1 illustrates the significant growth in activity in global credit markets
from 2007 to 2012.
Investment in countries identified as “emerging” economies has correlated with a
string of debt defaults—the failure of a nation’s government to repay sovereign debt to
foreign lenders. Prominent examples include Mexico in 1982,3 Russia in 1998,4 and
Argentina in 2001.5 In response to such financial crises, the International Monetary Fund
has issued nine separate “bailout” loans—allowing the sovereigns to maintain short-term
solvency and economic stability, while also limiting the potential global impact of default
1
Felix Huefner, Robin Koepke, Sonja Gibbs, and Emre Titfik, “Capital Flows to Emerging Market
Economies,” Institute of International Finance, (June 26, 2013), 3.
2
“Sleepless nights,” The Economist, (Nov 9, 2013).
3
Ross Buckley, Emerging Markets Debt: An Analysis of the Secondary Market, (Kluwer Law International,
1999) 57-62; Ibid, 186-200.
4
Vladimir Tikhomirov, The Political Economy of Post-Soviet Russia, (St. Martin’s Press, 2000), 254-255.
5
Buckley, 186 – 200.
1
realization6—between 1980 and 2001, amounting to approximately $300 billion of aid to
the EMEs.7
Figure 1.1 Credit Market Activity in Brazil, Russia, India, and China, 2007 – 2012; Asian
Credit Markets; Global Credit Markets
Source(s): Serkan Arslanal and Takahiro
Tsuda,“Tracking Global Demand for
Emerging Market Sovereign Debt,”
International Monetary Fund, (2014), 46.
6
“Bailout,” The New Palgrave Dictionary of Economics Online,
http://www.dictionaryofeconomics.com/resources/default/bailout; Giovanni Dell’Ariccia, Isabel Schnabel,
and Jeromin Zettelmeyer, “How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?,”
Journal of Money, Credit and Banking 38, no. 7 (October 1, 2006), 1689–1714.
7
“IMF Lending Arrangements as of April 30, 2013,”
http://www.imf.org/external/np/fin/tad/extarr11.aspx?memberKey1=ZZZZ&date1key=2013-04-30.
2
According to one study,8 the period defined as 1980 to 2000 endured over twice
the number of financial crises as the “Bretton Woods”9 era after the Second World War
(1944 – 1973), and saw more than three times the number of financial crises as the period
stretching from 1880 until the Great Depression.10 The prevalence of crises, and the
shortening periods of stability between them,11 raises fundamental questions about the
current infrastructure supporting global flows of capital.
Investment in EME’s has also, at times, generated growth in those economies12 by
increasing the productive capacity of those nations receiving the capital. But the
prevalence of crises motivates the study of emerging market investment to better
understand how the international community might pursue supervision and potential
regulation of these flows. Through preventative infrastructure, the international
community can begin to curb the shocks stemming from crises, which include massive
economic shifts in production, inflation, and employment rates. The currently accepted
disincentive associated with a debt default, which will be substantiated further in the
8
Authors define financial crises as “episodes of financial-market volatility marked by significant problems
of illiquidity and insolvency among financial-market participants and/or by official intervention to contain
those consequences.”
9
A reference to the international monetary regime organized at the Bretton Woods conference in 1944. The
regime was dissolved in 1973; Benjamin Cohen, "Bretton Woods System,” Routledge Encyclopedia of
International Political Economy,(Taylor & Francis, 2001).
10
Michael Bordo, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Martinez-Peria, “Is the
Crisis Problem Growing More Severe?,” Economic Policy, no. 32 (April 1, 2001), 51.
11
Carmen Reinhart and Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly,
(Princeton: Princeton University Press, 2009), 83.
12
Reuven Glick, Ramon Moreno, and Mark Spiegel, “Financial Crises in Emerging Markets: An
Introductory Overview,” Financial Crises in Emerging Markets, (Cambridge University Press: 2001), 1–2.
3
subsequent literature review, is predicted to be relatively long-lasting; a 2013 study by
economists at the Bank of England shows that the “average mean length of crisis (in
years)” following the onset of a debt default is 3.2, while a default combined with
associated economic shocks—as was notably the case during Russia’s triple crisis in
1998 that included a debt default, currency crisis, and banking crisis—could last, on
average, over 8 years.13
In this thesis, I explore the apparent contradiction between theory in political
economy that suggests short-to-mid term costs in the aftermath of sovereign debt default
and the decade of macroeconomic growth logged in Russia in the aftermath of its 1998
financial crisis. Figure 1.2 traces the growth in terms of GDP. What variables explain the
recorded growth in Russia following the debt default? Through a close analysis of the
current literature combined with a contextualized case study of Russia from 1999 to
2005, I add to the current understanding on costs of sovereign financial crises implied by
the current era of international financial infrastructure.
Figure 1.2 Russian GDP, 1995 – 2007
Annual GDP (millions of rubles)
35000.0
30000.0
25000.0
20000.0
15000.0
10000.0
5000.0
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
13
Bianca De Paoli, Glenn Hoggarth, and Victoria Saporta, “Output Costs of Sovereign Default,” Sovereign
Source(s):
Goskomstat.
Debt,
ed Robert
Kolb (John Wiley and Sons: 2013), 27-29.
4
I argue that Russia’s political-industrial complex, illustrated below in figure 1.3,
arose as a reaction to the market transition of the 1990s. This policy framework arises
within the context of President Vladimir Putin’s administration and the notable state
building and overturn of neoliberal policymaking of the first Russian President, Boris
Yeltsin. Here, I define neoliberalism in contrast with Keynesian economics.
Neoliberalism, many scholars argue, represents the shift in political economic ideology
during the second-half of the 20th century away from the Keynesian focus on government
guidance of markets toward a free-market model that protects private interests over the
state agenda.14 The post-default framework synthesizes the main forces—explored in
detail in Chapter Four—that developed Russia’s “political-industrial complex.” President
Putin’s domestic political regime combined with the influence of a surge in global energy
prices created a natural resource-fueled economy for Russia with a simplified, productive
fiscal code and direct state involvement in the energy sector. I argue that this politicalindustrial complex generated foreign investment for the Russian “emerging market,” and,
thereby, offset the potential costs associated with sovereign debt default. My post-default
framework, figure 1.3, is comprised of three levels. The bottom levels are the two
baseline shifts in domestic policies and global markets that feed into the second level,
which is the “political industrial complex.” The third level is the foreign investment that
14
The Rise of Neoliberalism and Institutional Analysis. Edited by John L. Campbell and Ove K. Pedersen.
Princeton University Press, 2001; Christopher Payne, The Consumer, Credit and Neoliberalism :
Governing the Modern Economy, Routledge Frontiers of Political Economy, (Routledge, 2012); Dic Lo,
Alternatives to Neoliberal Globalization : Studies in the Political Economy of Institutions and Late
Development, (Palgrave Macmillan, 2012).
5
this dynamic generates. In turn, the foreign investment reinforces the political industrial
complex.
Figure 1.3 Post-Default Framework
The post-default framework synthesizes the political economic movements that developed
into what I call the “political-industrial complex” under Putin—the main driver of
foreign investment in Russia at the turn of the century.
The past two decades of financial globalization show that the EM trend is
continuously reinventing itself, as neoliberal economic theory and its open-market
politics develop across burgeoning market economies. Assuming that investment in the
emerging markets continues in today’s neoliberal financial markets, it is important to
understand how the extension of this specific global financial order to developing
economies has affected current understandings of sovereign debt.
6
After the series of defaults through the turn of the century, economist Barry
Eichengreen commented that future research on financial crises should aim to guide the
next wave of emerging economies in order to apply lessons learned from previous waves.
It is the [sic] future generation of emerging markets—countries that have
not yet “emerged” financially but which will figure increasingly
prominently in international financial markets going forward—whose
needs must be addressed in order to safeguard financial stability.15
This chapter began with the most recent statistics on global capital flows—direct
evidence that investment in the emerging markets is not projected to slow down in the
short term, justifying the need for a better understanding of how such flows affect
investment destinations. Understanding the role this type of investment played in Russia,
I argue, will help define how economists, political scientists, and policymakers begin to
reanalyze decision-making during the 21st century.
DEFINING KEY IDEAS
Investment in the emerging markets traces back to the International Finance
Corporation at the beginning of the 1980s, during which time financier Antoine Van
Agtmael coined the term “emerging market” to describe a country whose growth
indicated a trajectory toward economic congruence with the largest, highest-producing
15
Barry Eichengreen, Financial Crises: And What To Do About Them (Oxford: Oxford University Press,
2002), 7.
7
nations — the United States and United Kingdom, most prominently.16 Van Agtmael’s
emerging market theories, along with those of investors and scholars inspired by his
hypothesis, preceded trillions of dollars in private investment from Western financial
hubs into EMEs.
Following the current convention in empirical research on sovereign debt default,
I use Carmen Reinhart and Kenneth Rogoff’s definition of financial crisis, which they
describe as an economic shock stemming from either a qualitative or quantitative crisis
marker, categorizing across instances of inflation, currency crisis, debasement, banking
crisis, or default. Given the scope of the Russian case in 1998, this thesis addresses
currency and banking crises, which are explored further in the subsequent chapter, but
focuses specifically on instances of debt default— a financial crisis incited by a
sovereign’s inability to make payments on liabilities associated with foreign creditors and
typically associated with financial products denominated in foreign currency.17
The aforementioned private flows of capital are the sum of both foreign direct
investment and portfolio investment. Foreign direct investment is investment across
borders through which the resident of one economy purchases an interest in an enterprise
of the foreign economy. FDI arrangements create “lasting interest” given the potential for
direct management by foreign investors.18 In contrast, portfolio investment is speculative
in nature, including purchase of assets wherein an investor has a vested interest in
16
Jason Zweig, “Here Comes the Next Hot Emerging Market: the U.S.,” The Wall Street Journal, (April
2013).
17
Reinhart and Rogoff, 3-20.
18
“Foreign Direct Investment in Emerging Market Countries,” International Monetary Fund: Capital
Markets Consulting Group, (September 2003), http://www.imf.org/external/np/cmcg/2003/eng/091803.pdf.
8
creating profit through the resale of the asset at a higher price in a future period or
through the collection of interest on a long-term fixed income product.19 I focus on both
portfolio and FDI investment given a direct relationship between the two flows in
emerging market economies.20
SIGNIFICANCE
Theoretical Significance
This thesis contributes to economic and political theory on the costs and
conditions associated with sovereign debt default. Though still a relatively young subfield
of study, the current literature on default costs can be divided into penalty costs,
reputational costs, and output costs. In recent years since the string of EME debt defaults,
researchers have focused on empirically testing the theory of the 1980s.
The two most notable, and entrenched, theories on sovereign debt default,
including costs, were completed in the 1980s — one paper by Jonathon Eaton and Mark
Gersovitz21 in 1981 and another from Jeremy Bulow and Kenneth Rogoff that was
19
Deardorff, 276.
20
Reuven Glick and Michael M. Hutchison, Banking and Currency Crises: How Common Are Twins?,
EPRU Working Paper Series (Economic Policy Research Unit (EPRU), University of Copenhagen.
Department of Economics), accessed December 13, 2014, https://ideas.repec.org/p/kud/epruwp/99-20.html;
Glenn Hoggarth, Ricardo Reis, and Victoria Saporta, “Costs of Banking System Instability: Some
Empirical Evidence,” Journal of Banking & Finance 26, no. 5 (May 2002): 825–55, doi:10.1016/S03784266(01)00268-0; Daniela Klingebiel and Luc Laeven, Managing the Real and Fiscal Effects of Banking
Crises (World Bank Publications, 2002).
21
Jonathan Eaton and Mark Gersovitz, “Debt with Potential Repudiation: Theoretical and Empirical
Analysis,” The Review of Economic Studies 48, no. 2 (April 1, 1981): 289–309, doi:10.2307/2296886.
9
published in 198922. Unlike in a case of private bankruptcy, a case of sovereign default is
not associated with any law forcing a sovereign nation into repayment. Eaton and
Gersovitz model the potential output effects — including reputational costs such as the
costs of being locked out of capital markets – that implicitly persuade sovereigns to repay
debt holders. Bulow and Rogoff suggest, instead and in line with the penalty perspective,
that creditors actually do have legal rights to repayment in the lending country, meaning
that lenders can petition in court to seize a sovereign’s foreign assets in the lending
country. In a 2014 study, economists Carmen Reinhart and Kenneth Rogoff suggest that
the main difference between these two paradigms is not in magnitude but rather in the
policy implications that each inspires.23 In principle, both determine there are
international costs associated with sovereign debt default in an era of global capital.
Give the string of defaults across EME’s, scholarship since 2002 has been reinspired with two dozen studies on the short-term effects on output,24 as measured
through GDP— which remain more widely studied25 than the medium-term effects that
have received relatively less attention in the literature. This thesis presents evidence
22
Jeremy Bulow and Kenneth Rogoff, “Sovereign Debt: Is to Forgive to Forget?,” The American Economic
Review 79, no. 1 (March 1, 1989): 43–50.
23
Reinhart and Rogoff, 56-57.
24
Ugo Panizza, Federico Sturzenegger, and Jeromin Zettelmeyer, “The Economics and Law of Sovereign
Debt and Default,” Journal of Economic Literature 47, no. 3 (2009): 651–98; Michael M. Hutchison and
Ilan Neuberger, "How Bad Are Twins? Output Costs of Currency and Banking Crises," EPRU Working
Paper Series 02-09, Economic Policy Research Unit (EPRU), (University of Copenhagen. Department of
Economics); Poonam Gupta, Deepak Mishra, and Ratna Sahay, "Behavior of output during currency
crises," Journal of International Economics vol. 72(2), 428-450; Abdul Abiad, Petya Koeva Brooks, Irina
Tytell, Daniel Leigh, and Ravi Balakrishnan, "What’s the Damage? Medium-Term Output Dynamics After
Banking Crises," International Monetary Fund.
25
Panizza, Sturznegger, and Zettelmeyer, 651 - 652.
10
across both timeframes in order to build upon the intricacies. These studies, as a general
category, build upon the work of Eaton, Gerosovitz, Reinhart, and Rogoff, offering
applied statistics that are incorporated into my research design. These quantitative tests
explain how crises materialize ex-ante and how far their ramifications—in terms of
output, re-entry into international capital markets, amongst other factors—extend ex-post.
The major variables under analysis are categorization, terms of inciting event and sectors
affected, duration, and macroeconomic costs. I add to this more recent body of research
by testing the theoretical models across the 1998 Russian case. My work is differentiated
from the preceding literature in its methods and case selection.
I approach this evolving discussion from the perspective of historical
institutionalism, building off the baseline in current understanding on domestic growth
fleshed out by economists including Daron Acemoglu and James Robinson.26 In the
social sciences, historical institutionalism is a research perspective, which posits that
sovereign nations follow a determined path once the relevant actors have boarded and
invested in that path.27 I accept this “path dependency” perspective with the added
stipulation of “critical juncture” theory28 that suggests a path is either derailed or reset
given the influence of major moments and decisions. Through assuming this perspective,
26
Daron Acemoglu, Simon Johnson, and James A. Robinson, “The Colonial Origins of Comparative
Development: An Empirical Investigation,” The American Economic Review 91, no. 5 (December 1, 2001):
1369–1401; Daron Acemoglu and Simon Johnson, Unbundling Institutions, (National Bureau of Economic
Research, September 2003), http://www.nber.org/papers/w9934.
27
Kathleen Thelen, “Historical Institutionalism in Comparative Politics,” Annual Review of Political
Science 2, no. 1 (1999): 369-404, doi: 10.1146/annurev.polisci.2.1.369; B. Guy Peters, Jon Pierre, and
Desmond King, “The Politics of Path Dependency: Political Conflict in Historical Institutionalism,” The
Journal of Politics 67, no. 04 (2005): 1275-1300.
28
Ruth Berins Collier and David Collier, Shaping the Political Arena: Critical Junctures, the Labor
Movement, and Regime Dynamics in Latin America (Notre Dame, Ind: University of Notre Dame Press,
2002), 31.
11
I reinforce the importance of historical progression and context in identifying socially
constructed dynamics in economics.
I take on this perspective to critically analyze existing theory on costs and also to
tackle the issues of macroeconomic growth in emerging market economies. I argue for
recognition of the critical junctures evident in the Russian case that distort the empirical
away from the predicted outcomes. First, the ascent of current President Vladimir Putin
and the associated shifts in the political economic policy strictly away from the precedent
of Boris Yeltsin’s administration lead to shifts in industrial organization of Russian
sectors—the most prominent example being the energy sector—, as well as foreign
expectations of stability given consolidation of power. Putin’s overturn of the roughly
neoliberal order in Russia during the market transition in conjunction with the
international rise of prices in the energy markets comprise the base level of my argued
post-default framework, feeding into an overall political industrial complex that breeds
international investment, allowing for positive flows that offset the predicated declines in
the aftermath of default.
This thesis takes on an institutionalist perspective. In opposition to the classical
take on economic growth that preaches the importance of investment in physical and
human capital29, contemporary economics preaches the importance of strong, nonextractive domestic-level institutions as a stepping-stone toward the classical growth
ideals.30 This thesis explores both the institutional story for domestic-level growth
29
Robert Solow, “Technical Change and the Aggregate Production Function,” The Review of Economics
and Statistics, no. 3 (August 1, 1957), 312-320, doi:10.2307/1926047.
30
Daron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity and
Poverty. (New York: Crown, 2012).
12
through international financial architecture, positing that these two narratives are
inherently interconnected in today’s globalized economy. This current era of political
economy is marked by a distinct lack of financial structure relative to the Bretton Woods
or Gold Standard eras and the dominance of neoliberal financial thinking, which has
significantly altered the financial climate in terms of operations and institutions.31 In the
aftermath of three decades of unprecedented economic crisis, some political scientists
seriously question the neoliberal framework that currently governs the international
system, which is built upon and results from the neoliberal preference for open markets
with little government influence. Neoliberal ideology affects individual, domestic-level
growth through its ideological influence via international financial institutions like the
International Monetary Fund and the World Bank.32 This thesis builds on the current
research on this topic by analyzing the effects of neoliberal policies in Russia in the postSoviet political system.
Practical Significance
31
Gerald Epstein and Martin Wolfson. “Introduction: The Political Economy of Financial Crises,” The
Handbook of Political Economy of Financial Crises, ed Epstein and Wolfson, (Oxford University Press:
2013), 1 – 16.
32
Douglas Arner, Financial Stability, Economic Growth, and the Role of Law, (Cambridge University
Press, 2007), 14 – 22.
13
Given greater volatility in market behavior during the current period, scholars and
policymakers must work together to analyze and potentially restructure the international
financial infrastructure in two ways. At one level, there is a decision to maintain a
framework based on ideology and the next level is the decision over which type of
ideology will produce a stable order. Of course, both points have been under significant
debate for years, particularly given the devastating global reach of the Great Recession.
This thesis builds on both the theoretical and applied debate, contributing through casespecific testing and analysis.
Adding to a more comprehensive understanding of financial crises, this thesis aids
policymaking more generally by facilitating the construction of more informed and
effective regulations for quantity and frequency of international capital flows in an
attempt to abate the destructive effects of financial crises, such as losses of international
trade, inflation, stagnation, amongst others,33 without the crisis management processes
involving international intermediation or restructuring. In addition to potential regulation
of speculative investment, I also address recommendations for more comprehensive legal
infrastructure for international financial movements.
RESEARCH DESIGN
33
Classens, Kose, Laeven, and Valencia, 5 – 14.
14
Case Study
This thesis utilizes a case study method, as described by political scientists
Stephen Van Evera.34 The case study design allows for a deep analysis of a particular
iterance of the phenomenon of interest. In a theory-testing project, analyzing the specifics
of one iteration allows a researcher to identify at which points accepted theory failed
across or during a case.35 I use the case study method for two distinct argumentative
purposes. First, I use the Russian case as a deviant case, proving that the costs
traditionally associated with debt default are not fulfilled, and then I test my hypothesis
on the institutional costs I believe should be added to the framework on default costs
given the proven importance of institutional strength for economic growth.
This thesis presents Russia as a deviant case study, with the assumption, which
will be substantiated further in chapters two and three, that the 1998 credit default did not
follow the pattern of outcomes as predicted by political economic theories. In short,
immediately following the default in August, Russia experienced a relative low output
between 1998-99, followed by an upward trending line to record-high levels through the
2000’s up until the Great Recession.
Economists aim to offer quantitative models of all types of crises, but data
restrictions prevent this ideal from materializing. The field has moved slowly but
markedly toward a mathematical standard, demanding large-n datasets and carefully
34
Stephen Van Evera, Guide to Methods for Students of Political Science (New York: Cornell University
Press, 1997) 49-53.
35
Ibid, 54-56.
15
randomized research as benchmarks for both internal—statistical significance—and
external validity—the degree to which results can be generalized out from a specific
study. While statistical studies prove reliable and replicable, this particular study is restricted
from incorporating wide statistical analysis as the main method given data restrictions,
feasibility issues, and the intricacies that would be lost without a full case study. A large-n
sample of countries that have experienced financial crises in a similarly deviant structure is
impossible to construct. The data simply does not exist in the study of financial crises,
which are distinctly notable as uncommon events, the data pool does not fully and always
allow for the studies economists aim to conduct. Even by liberal measures, the 20th century
saw no more than 30 financial crises of varying type and magnitude.36
The Russian case is one of “intrinsic importance” fulfilling one of political
scientist Stephen Van Evera’s integral identifying components for effect case studies.37
Amongst the literature on financial crises overall, and even among the literature on
financial crises in emerging markets during the 1990’s, this particular Russian case
receives relatively little attention at a detailed level. Juxtaposition between the Asian
crises of the 90s and the Argentinian default after the turn of the century, the Russian
case is easily overlooked. Moreover, I argue that the Great Recession has overshadowed
the debt defaults in EME’s across the 90’s, gaining more research attention given the
timeliness, magnitude, and actors involved. Yet, the 1998 default is rich in economic data
and also particularly well recorded by the Russian press. The default’s more lasting,
global effects — including the failure of well-known U.S.-based hedge fund Long Term
36
Charles W. Calomiris, Banking Crises and the Rule of the Game (National Bureau of Economic
Research: 2009).
37
Van Evera, 77.
16
Capital Management — are also well recorded by Western news outlets, positioning the
case well for additional, in-depth exploration.
Methods
In order to substantiate the two main points of research across this study, this
thesis employs a process-tracing method across a single, deviant case study38 to identify
and bridge the discrepancy in costs predicated by political economic theory and the
empirical realizations specific to the case. Through process tracing, I construct a chain of
events to test “theories using observations within cases”39
Peter Hall, a political scientist specializing in comparative politics at Harvard
University, has described process tracing as “methodology well-suited to testing theories
in a world marked by multiple interaction effects ... precisely the world that more and
more social scientists believe we confront.”40 Hall’s definition is the reason this method
is best suited to tackle the research question. This design explores variables through
qualitative analyses — weighing the relative importance of political decisions and
dynamics — and quantitative analyses — measuring economic variables over time —,
crafting a mixed-methods picture within the case study.
As pictured in figure 1.4, this research design includes two chains—one empirical
chain and one counterfactual chain. The empirical chain establishes through the process-
38
Ibid, 70 – 88.
39
Ibid, 56.
40
Peter Hall, Aligning Ontology and Methodology in Comparative Politics, in Comparative Historical
Analysis in the Social Sciences, ed James Mahoney and Dietrich Rueschemeyer, (Cambridge University
Press, September 2000), 14.
17
tracing narrative, while the counterfactual chain is a series of accretive projections that
are based initially on the imaged reality of the removal of three critical junctures I
identify in the empirical chain. This design’s purpose is to establish the different between
measurements of the chosen variables—proxies for the three main categorizations of
costs in the aftermath of debt default—in the empirical observations versus the
counterfactual projections.
Figure 1.4 Research Method
Empirical Chain
Debt Default
Trade Flows
Real GDP
Borrowing
Costs
Counterfactual Chain
Debt Default
Real GDP
Trade Flows
Borrowing
Costs
The two chains of this research design flow through the same sequential process
tracing of the variables identified in this figure—Real GDP, trade flows, and
borrowing costs. But in the empirical chain, I measure recorded events that are
affected by the 3 critical junctures explored in Chapter Four. The counterfactual
measurements are imagined based off the removal of these critical junctures.
The counterfactual analysis presented in Chapter Five uses baseline data from
Goskomstat and the OECD to construct three sets of projections from 1998 to 2005 over
18
the three respective variables of interest. The projection calculations are determined using
the market mechanism models outlined in the literature review found in Chapter Two of
this thesis. By constructing these projections, I can compare the empirical process tracing
from Chapter Four to the projected losses that market mechanisms would have predicted.
Through this comparative isolation, I can show that the difference between the empirical
and the imagined chain can be explained by the critical junctures in the post-default
framework.
Timeframe
The timeframe under analysis stretches from the year of default, 1998, until 2005.
The end of the timeframe allows analysis without the confounding effects of the Great
Recession but still allows for significant opportunity to trace costs through the short- to
mid-term in the aftermath of the default year. Given the process-tracing method
employed here, it is only important to begin with the year of default as the starting point
and reach out to view both short and medium term effects for analysis. The purpose is to
identify the post-default output chain, which means events or indicators preceding the
default are not relevant to this particular study.
Sources
To craft the theoretical and empirical chains for this thesis, I rely on secondary
historical sources, as well as primary media sources, government reports, and quantitative
data from the International Monetary Fund, the World Bank, Goskomstat, and the
Russian Ministry of Finance.
19
The counterfactual chain draws primarily from economic and political science
literature, utilizing articles and books from preeminent scholars in the field including
Carmen Reinhart and Kenneth Rogoff,41 Franklin Allen,42 Robert Kolb,43 Jonathan Eaton
and Mark Gersovitz,44 Carlos Medeiros,45 Barry Eichengreen,46 Douglas Arner,47 and
Gerald Epstein and Martin Wolfson.48 These scholars collectively represent both the
policy and academic perspective of the current debate. I conduct my estimated
projections using data from my quantitative sources dated prior to the debt default and the
decline in Russian fixed-income spreads, beginning roughly in 1997.
The empirical chain utilizes newspaper accounts from the timeframe under
analysis in conjunction with both domestic government and international organizations’
reports on the crisis. While news media traditionally offers an ideal source for processtracing narratives within a case study given the advantages of first-hand contextual
41
Reinhart and Rogoff.
42
Franklin Allen and Douglas Gale, “Financial Contagion” Journal of Political Economy (Issue 108, no.
11: 2000).
43
Robert Kolb, “Sovereign Debt: Theory, Defaults, and Sanctions,” Sovereign Debt, (John Wiley and
Sons: 2011).
44
Eaton and Gerosovitz.
45
Carlos Mederios, Mark Gapen, and Larry Zanforlin, “Assessing the determinants and prospects for the
pace of market access by countries emerging from crisis — further considerations,” International Monetary
Fund, International Capital Markets Department (2005).
46
Eichengreen.
47
Douglas W. Arner and Michael Taylor, The Global Financial Crisis and the Financial Stability Board:
Hardening the Soft Law of International Financial Regulation? SSRN Scholarly Paper (Rochester, NY:
Social Science Research Network, June 1, 2009).
48
Martin H. Wolfson and Gerald A. Epstein, eds., The Handbook of the Political Economy of Financial
Crises (New York, NY: Oxford University Press, 2013).
20
material, the Russian media at the turn of the century presents particular challenges given
the privatization of media and the subsequent biases represented in the industry.
In Russia since the fall of the USSR, “news is overwhelmingly a product of
strategic interactions of individuals and groups with different interests — interests that
make people want to shape the final product in a certain way.”49 Given the political
variables that play into this research design, the political biases of certain papers need to
be eliminated through diversification and triangulation. During the period of
privatization, many of the newly rich Russian “oligarchs” — men who had accumulated
massive capital during the transition to liberal markets — purchased media companies.
These oligarchs are distinctly known to have maintained close ties with Boris Yeltsin’s
administration, while Vladimir Putin’s administration began a tradition of distance from
and near hostility against select oligarchs.50 This thesis examines both administrations
and the transition between them, meaning that the bias toward Yeltsin and bias against
Putin are taken into consideration. With the intention of cancelling out the potential
biases in reporting, this thesis traces events identified through content analysis in the
pages of Kommersant and Izvestiya.
The content analysis is conducted in Russian through query refinement using
newspaper archives and the East View Universal Database at the Harvard Davis Center
for Russian and Eurasian studies. The macroeconomic data necessary for this design
comes from the United States Federal Reserve Bank, the Organization for Economic
49
Olessia Koltsova, News Media and Power in Russia, (Routledge: 2006), xi.
50
David Kotz and Fred Weir, Russia’s Path from Gorbachev to Putin: The Demise of the Soviet System
and the New Russia, 2nd edition, (London; New York: Routledge, 2007), 213 – 235.
21
Cooperation and Development, Goskomstat, and RosStat, the Russian government’s
internal statistics services. Russian government sources are accessed in their original
Russian language versions.
Table 1.1 Research Sources
Type of Analysis
Sources
Methods
Quantitative
United States Federal Reserve Bank,
Organization for Economic Cooperation and
Development, RosStat, Goskomstat
Computation, graphical
analysis, change over
time analysis
Qualitative
IMF, OECD, World
Bank, Russian
Federation memos
Kommersant,
Izvestia
General Limitations
22
Content and frequency
analyses
With an ideal design, I would be able to travel and interview key sources within
the Russian government in order to provide another viewpoint to balance out the media
sources. But given time and financial limitations, I instead rely on government memos
and reviews in order to fill that void.
There are also unfortunate questions of data reliability in terms of the
macroeconomic indicators that will comprise the thesis’s quantitative section. Figures
reported by Moscow from both before and after the crisis may be skewed for various
reasons, including the effects of Russia’s informal economy and self-reporting biases.
Summary of Chapters
23
Chapter Two presents the current literature related to this field of study. The review is
two-pronged, presenting literature on the theory tested across the case and literature this
thesis draws into the current framework on debt default. Chapter Three presents a brief
history of capitalism in Russia, with a specific focus on the capitalist transition during the
1990s in order to provide adequate context for the subsequent process tracing. Chapter
Four presents the empirical chain of evidence, tracing Russia’s credit default from 1998
to 2005. Chapter Five presents the counterfactual chain and explores the difference
between the two chains of action. Chapter Six draws implications from these findings for
theorists who hope to better understand and influence policy on global capital flows.
CHAPTER 2
24
WHAT IS SOVEREIGN DEBT DEFAULT?
During the modern era sovereign external default crises have been far more
concentrated in emerging markets than banking crises have been … sovereign
defaults on external debt have been an almost universal rite of passage for every
country as it has matured from an emerging market economy to an advanced
developed economy. This process of economic, financial, social, and political
development can take centuries.
—Carmen Reinhart and Kenneth Rogoff,
This Time is Different: Eight Centuries of Financial Folly
The study of costs in the aftermath of sovereign debt default is a relatively young
field in economics.1 Since its rough nascent at the beginning of the 1980s, the field has
seen two waves of significant contribution—the 80s and the first decade of the 21st
century after a series of sovereign defaults resurrected interest in the topic.2 This thesis
contributes to the current understanding on default costs for sovereign nations, bridging
across the fields of economics, law, and political science. Through this synthesis, I both
establish a baseline for the theory-testing portion of this thesis and establish baseline
theory that I will build upon through process-tracing the Russian case study.
As this thesis explores debt default in its aftermath, I first define the particular
financial crisis under analysis and place it within a framework of how crises are
organized in theoretical and empirical literature. Given the specific dynamics during
Russia’s 1998 crisis, I present the relevant detail on the dynamics of “event-based” crises.
1
Ugo Panizza, Federico Sturzenegger, and Jeromin Zettelmeyer, “The Economics and Law of Sovereign
Debt and Default,” Journal of Economic Literature 47, no. 3 (September 1, 2009), 651.
2
Ibid, 652; Jonathan Eaton and Raquel Fernandez, Sovereign Debt, Working Paper (National Bureau of
Economic Research, May 1995), http://www.nber.org/papers/w5131; Carmen Reinhart, Sovereign Credit
Ratings Before and After Financial Crises, MPRA Paper (University Library of Munich, Germany, 2002),
https://ideas.repec.org/p/pra/mprapa/7410.html.
25
For the purpose of motivating the study of sovereign debt default, I explain the legal
mechanisms that inspired the field to pursue research on costs associated with this
particular crisis. I subsequently outline the evolving consensus on the costs associated
with this type of financial crisis in the fields of economics and political science. This
chapter’s baseline conclusions, in part, comprise the expected aftermath associated with a
debt default—explicitly not the reality recorded during the Russian case.
The third section of this chapter assumes a historical institutionalist perspective to
analyze the current organization of international financial architecture, given the
correlated increase in crisis and market volatility during this period relative to previous
eras.3 I then juxtapose literature on domestic-level growth through government
institutions, laying the framework for my argument on the inherent contradiction between
neoliberal advisory during this period—proven to correlate to economic shocks— to
emerging market economies and contemporary theories on drivers of economic growth.
The theories presented here support my argument by introducing variables—
including law and international financial architecture—that played a role in the empirical
distortions recorded during the aftermath of the 1998 Russian sovereign debt default,
given the volume of foreign investment flowing into the country. Subsequent chapters
explore the discrepancy between the chosen case and a counterfactual originating in the
theoretical predictions presented in this chapter.
DEFINING CRISIS
3
Michael Bordo, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Martinez-Peria, “Is the Crisis
Problem Growing More Severe?,” Economic Policy, no. 32 (April 1, 2001), 51.
26
A sovereign debt default describes both the decision and the aftermath of the
decision made by a nation’s central bank to miss payment on the principal of loan
obligations made to external creditors by a specified, agreed upon date.4 A more
expanded definition from the credit agency Standard and Poor’s describes sovereign
default as the reissuance of “an exchange offer of new debt with less favorable terms than
the original issue.”5
The manner by which scholars define and categorize the various types of financial
crises is “strongly influenced by the theories trying to explain those [sic] crises,” write
economists at the International Monetary Fund in a 2013 report.6 Debt defaults, both
external and domestic-fueled internal episodes7, fit under the category of financial crises
defined through subjective events—referred to by economists as “event-based” crises.
The other main umbrella category of crises is the quantitatively defined crisis.8 Figure 2.1
graphically represents the breakdown of the most commonly occurring crises along with
their categorization between event-based and quantitatively identified.
Table 2.1 Categorizing Financial Crises
4
Carmen Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly,
(Princeton: Princeton University Press, 2009), 10-11.
5
David Beers and John Chambers, “Default Study: Sovereign Defaults At 26-Year Low, To
Show Little Change In 2007,” Standard & Poor’s CreditWeek, (Standard and Poor, 2006).
6
Stijn Claessens and M. Ayhan Kose, Financial Crises Explanations, Types, and Implications, IMF
Working Paper (International Monetary Fund, 2013), 12.
7
External debt refers to debt products held by foreign lenders, whereas internal debt is associated with
domestic lenders.
8
Reinhart and Rogoff, Chapter 1.
27
Financial
Currency
crisis
devaluation
categories
Quantitative
Inflation
Currency
debasement
X
X
X
Event-based
External
debt
default
Domestic
debt
default
Bankin
g crisis
X
X
X
Source(s): Carmen Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of
Financial Folly, (Princeton: Princeton University Press, 2009).
Event-based financial crises are less studied in economics given the inherent
difficultly of concisely and accurately modeling the interactions of political variables that
factor into the qualitatively defined category. At the empirical level, thus far, economists
have refrained from rigorous study of debt defaults, though banking crises have received
relatively more attention.9 In order to move forward with an analysis of event-based
financial crises from the political economic perspective, it is first necessary to introduce
and explain current economic thought on the two main subtypes of event-based crises:
banking crises and debt defaults.
Since the 1980s, a prominent group of economic thought has maintained that
banking crises result from random, event-driven phenomena, with explanations rooted in
political psychology.10 But, more recently, economists Franklin Allen and Douglas Gale
published an article that refutes the accepted framework with their revised model, which
suggests that banking crises are better understood as expected phenomena that roughly
9
Bianca De Paoli, Glenn Hoggarth, and Victoria Saporta. "Output Costs of Sovereign Default."
In Sovereign Debt, edited by Robert Kolb, (Hoboken, New Jersey, John Wiley and Sons: 2011), 26.
10
Robert Dekle, “Banking crisis,” In Kenneth A. Reinert and Ramkishen S. Rajan (Eds.), The Princeton
encyclopedia of the world economy, 2010.
28
follow the business cycle — a pattern of regular, predictable fluctuations in a market
economy.11 Given this disagreement within the literature over how banking crises are
defined and identified, this thesis will restrict its definition to the paradigm utilized by
Carmen Reinhart and Kenneth Rogoff in their formative text, “This Time is Different.”12
Published in 2009, the work presents an event-based perspective on banking crises with a
focus on political economy. The authors suggest that, given current limitations due to a
lack of quantitative data on the crisis category, banking crises should be identified
qualitatively as
(1) bank runs that lead to the closure, merging, or takeover by the public
sector of one or more financial institution … and (2) if there are no runs,
the closure, merging, takeover, or large-scale government assistance of an
important financial institution (or group of institutions) that marks the start
of a string of similar outcomes for other financial institutions.13
The empirical literature on banking crises focuses on the structural effects on domestic
level institutions in the aftermath of bank runs. In situations during which domestic
institutions are highly leveraged, potential exists for significantly destabilizing economic
shocks across the domestic economy through a liquidity crunch.14
11
Franklin Allen and Douglas Gale, "Financial Contagion." Journal of Political Economy 108, no. 11
(2000): 1-33; “The NBER’s Business Cycle Dating Committee,” accessed December 13, 2014,
http://www.nber.org/cycles/recessions.html.
12
Reinhart, Carmen M, and Kenneth S Rogoff. This Time Is Different: Eight Centuries Of Financial Folly.
(Princeton, New Jersey: Princeton University Press, 2012).
13
Reinhart and Rogoff, 10.
14
Reuven Glick and Michael M. Hutchison, Banking and Currency Crises: How Common Are Twins?,
EPRU Working Paper Series (Economic Policy Research Unit (EPRU), University of Copenhagen.
Department of Economics), accessed December 13, 2014, https://ideas.repec.org/p/kud/epruwp/9920.html.; Glenn Hoggarth, Ricardo Reis, and Victoria Saporta, “Costs of Banking System Instability: Some
29
The clean delineations of these crises within economic literature do not in any
way reflect the real-world manifestations given the influence political variables exert on
the economic decisions made by sovereigns. That being said, the literature has begun to
reflect this; economists have thoroughly studied the “twin” crisis phenomenon15, which
describes the dual iteration of a currency and banking crisis. Theory predicts that, more
often than not, a banking crisis is associated with another crisis that precedes it and
cultivates the economic climate for distrust in domestic banking institutions.16 But, less
studied, is the triple crisis variation that was seen in Russia in mid-1998. Though I refer
back to banking crises and currency crises as I process-trace the Russian case, the
explanations provided serve only as reference, given that the focus of this thesis is default
and its outcomes.
LAW OF SOVEREIGN DEFAULT
Empirical Evidence,” Journal of Banking & Finance 26, no. 5 (2002): 825–55.Klingebiel and Laeven,
Managing the Real and Fiscal Effects of Banking Crises.; Daniela Klingebiel and Luc Laeven, Managing
the Real and Fiscal Effects of Banking Crises (World Bank Publications, 2002), 15 -30.
15
Graciela Kaminksy and Carmen Reinhart, “The Twin Crises: The Causes of Banking and Balance of
Payments Problems,” Board of Governors of the Federal Reserve System, (International Finance
Discussion Papers: 544, 1996).
16
Reuven Glick and Michael M. Hutchison, Banking and Currency Crises: How Common Are Twins?,
EPRU Working Paper Series (Economic Policy Research Unit (EPRU), University of Copenhagen.
Department of Economics).
30
The simplest way to begin explaining the legal concept of a debt default is
through the analogy of corporate bankruptcy. While most developed nations maintain
proceedings through which creditors can appeal for repayment in the case of a corporate
bankruptcy,17 such legal structures do not formally exist for sovereign default. For
example, while a private creditor would be obligated to repayment on a corporate bond
holding due to mandates by the United States federal government if the case involved a
debtor firm like Apple Inc., that same creditor would not be due his or her obligation if
the product in question was a fixed income holding in another nation’s central bank
according to standing law.
Given this lack of legal infrastructure to enforce repayment, economists and
political scientists have studied sovereign default in order to understand what motivates
sovereign nations to repay obligations during periods of insolvency when there are no
legal structures to penalize or incentivize certain behaviors. Before moving forward with
hypothesized explanations to this question, I explain the legal reasons for why this
question arises. Restricting the period of analysis to the post-1980s crises, there are two
major relevant principles. The first is the concept of sovereign immunity: the principle
that “sovereigns cannot be sued in foreign courts without their consent.”18 In the
aftermath of the Second World War, sovereign immunity has become increasingly
restrictive in definition. At the encouragement of the U.S. government, the Foreign
17
Enrica Detragiache, “Public versus Private Borrowing: A Theory with Implications for Bankruptcy
Reform,” Journal of Financial Intermediation 3, no. 4 (September 1994): 327–54,
doi:10.1006/jfin.1994.1009.
18
“The NBER’s Business Cycle Dating Committee,” accessed December 13, 2014,
http://www.nber.org/cycles/recessions.html.
31
Sovereign Immunities Act (FSIA)19, passed in 1976, allows individuals to lodge formal
complaints against foreign governments in the U.S. court system. In their survey of
sovereign debt default law, Panizza, Sturzenegger, and Zettelmeyer synthesize the current
state of debate as follows: “Sovereigns can no often be held accountable for breach of
commercial contracts with foreign parties in the same manner as private parties. This
leaves open the question of what is a commercial transaction, and who is sovereign,
within the terms of a foreign sovereign immunity law.”20 The second principle is that of
international comity, which the United States Supreme Court recognizes as “the
recognition which one nation allows within its territory to the legislative, executive, or
judicial acts of another nation.”21 In scholarship, the concept is just as vaguely defined, as
there are no clear principles underlying the concept.22 The comity concept has historical
developed as a broad, widely misunderstood and oft-manipulated diplomatic tool and this
exact nature has allowed for certain specific patterns of use to develop. According to one
law historian and professor, it’s precedent places “limits on domestic law out of deference
to the global markets.”23 Ultimately, this concept points to the inherent political nature of
debt default in today’s geopolitical order and hints at the importance of a nation’s
19
Robert B. von Mehren, “Foreign Sovereign Immunities Act of 1976,” Columbia Journal of
Transnational Law 17 (1978): 33.
20
Ibid.
21
“Hilton v. Guyot”, United States Reports, Vol. 154, 159.
22
Joel Paul, “The Transformation of International Comity,” Law and Contemporary Problems 71, no. 3
(July 1, 2008), 19–38.
23
Ibid, 20.
32
“reputation” in the aftermath of a default—a recurring theme that I return to later in this
chapter.
Given these two principles, it is feasible for creditors to refuse restructuring
agreements proposed by the defaulting nation in situations of sovereign default. After a
sovereign default announcement, creditors can feasibly bring a nation to court on the
basis of restructuring disagreements. But this option is heinously underutilized. More
often than not, creditors accept the proposed “haircut” — loss of capital taken during
restructuring of debt obligations due to debtor insolvency — without protest because of
the implicit structures that guide decision-making leading up to the announcement of a
restructuring plan. “Strong mechanisms, both contractually and through informal
institutions like the Bank Advisory Committee process, … encourages [sic] collective
negotiations with the debtor in resolving debt disputes and discourages [sic] go-it-alone
litigation,” write Panizza et al about recent episodes of sovereign debt default.24
When an individual creditor decides to enter litigation despite these structural
mechanisms, the process is empirically proven to be lengthy and almost never fruitful.
While the legal history shows decisions favorable to creditors, on average, in this type of
dispute, the ultimate payoffs, in terms of real capital assets, are almost never realized.25
Moreover, historically, the cases in which a private party has successfully tried to
prosecute a sovereign have resulted in extremely lengthy processes, essentially restricting
this option to highly liquid and lucrative institutional investors. One of the more notable
cases that proves this point is the decade-long fight between Elliot Management
24
Panizza, Sturzenegger, and Zettelmeyer, 655.
25
Ibid, 659.
33
Corporation and the Argentinian government in the aftermath of Argentina’s 2001
default. An Elliot subsidiary sued the government for full repayment in U.S. courts.26
In 2001, following the series of debt default across the emerging market
economies, economist Anne Kreuger, first deputy managing director at the IMF,
proposed an international sovereign debt restructuring mechanism that would be able to
fill in the holes present within international regulation of default and the difficultly of
pursuing international legal reform.27 Krueger aimed for the creation of a mechanism that
would “aim to help preserve asset values and protect creditors’ rights, while paving the
way toward an agreement that helps the debtor return to viability and growth,” using the
IMF as an intermediary organization between creditor and debtor in a more formal
capacity.28
Far-reaching developments in capital markets over the last two or three
decades have not been matched by the development of an orderly,
predictable framework for creditor coordination, in which the roles of the
debtor, the creditors and the international community are clearly spelt out.
… [This] imposes significant costs on all the parties involved…. Our goal
therefore should be the creation of better incentives to encourage the
orderly and timely restructuring of unsustainable sovereign debts, while
protecting asset values and creditors’ rights.29
26
“Hold-Out Fund Elliott Management Pursuing Sanctions Against Argentina,” International Business
Times UK, accessed March 9, 2015, http://www.ibtimes.co.uk/hold-out-fund-elliott-management-pursuingsanctions-against-argentina-1473221; “Argentina, Elliott Finally May End Bond War,” CNBC, accessed
March 9, 2015, http://www.cnbc.com/id/102298800.
27
Anne Kreuger, “A New Approach to Sovereign Debt Restructuring,” International Monetary Fund
(2002).
28
Ibid, 2.
29
Ibid, 7 -8.
34
But Krueger’s proposal was ultimately defeated as Western powers indicated strong
opposition, likely worried about the expansion of IMF policing power.30
Given this legal landscape, what motivates a sovereign government to genuinely
fulfill restructured obligations in the aftermath of a debt default? It’s this question that
motivates and sets apart analysis of debt default outcomes in the general study of
financial crises.
DEFAULT COSTS AND EMPIRICAL EVIDENCE
Given that there are no true, explicit legal ramifications to incentivize sovereign
nations into repayment, economists hypothesize that there are implicit financial and
political costs that incentivize nations into debt restructuring and eventual repayment.
According to this logic, the costs that ensure repayment after default are directly
connected to the logic creditors assume when lending to sovereigns31—the ultimate basis
on which the market for foreign debt can perpetuate. If sovereign nations were
empirically proven to avoid repayment, no lenders would be willing to bring supply,
eradicating a functioning market for sovereign debt.
30
Ross P. Buckley and Douglas W. Arner, From Crisis to Crisis: The Global Financial System and
Regulatory Failure, (Kluwer Law International, 2011).
31
Mark Wright, “Theory of Sovereign Debt and Default,” Encyclopedia of Financial Globalization, (April
2011), 1.
35
Penalty Costs
The economic and political literature on sovereign default identifies three major
groupings of “penalty”—internationally sanctioned reactions to a nation’s announcement
of insolvency—costs in the aftermath of default: decline in international trade, restricted
access to financial markets, and decline in output growth. In the aftermath of sovereign
default, nations are expected to experience a decline in aggregate international trade
given the incidence of either tariff barriers, loss of trade credit, or the actual physical
seizure of assets. Empirically, these groupings are certainly not exclusive in nature, as
they are inherently linked. For example, a declining level of access to international trade
can then feed into a decreasing real GDP when a nation sees a decrease in overall
exports. That being said, for the purposes of this analysis, these delineations are useful as
a means of organizing the potential dynamics that can arise in the aftermath of default.
Tariff barriers and loss of trade credit are related ideas in that they both represent
penalty as a form of punishment for the debtor nation. In this way, trade credit losses are
explicitly political moves on the part of former trade partners, sending a signal to the
broader market about the debtor nation. Tariff barriers represent an economic
punishment, actively prohibiting a debtor nation from certain financial interaction in the
global market given the distrust engendered through the default. The first empirical
analysis of trade losses conducted by economist Andrew Rose in 2005 shows a
statistically significant 7 percent annual decline — lasting 15 years on average—in
36
exports and imports for countries in the aftermath of debt default.32 But, notably, Rose
utilizes panel data that spans up until 1970, whereas a more recent study of debt defaults
over the past 30 years shows that there is not one instance of overtly recorded trade
sanctions33, though that does not necessarily mean that indirect outcomes have not
occurred; a study extending to present day simply does not exist as of yet. A 2005 study
conducted by economists at the IMF finds that regaining market access is the function of
a country’s “external” situation in the aftermath of default combined with domestic
macroeconomic policy.34
The third of these alternatives has been empirically proven to almost never occur,
given the legal framework discussed above.35 But the theoretical literature, spearheaded
by economists Jeremy Bulow and Kenneth Rogoff in 1989 contest the theory that while
lenders cannot seize assets of a sovereign nation within that respective nation’s borders,
there is legal ground for claims through which lenders can effectively seize a nation’s
foreign asset’s within the lender’s respective nation of residence.36 Bulow and Rogoff
stand in debate against the theories of Eaton and Gerosovitz, advocates for a mechanism
of “reputational” costs.
32
Andrew Rose, “One Reason Countries Pay Their Debts: Renegotiation and International Trade,” Journal
of Development Economics 77, 1, pp. 189-2006.
33
Jose Vicente Martinez and Guido Sandleris, Is It Punishment? Sovereign Defaults and the Decline in
Trade, Business School Working Paper (Universidad Torcuato Di Tella, 2008).
34
Carlos Medeiros, Mark Gapen, and Luisa Zanforlin,“Assessing the determinants and prospects for the
pace of market access by countries emerging from crisis – further consideration,” (International Monetary
Fund, International Capital Markets Department, 2005).
35
Panizza, Sturzenegger, and Zettelmeyer, 655-659.
36
Jeremy Bulow and Kenneth Rogoff, “A Constant Recontracting Model of Sovereign Debt,” Journal of
Political Economy 97, no. 1 (February 1, 1989): 155–78.
37
Reputational costs
In 2012, economist Robert Zymek at the University of Edinburgh conducted a
study of international trade effects to discover that the significance of trade declines is, in
fact, related to the capital market restrictions.37 Empirically, Zymek found that trade
costs, as advocates of “penalty” mechanisms claim, exist. But his conclusions support an
alternate understanding, which posits that debtor countries are not blocked off from
imports; they just don’t have access to the capital needed to finance the purpose of
imports. Eaton and Gerosovitz first introduced the concept of blocked access to
international financial markets as a cost associated with sovereign default in their seminal
piece38 on debt default, addressing the aforementioned repayment question that opened
this section. Operating under the assumption that nation-states are repeat borrowers with
a vested interest in maintaining open lines of trade, Eaton and Gerosovitz model a
situation in which debtor nations post-default are faced with prohibitively high interest
rates, increasing the cost of borrowing and therein essentially locking that nation out of
international capital markets.39 Economists refer to this same mechanism as the outcome
of “reputational costs,” which derives from an empirically tested point of view that
suggests default, as an act, signals fragility and unreliability to creditors around the
37
Robert Zymek, Sovereign Default, International Lending and Trade, SSRN Scholarly Paper (Rochester,
NY: Social Science Research Network, June 27, 2012), http://papers.ssrn.com/abstract=2103622.
38
Jonathan Eaton and Mark Gersovitz, “Debt with Potential Repudiation: Theoretical and Empirical
Analysis,” The Review of Economic Studies, Vol. 48, No. 2 (Apr., 1981), 289-309
39
Ibid.
38
world. “Default could signal that the government is unreliable, not just in debt, but in
international affairs more generally.”40 In the same way that an individual debtor with a
low credit score would have trouble finding a loan without exorbitantly high interest
rates, a defaulting nation faces high interest rates41 because of its “reputation” for
mismanaged fiscal policy. Researchers at the Bank of England produced the latest
research on credit spreads in the aftermath of debt default using a sample of debtor
countries from the past 30 years, concluding in line with previous literature. Consistent
with the evidence from Ozler (1993) and Reinhart et al (2003), for a given debt/GDP
ratio, past defaulters have generally had a higher bond spread/lower credit rating than
non-defaulters in recent years,” the researchers write.42
Output costs
The final major category of penalty costs anticipated post-sovereign default is
output costs. Empirically, default is correlated with aggregate decreases in domestic
GDP.43 And while this is a logical determination, economists continue to discover the
40
Michael Tomz and Mark L. J. Wright, “Empirical Research on Sovereign Debt and Default,” NBER
Working Papers (National Bureau of Economic Research, February 2013),
http://www.nber.org/papers/w18855.
41
Sule Özler, “The Evolution of Credit Terms: An Empirical Study of Commercial Bank Lending to
Developing Countries,” Journal of Development Economics 38, no. 1 (January 1992), 79–97;Carmen M.
Reinhart, Kenneth S. Rogoff, and Miguel A. Savastano, Debt Intolerance, Working Paper (National Bureau
of Economic Research, August 2003), http://www.nber.org/papers/w9908.
42
Bianca De Paoli, Glenn Hoggarth, and Victoria Saporta. Costs of Sovereign Default (London: Bank of
England, 2006),10.
43
Michael P. Dooley, “Can Output Losses Following International Financial Crises Be Avoided?,” NBER
Working Papers (National Bureau of Economic Research, February 2000),
http://www.nber.org/papers/w7531.; Daniel Cohen, “The Debt Default, Post Mortem,” National Bureau of
Economic Research (Macroeconomics Annual, 1992), 105.
39
paths through which these output costs arise. The most recent anthology published on
sovereign debt suggests that output costs are associated with default’s consequences on a
domestic economy. Most often the effects are felt through the banking system—“Once
banking problems emerge, any fiscal weakness, in turn, reduces the ability of the
government to take measures to contain a crisis,” De Poali et al write in their 2013
anthology article.44 Very few studies have been conducted on the magnitude of output
costs associated with sovereign debt default, though the literature on output costs after
banking and currency crises (the so-called “twin” crises) is extensive. A 2009 study
conducted by De Paoli offers the following insight: The average mean length of a period
of output losses in the aftermath of just a sovereign debt default is 3.2. In contrast, for a
case of a “triple crisis” — as occurred in Russia in 1998 — the average mean length of
losses is 10.5 years, with median loss per year coming to 18.7x multiple.45 Output costs
can also be interpreted as “reputational costs” given the signaling role of GDP as an
indicator of macroeconomic health and growth.46
Table 2.2 Potential costs of sovereign default
Penalty Costs
Reputational Costs
Output Costs
Trade declines
Cost of borrowing
GDP decline
Asset seizure
Access to capital markets
Banking sector weakness
44
De Paoli et al, 25.
45
Ibid, 27.
46
“Is GDP a Satisfactory Measure of Growth? - OECD Observer,” accessed December 13, 2014,
http://www.oecdobserver.org/news/archivestory.php/aid/1518/Is_GDP_a_satisfactory_measure_of_growth
_.html.
40
DOMESTIC GROWTH AND INSITUTIONS
Introduction
In the literature on sovereign default, there is a rough delineation across empirical
studies: Either researchers choose to take on a historical survey of incidents across the
20th century up until approximately the 1970’s or they decide to take on the timeframe of
post-1980s. Almost all studies conducted on the study of sovereign default during the
2000’s follow the second pattern and repeat the same general sentiment: Default is a
mainstay of international finance; there have been dozens of defaults in each century
since the dawn of global trade, and the pattern is seemingly not trending down anytime
soon.47 Given this, what makes debt default in the 21st century different than the
preceding examples? Many argue that the answer lies in the current global climate for
finance—the international financial architecture (IFA) that binds together the actors
involved in global transactions given conditions that allow for capital mobility in
unprecedented ways.48 First, I explain a baseline of the current international financial
architecture relative to previous monetary regimes. Then, I outline the current discussions
on domestic level growth and the importance of institutions. I ultimately juxtapose these
47
De Paoli, Hoggarth, and Saporta, 23; Tomz and Wright, Empirical Research on Sovereign Debt and
Default; Barry Eichengreen, Financial Crises: And What To Do About Them (Oxford: Oxford University
Press, 2002); Reinhart and Rogoff, This Time is Different.
48
Douglas Arner, “Financial Stability, Economic Growth, and the Role of Law" (New York: Cambridge
University Press, 2007); Douglas Arner, M Yokoi-Arai, and Z Zhou (eds), Financial Crises in the 1990s: A
Global Perspective (London: British Insittute of Intenrational and Comparative Law, 2001); Zanny MintonBeddos, “Why IMF Needs Reform,” Foreign Affairs 123, (May 1995).
41
two topics to create a baseline off which I analyze the ramifications for the mechanisms
of debt default costs outlined above.
Neoliberal architecture
Scholars of political economy have devoted significant time to understanding the
current “non-system” that governs and regulates international flows of capital in the postBretton Woods period. Unlike the prior international frameworks for finance such as the
Gold Standard and Bretton Wood—both characterized by structured, deliberate
systems49—, financial globalization has coincided with a swift call for economic
liberalization, creating a system whose power rests more heavily on ideology than
institutions.50 Given the sheer quantity and magnitude of the literature related to IFA, I
choose to filter through the perspective political scientists Nolan McCarthy, Keith Poole,
and Howard Rosenthal assumed in their 2013 book “Political Bubbles: Financial Crises
and the Failure of American Democracy.”51 In this work, McCarthy, Poole, and
Rosenthal explain the Great Recession in the U.S. through a political framework,
identifying the variables ideology, interests, and institutions as motivating pieces for the
dynamics of the recession. The attempt to understand financial crises as political science
forces a researcher to think through the web of actors involved in events proceeding and
49
G. Geoffrey Booth, Fred R. Kaen, and Peter E. Koveos, “R/S Analysis of Foreign Exchange Rates under
Two International Monetary Regimes,” Journal of Monetary Economics 10, no. 3 (1982): 407–15,
doi:10.1016/0304-3932(82)90035-6.
50
Michael Camdessus, “The Role of the IMF: Past, Present, and Future,” IMF Speech 98/4, Remarks at the
Annual Meeting of the Bretton Woods Committee, Washington, DC, 13 Feb. 1998.
51
Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Political Bubbles: Financial Crises and the
Failure of American Democracy (Princeton University Press, 2013).
42
subsequent to the onset of a crisis. Given this, I posit that the “political bubble”
framework is particularly salient in that it breaks down the very base components of a
financial system through individuals (the interests), ideologies (the driving force behind
interests), and institutions (the structures through which interests manifest ideology). I
choose not to apply or explore the U.S.-centric explanations of financial crises present
within this book, but instead use this basic framework, adopting the components and
applying them to a global financial system. Given that this thesis is restricted in frame to
a period in the post-Bretton Woods era, I do not enter a lengthy discussion of the Gold
Standard or Bretton Woods period, but the two systems will be utilized relative to the
current era for reference.
Interests and Ideologies
Before entering a discussion over the current financial structure, I first fully
define the term “neoliberalism.” Neoliberal theory is an extension of the thinking of
liberal economists like Adam Smith, who preached the importance of market forces and
individual freedoms and influenced thinkers of the 20th century including Milton
Friedman and the “Chicago School.”52 Through public policy, neoliberalism encourages
market deregulation, state decentralization, and reduced political influence on
macroeconomic policy.53 Some call neoliberalism a stage of capitalist evolution—an
52
Eduardo Rosenzvaig and Ronaldo Munck, “Neoliberalism: Economic Philosophy of Postmodern
Demolition,” Latin American Perspectives 24, no. 6 (November 1, 1997): 56–62; Friedman, Milton, 1970.
"A Theoretical Framework for Monetary Analysis," Journal of Political Economy, University of Chicago
Press, vol. 78(2), pages 193-238; Friedman, Milton, 1971. "A Monetary Theory of Nominal Income,"
Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-37.
53
John Campbell and Ove Pederson, The Rise of Neoliberalism and Institutional Analysis, (Princeton, N.J.:
Princeton University Press, 2001).
43
ideology that drives markets motivated by growth maximization at the cost of societal
social goals.54 The rise of neoliberal economic thinking coincided with the breakdown of
the Bretton Woods financial order55 and a geopolitical environment very much controlled
by United States hegemony. The United States, therein, certainly plays the role of a major
interest in the current international framework. Other traditional Western powers,
including the United Kingdom and Western Europe,56 can roughly be grouped into the
U.S. interest for the purposes of this analysis.
The remaining major interests in the current financial architecture are the IFI’s,
such as the International Monetary Fund and the World Bank—both organizations trace
their founding back to the establishment of the Bretton Woods regime. While these two
institutions represent just a sample of the IFI’s—others include the Bank for International
Settlements and the various regional development banks—I choose to focus on the IMF
given its close involvement in sovereign debt default during the 1980s and 90s and
explore the World Bank given its role in drafting economic development ideology
through its mandate of poverty alleviation. Ultimately, these two organizations are the
most relevant to the scope of this thesis.
Since their origination, both the IMF and World Bank have both formal and
informal evolutions of mandate. Under the Bretton Woods regime, the IMF’s role was to
54
Gerard Dumenil and Dominique Levy, “The Crisis of Neoliberalism" Harvard University Press,”
accessed December 13, 2014. –FIX
55
Arner, 52; Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the
1990s (Cornell University Press, 1996).
56
The European Union, as an entity, can be historically traced back to neoliberal concepts of free trade and
capital liberalization.
44
police adherence of the regime’s monetary basis: “fixed-but-adjustable exchange rates
and the removal of restrictions on current account transactions.”57 At an ideological level,
the Bretton Woods regime was constructed as a revised Gold Standard regime with focus
on macroeconomic stability through monetary policy that emphasized full employment.58
In the aftermath of Bretton Woods, as exchange rates went unpegged and free capital was
introduced to the international economy, that mandate of the IMF was essentially erased.
Some political scientists believe that the current set-up of the IMF was one of
convenience, allowing Western powers to “dominate the actions of the IMF and its
policies.”59 But renovation of the IMF and the World Bank was, in large part, a side
conversation among a massive international discussion over appropriate monetary policy.
While this thesis does not go into the realm of monetary economics, it is important to
point out the construction of these organizations allows them to be governed by its
leading member-states and the ideology associated with those states’ interests.
Institutions
In international finance, the topic of institutions is highly contentious, as scholars
debate what type of structures are necessary to uphold a certain framework. I argue here
that one’s understanding of the purpose of IFA molds one’s view on the role of
institutions. I define IFA as the primary arbiter of international financial law and policy,
57
Joseph Joyce, “The IMF and Global Financial Crises Phoenix Rising? | International Economics,”
Cambridge University Press, accessed December 13, 2014.
58
Arner, 52.
59
Ibid, 19.
45
working off Douglas Arner’s theory on the “institutional underpinnings of finance.”60
Arner writes, “A market economy and a market-based financial system cannot exist if
certain legal and institutional supports are not in place, namely a system of governance
which establishes property rights and enforcement of contracts.”61 And Arner’s
substantiation is not a new idea; the importance of institutions in political economy can
be traced back to classic theorists including Keynes and his followers. Keynesian
economists push for the involvement of the state in a nation’s macroeconomic policy for
purposes of stabilization during market fluctuations, inevitable symptoms of a capitalist
economy.
In today’s globalized economy, this same sentiment should hold true for both a
nation’s inward domestic policies that regulate and sustain a stable macroeconomic
policy, and a nation’s outward policy toward trade partners and, as an extension, financial
markets. Both empirically and theoretically there is evidence that market economies help
facilitate development goals in emerging market economies.62 But these studies
necessitate the full development of financial sectors63, including “legal systems that
effectively protect the rights of outside investors and enforce contracts” for full
realization of the predicted effects.
60
Douglas Arner, “Financial Stability, Economic Growth, and the Role of Law,” (Cambridge University
Press, 2007)
61
Ibid, 16.
62
Thomas Beck, A. Demirguc-Kunt, and Robert Levine, “Finance, Inequality, and Poverty: Cross-Country
Evidence,” World Bank Working Paper (May 2005); Peter Honohan, “Financial Development, Growth,
and Poverty: How close are the links?”, World Bank Policy Research Working Paper 3202, (Februray
2004).
63
Arner, 47.
46
In growth economics, today, many hail the notion of stable, non-extractive —and
most often democratic — institutions as a “silver bullet” variable for true growth
progression. Economists like Daron Acemoglu, James Robinson, and William Easterly
all concede that the question of economic growth, at a domestic level, for countries both
“emerging” or “developing” or somewhere in between is a very complicated question.
But they all also agree that no matter how the other variables — including population
trends, technological progress, and aggregate human capital — develop, without the right
formula for institutions, nations will not follow their true growth path.64
From the institutionalist perspective, he problem with a neoliberal IFA is the
influence it has on EME’s during critical periods. IFI’s like the World Bank, whose role
as development arbiter has moved from first-world infrastructure concerns to advisor on
third-world financial development in the post-Bretton Woods era, incentivize neoliberal
ideology in the interest of Western powers. I explore the recorded effects of this type of
advising through my case study.
64
Daron Acemoglu, Simon Johnson, and James Robinson, “The Colonial Origins of Comparative
Devleopment: An Empirical Investigation,” American Economic Review, (2001); Daron Acemoglu and
James Robinson, “Why Nations Fail,” (Crown, 2012); William Easterly, “The White Man’s Burden: Why
the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good,” (New York: Oxford
University Press).
47
CONCLUSION
According to the current understanding of sovereign default mechanisms, the
costs associated with a default in the aftermath are an integral part of the continuance of a
market on sovereign debt. Without an international legal infrastructure to ensure
restructuring and repayment in the case of sovereign insolvency, the market mechanisms
currently outlined and understood are what economists and political scientists continue to
test and revise. Empirically, there is some debate over the reality of these costs, given the
number of case-specific political factors that distort models, resulting in extreme cases.
The most recent decades of crisis across the emerging market economies provide
examples of these extreme cases. In order to better understand such outlying cases, I
analyze closely the case of Russia in 1998, which does not fit into the cost mechanisms
outlined in this chapter. By tracing out the aftermath of the case in question, I argue that
the theory-testing I conduct against the cost mechanisms introduced in this chapter show
that international financial architecture, along neoliberal lines, distorts these traditionally
understood mechanisms, instead inspiring longer-term costs at a developmental level for
emerging economies.
48
CHAPTER THREE
MARKET TRANSITION
It seems to me that nothing can stop Russia from a long, steep, powerful upward
trajectory of growth, constantly gaining in strength. This will be evident not only
to specialists in economics and statistics but will also be felt within the family of
every Russian breadwinner: from his wages, from his income, from his ability to
buy a new car and go on a full-fledged summer vacation.
—Anatoly Chubais, Deputy Prime Minister of
Russia, Argumenty i Fakty, 1997, no. 47
Though this thesis does not delve into the causation hypotheses that many
scholars have developed in the aftermath of the debt default,1 this chapter examines the
period prior to the default event—Russia’s transition from a centrally planned to marketbased economy—in order to properly contextualize the subsequent dynamics within the
Russian economy. The purpose is to describe Russia’s macroeconomic conditions during
the years immediately preceding default through the policy decisions made by key actors,
an introduction of the market for Russian debt, and the generalized conditions
surrounding foreign investment more broadly. This chapter’s chronology—outlining
fiscal and monetary decisions alongside their realized effects on the Russian economy
relative to the key domestic and international actors—offers context for the process
1
Martin G. Gilman, “No Precedent, No Plan inside Russia’s 1998 Default,” (2010: MIT Press); Padma
Desai, “Why Did the Ruble Collapse in August 1998?,” The American Economic Review 90, no. 2 (May 1,
2000): 48–52; Darrell Duffie, Lasse Heje Pedersen, and Kenneth J. Singleton, “Modeling Sovereign Yield
Spreads: A Case Study of Russian Debt,” The Journal of Finance 58, no. 1 (February 1, 2003), 119–59,
doi:10.1111/1540-6261.00520.
49
tracing presented in subsequent chapters. I focus on monetary and fiscal policy as the two
channels through which government can effectively inspire change in a nation’s economy
and, thereby, the primary dynamics shaping international perceptions of a nation’s
investment environment. After framing the discussion below, I introduce the monetary
policy decisions during the Yeltsin era, then dynamics of the Yeltsin fiscal regime, and
move into investment channels, focusing on the government debt market as the main
destination of foreign portfolio investment during this period and then the oil market as
one of the largest destinations for foreign direct investment.
CURRENCY FRAMEWORK
As the USSR dissolved, the new Russian leaders positioned themselves to
embrace the international community. “We are turning to the world community with pure
intentions in order to win friends but not enemies, and to establish honest and civilized
relations with other states,” announced Yeltsin during his first inaugural address.2 And,
on its part, the international community immediately took interest in the transitions across
all of the post-Soviet states. In the public sphere, Western advisors worked closely with
Yeltsin’s cabinet, settling on the importance of “shock therapy”—the immediate
liberalization of the Russian economy with specific focus placed on removing price
Boris Yeltsin, “Inaugural Speech by President Boris Yeltsin of the Republic of Russia,” Cambridge
Journals (Cambridge University Press, Foreign Policy Bulletin 2, no. 01, July 1991), 32.
2
50
controls and privatizing public enterprise and property.3 And in private enterprise,
Western industrial organization, and business practices more generally, were increasingly
serving as models for engineering entrepreneurs able to game through a difficult
economic environment.
The market transition—colored by the baseline decision to pursue aggressive
shock therapy— placed the country in a very particular macroeconomic climate prior to
the August 1998 devaluation of the ruble. On October 11,1994, almost three years after
the collapse of the USSR, a currency crisis hit Russia’s fledging market economy as
politicians and policymakers transitioned from a period of dissolution to a period of
rehabilitation, and eventually construction. The ruble’s instability throughout the 1990’s,
as evidenced by its fluctuations, symbolizes degree of disorganization plaguing the top of
the leadership command through the bottom of the bureaucratic order.4 The expectations
placed on Russia, for this reason, were never fully realized.
Monetary Politics: Center Stage in Moscow
“Capitalism Russian Style: Russian and East European Government, Politics and Policy,” Cambridge
University Press, accessed January 12, 2015, http://www.cambridge.org/US/academic/subjects/politicsinternational-relations/russian-and-east-european-government-politics-and-policy/capitalism-russian-style;
Anders Aslund, Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed,
Peterson Institute Press: All Books (Peterson Institute for International Economics, 2007),
https://ideas.repec.org/b/iie/ppress/4099.html; “Inflation and Monetary Policy in Russia: Transition
Experience and Future Recommendations,” CASE - Center for Social and Economic Research, accessed
January 14, 2015, http://www.case-research.eu/en/node/54944.
3
Jeffrey D. Sachs, “Economic Transition and the Exchange-Rate Regime,” The American Economic
Review 86, no. 2 (May 1, 1996): 147–52.
4
51
Western experts offered Russian policymakers economic counsel focused on the
importance of quickly transforming the economy through monetary policy.5 At the most
basic level, the advent of the Russian Federation forced Russian policymakers, along with
the domestic scholars that advised their decisions, to shift the collective understanding of
the purpose of monetary policy. During the Soviet period, monetary policy was utilized
dually for the purposes of regulating household purchasing power while ensuring the
realization of the Communist Party of the Soviet Union’s (CPSU) aggregate “economic
plan” through cycles.6 But in the transition to a market economy, monetary policy was
needed for the purpose of price stability—allocations being left to the markets.
From an economic perspective, a “shock therapy” approach would achieve the
macroeconomic goals preached by neoliberal economists as the building blocks for
economic growth in developing economies as quickly as possible. Western advisors
heavily preached the importance of quickly establishing market movements in order to
stimulate growth through international business.7 Many built their expectations based on
the assumption that the Russian case could model after the Polish success. Relative to the
post-Soviet economies, Poland’s immediate real GDP growth from 1990 to 1999 was
5
David Kotz and Fred Weir, Russia’s Path from Gorbachev to Putin: The Demise of the Soviet System and
the New Russia, 2 edition (London ; New York: Routledge, 2007); Gustafson “Capitalism: Russian Style”;
Anders Åslund, How Capitalism Was Built : The Transformation of Central and Eastern Europe, Russia,
and Central Asia / (Cambridge University Press, 2007); Fish, Steven, “Democracy Derailed in Russia: The
Failure of Open Politics.”
6
Aslund, “How Capitalism Was Built”; 1. Granville and Oppenheimer, Russia’s Post-Communist
Economy, ed. Bridgette Granville and Peter Oppenheimer (Oxford University Press, 2002), 21 - 27.;
Bridgette Granville, “The Problem of Monetary Stabilization,” Russia’s Post-Communist Economy, ed.
Bridgette Granville and Peter Oppenheimer (Oxford University Press, 2002), 95.
7
Ibid.
52
both remarkably stable and upward growing.8 "Poland, with its reforms in place, is the
fastest-growing economy in Eastern Europe," said Jeffery Sachs at the time. "If Poland
can do it, so can Russia."9
Politically, policymakers favored the method given a widely held belief that
“during a time of extraordinary political upheaval, broad changes are politically possible
and the public is more willing to endure the pain of higher prices and economic
dislocation.”10 Yeltsin was riding the wave of enthusiastic reverence at the union’s
dissolution strongly through the beginning of the 90s with record-high approval ratings.11
And he hoped for this ride of popular support to continue through the anticipated struggle
of economic reform. Up until and through his ascent to the presidency, Yeltsin’s public
tone was one of revolutionary exuberance—first, on the issue of democratic transition
and subsequently on the issue of market transition. In a 1991 article in the newspaper
Rossiyskaya Gazeta, Yeltsin was quoted saying, “The time has come to act decisively,
with toughness and without hesitation. Everyone knows what our starting point is. … By
the fall of 1992, as I promised before the election, there will be stabilization of the
8
Demetrios Giannaros, “Twenty Years After The Economic Restructuring Of Eastern Europe: An
Economic Review,” International Business & Economics Research Journal (IBER) 7, no. 11 (February 16,
2011), http://www.cluteinstitute.com/ojs/index.php/IBER/article/view/3306, 38.
Peter Passell;, “Dr. Jeffrey Sachs, Shock Therapist,” The New York Times, June 27, 1993, sec. Magazine,
http://www.nytimes.com/1993/06/27/magazine/dr-jeffrey-sachs-shock-therapist.html.
9
10
Padma Desai, Conversations on Russia : Reform from Yeltsin to Putin (Cary, NC, USA: Oxford
University Press, Incorporated, 2006),
http://site.ebrary.com/lib/alltitles/docDetail.action?docID=10160514, 32.
11
Daniel Treisman, “Presidential Popularity in a Hybrid Regime: Russia under Yeltsin and Putin,”
American Journal of Political Science 55, no. 3 (July 1, 2011): 590–609, doi:10.1111/j.15405907.2010.00500.x, 8.
53
economy and gradual improvement in people’s lives.”12 Some analysts have explored
Yeltin’s political strategies until his reelection in 1996 from the perspective of communist
shielding. Everything from the decision to pursue shock therapy to his aura of
“revolutionary exuberance” to his government’s close relationships with Western
advisors can be seen as escalating preemptive movements against the re-establishment of
popular interest in communist ideology in the direct aftermath of the USSR collapse.
While this theory is not necessary relevant to the problem on hand, the logic underlying
this theory—which claims that Yeltsin pursued these strategies with full and undivided
purpose—is an important variable to identify during Russia’s transition period.
The market transition was set to be marked by the following steps devised by
Yeltsin’s cabinet, including economist and Prime Minister Yegor Gaidar, along with
prominent Western advisors like economist Jeffrey Sachs, who at the time was working
at Harvard University: free prices, tighten money supply, cut down government
borrowing significantly, peg exchange rate to the dollar, and inspire massive amounts of
foreign aid to Russia. All of these tasks were set to occur as immediately as possible
given the knowledge that such harsh austerity measures should starkly affect cost and
quality of living for the average Russian citizen. Publically, Yeltsin said the
government’s goals for economic transition were twofold: first, establish freedom in the
markets and second, stabilize Russia’s finances. He told the Russian people that in order
to achieve these goals and “offer people possibilities to work and receive as much as they
earn,” there first needed to be an immediate liberalization of prices and privatization of
12
Roy Aleksandrovich Medvedev, Post-Soviet Russia: A Journey Through the Yeltsin Era (Columbia
University Press, 2000), 19.
54
property.13 The full plan and intricacies involved with price liberalization were never
fully presented either to the public or to the Congress of People’s Deputies for reasons
that included the anticipated social discontent the plan would breed, as well as the plan’s
incomplete nature, according to some scholars. Instead, Yeltsin publically claimed that a
transition to a market pricing system would take about a half-year’s span, and pushed his
belief that the reformers could not “defend everyone’s standard of living in the first
stage.”14 The “shock therapy” paradigm colored Russia’s experience with capitalist
expansion during the decade. Monetary policy that was instilled early on would set the
baseline off which policymakers reacted with further policy, no longer in the name of
economic revolution, but for the sake of stabilization or compliance with international
guidance.
Before launching any of the recommended monetary policy, the Central Bank of
Russia (CBR) first spent the years 1992 – 1993 dissolving the “ruble zone,” as former
Soviet nations developed individual, sovereign currencies, and this allowed for Russia to
focus on its sovereign monetary policy as an individual nation.15 Prior to the dissolution,
15 former-Soviet states were issuing rubles without organized or centralized control
across all of the banks.16 Yeltsin appointed Viktor Gerashchenko17 as the newly
13
Anders Aslund, Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed,
Peterson Institute Press: All Books (Peterson Institute for International Economics, 2007),
https://ideas.repec.org/b/iie/ppress/4099.html, 90.
14
Medvedev, 19.
Marek Dabrowski, Wojciech Paczynski, and Lukasz Rawdanowicz, “Inflation and Monetary Policy
in Russia: Transition Experience and Future Recommendations,” CASE - Center for Social and Economic
Research, accessed January 14, 2015, http://www.case-research.eu/en/node/54944.
15
16
Aslund, Russia’s Capitalist Revolution, 95.
55
reimagined RCB’s head. Gerashchenko saw the bank through its transition from the
USSR to the Russian Federation.
The CBR did not take on a significantly tighter grip on the money supply until
1995, as fiscal problems were placed as the foremost concern, necessitating periodic
monetary expansion.18 Table 3.1 shows the size of the money supply from 1993 up
through 1998, in addition to the price levels associated with those years. In 1995, there’s
a notable increase in supply relative to the prior year, with an associated but relatively
steeper rise in the aggregate price level.
Table 3.1: Money Supply and Price Level in Russia, 1993 – 1998
Year
Consumer Price Level
Money Supply (millions of rubles)
1993
100
23,881
1994
97
68,544
1995
3970.41
151,627
1996
11808.39
192,402
1997
17425.64
270,602
1998
19973.27
344,113
Source(s): “Hyperinflation in Russia in the 1990’s,” San Jose State University Department of Economics,
http://www.sjsu.edu/faculty/watkins/russianinfl.htm.
17
Gerashchenko served as the last serving head of the State Bank of the USSR, beginning in 1991 up until
his appointment to the Russian Central Bank.
18
Dabrowski et al, 8.
56
Price Controls
The Russian government almost entirely liberalized prices in January of 1992,
excluding certain goods, like food for infant children, but lifting the decades-long
subsidies on consumer staples including bread and milk.19 The theoretical underpinning
of price liberalization in a transition economy is simple: In a centrally planned economy,
the government is charged with setting prices as a means of resource allocation, but in a
market economy, prices are determined through competitive production of private
enterprise.
The first and most pressing effect of price liberalization was the sudden surging of
prices to levels ranging from 800-900 times their pre-liberalization values during the first
quarter of 1992.20 With such an increase in prices across the board, the costs of
production rose dramatically, resulting in immediate declines in production. Enterprise
located outside the main provinces were late to register the price fluctuations into their
inventories and found themselves particularly disadvantaged when returning to purchase
intermediate goods for production. Many of the factories located in the non-central
regions closed, representing an aggregate economic contraction alongside the rampant
inflation that coincided with price liberalization.
As prices soared, the value of the ruble soared downward, creating vast demand
for large-denomination currency that far exceeded the productive capacity of the state’s
John-Thor Dahlberg, “Russia to End Most Price Controls by End of March : Economy: Moscow Adopts
a 1992 Reform Plan Vital to Yeltsin’s Hopes of Winning More International Assistance.,” Los Angeles
Times, February 28, 1992, http://articles.latimes.com/1992-02-28/news/mn-3072_1_price-controls.
19
20
Medvedev, 89-91.
57
printing presses, managed by the Treasury’s Gosznack agency. Though the reformers
were not actively pursuing a contracting monetary policy until 1995, the expansion in
money supply was not enough to keep the economy afloat. By 1992, currency circulation
feel 42 percent, feeding into a large system of barter including trade in kind paired with
the dollarization of the economy, as well as capital flight.21 Relative currency stability —
one of the reformer’s primary goals with price liberalization—was not achieved in the
first two years after the policy’s implementation.22 On Black Tuesday of 1994, the ruble
fell 27 percent against the dollar, a record plummet that called international attention to
Russia’s floundering transition plan.23 Table 3.2 shows the annual trajectory of the RubleDollar exchange rate over the transition period.
21
Aslund, 112-118.
22
Ibid.
Boris Brodksky, “Dollarization and Monetary Policy in Russia,” Review of Economies in Transition,
November 1997.
23
58
Table 3.2: Exchange Rate (Ruble-Dollar, 1991- 1998)
Country
Year
Exchange Rate (Ruble –
Dollar)
Russia
1991
0.00175
Russia
1992
0.2221
Russia
1993
0.991667
Russia
1994
2.19075
Russia
1995
4.55915
Russia
1996
5.12083
Russia
1997
5.78483
Russia
1998
9.70508
Arrears
Source(s): United States Federal Reserve Bank, FRED Database
Given the demonetization of the Russian economy, a lack of currency also created
a vast system of arrears across enterprise through peer-to-peer lending and in tax
payments. Both a lack of physical currency and a poorly functioning infrastructure
created a system in which missed payments were, more often than not, the expected
outcome of a business transaction—both peer-to-peer and firm-to-consumer.
59
Employers—Russia’s bureaucratic agencies in particular—became extremely
backlogged with arrears for missed wages, thereby severely restricting the purchasing
power of individuals and families.
Notable studies have explored the social effects of the transition, focusing on the
income inequality that paired with social welfare losses for Russian families during this
period, but these are not entirely relevant to the current problem—only insofar as they
further substantiate a lack of currency in the markets, especially at a regional level.24
Government spending on social programs to the poor was strictly and severely
diminished in the transition period, and logically so given the parameters of the
ideological transition that underlined market establishment. However, the percentage of
GDP allocated to social assistance trailed actually trailed Western democratic standards
during points of the transition. This social dynamic is important to note as it attests to the
wide social discontent that the transition period bred, a discontent that was specifically
associated with the Yeltsin government and decisions made therein. Some motivation
behind the fiscal cuts stemmed from the government’s inability to raise real capital
during the transition period.
Searching for Stability Through Fiscal Adjustment
With the liberalization of prices early on, the Russian Federation’s fiscal policy
achieved approximately half of its nascent fiscal policy. Fixed prices comprised a
“Poverty In Russia During The Transition,” World Bank Research Observer 13, no. 1 (February 1, 1998):
37–58, doi:10.1093/wbro/13.1.37; Christopher Marsh, “Social Capital and Democracy in Russia,”
Communist and Post-Communist Studies 33, no. 2 (June 2000): 183–99, doi:10.1016/S0967067X(00)00003-9.
24
60
significant portion of government subsidies in an otherwise widely inflationary
environment, and, not much later, additional social programs were cut down in the name
of fiscal stability and little-to-no market intervention.25 But fiscal policy is the
combination of two flows—spending and revenue accumulation. Throughout the
transition, the latter portion proved difficult for Russia. Figure 3.1 summarizes the
increasing levels of tax arrears in Russia over the period 1995 to 1998.
25
Ibid.
61
Figure 3.1 Federal Tax Arrears, 1995 - 1998
Source(s): Maria Ponomareva and Ekaterina Zhuravskaya, “Federal Tax Arrears in Russia,”
Economics of Transition, 2004.
Revenue Collection
Over the course of the transition, a clear and concise tax code was never
established. Based in historical standards and established institutions, the transition
effectively over-complicated an inherently complicated system, creating problems of
social compliance, low risk for evasion, and bureaucratic incompleteness—forces
implicitly tied into each other. Rates across the code varied vastly throughout the decade
relative to the fluctuations in inflation rates, producing a popular mistrust and
misunderstanding behind the tax code. Given a rise in rates across the board at the federal
level, the imposition from regional collectors with additional taxes made for a widely
62
inflated environment for businesses particularly given the generally weak economy of
Russia at this point in time.
While the system of connections between regional authorizes and the federal
government was maintained through the USSR dissolution, the main variables of the tax
code were revamped in an attempt to simulate more Western models of collection. Early
in the decade, a VAT (value-added tax) was established in addition to excise taxes on
enterprise profits and personal income.26
One large tenet of the fiscal transition for Russia was the development of a
collection mechanism that could be reliably applied to the new private enterprises. But
bureaucratically this goal was never successfully achieved. Part of this problem was the
disincentive based in wages and wage arrears for bureaucratic efficiency. Government
offices were some of the hardest hit by the inefficient circulation of capital. Workers
were reported to have gone significant stretches of time without going paid early in the
transition, creating a culture of inefficiency and creating opportunity for the development
of “violent entrepreneurship” in the state.
As private industry rose, firms discovered that the transaction costs incurred by
utilizing private “rule enforcers” were oftentimes significantly lower than the legal
enforcement mechanisms.27 This theory runs back to the base relationship between state
and private enterprise. In a liberal democracy, firms are essentially interested in
purchasing protections from the state, wherein taxes serve as quasi-payments between the
26
Galina Preobragenskaya and Robert W. McGee, Taxation and Public Finance in a Transition Economy:
A Case Study of Russia, SSRN Scholarly Paper (Rochester, NY: Social Science Research Network,
December 28, 2003), http://papers.ssrn.com/abstract=480862.
Vadim Volkov, “Violent Entrepreneurship in Post-Communist Russia,” Europe-Asia Studies 51, no. 5
(July 1, 1999): 741–54.
27
63
two parties. This same type of “enforcement partnership,”28 however, can arise between
private parties in the absence of an effective state entity. With the failure of the Russian
bureaucracy, the transition period saw a remarkable rise of private “violent
entrepreneurs,” developing into sophisticated regional monopolies at a huge cost to fiscal
stability.29
These networks of organized crime, in addition to the private enterprise that
oftentimes partnered with them, attests to the fact that there were significant stocks of
capital resting in particular parts of the Russian economy during the transition. The next
two sections explore this capital and its foreign counterpart from the perspective of
investment opportunities given the economic baseline already explored.
PORTFOLIO INVESTMENT
In 1993, even prior to the full establishment of a singularly Russian central bank,
the federal government established the market for short-term fixed income debt
products—named gosudarstvennoye kratkosrochnoye obyazatyelstvo in Russia. Active
trading across both a primary and secondary market for GKOs launched in the
subsequent year in a model based largely off the internal government credit bonds from
the perestroika period. For two years after the establishment of this market, trading
continued across three main products, including three-month, six-month, and two-year
28
Ibid.
29
Ibid.
64
bonds. Despite a highly inflationary environment, in 1996, the six-month GKOs logged
250 percent annual rates of return against 20-25 percent inflation rates. For residents
who, unlike the majority of the nation, were in possession of capital, the GKOs
represented a massive investment opportunity that required short-term capital
commitments.30
In August of that same year, the market for GKOs was fully liberalized, allowing
foreign investors from around the globe to join in on the speculation almost
simultaneously with the creation of a futures market. While it was well known that
foreign investors were already responsible for the demand that was raising yields until
1996, as brokerage networks popped up that connected Wall Street to Moscow, the
decision to liberalize allowed for realization of a full semblance of foreign interest. In an
already risky market given the macroeconomic and fiscal instability present in Russia, at
the time, the foreign investors inserted new and unprecedented degrees of “political” risk
into the market31—most notably tying in the Russian products across Asia, Europe, and
into the United States.
Market liberalization produced a surge in trading within the GKO markets, as
figure 3.3 attests to. From 1996 to 1997, it seemed as if the government had found a
lucrative source of revenue that would be able to help float the budget in the short-term
after the IMF funds from 1995 led to the most balanced budget of the transition period.
Anatoly Peresetsky, Gahar Turmuhambetova, and Giovanni Urga, “The Development of the GKO
Futures Market in Russia,” Emerging Markets Review 2, no. 1 (March 1, 2001), 1–16, doi:10.1016/S15660141(00)00016-9.
30
31
Ibid; Aslund, Russia’s Capitalist Revolution, 189-190.
65
Table 3.3 GKO Market Revenues
GKO-OFZ REVENUE AS PERCENTAGE OF GDP
1995
1996
1997
5.0 percent
11.1 percent
15.5 percent
Source(s): Nicola Melloni, Market Without Economy: The 1998 Russian Financial Crisis (Columbia
University Press, 2007); Goskomstat.
In the aftermath of the debt default, many have commented on the complicated
nature of associations between the primary, secondary, futures, and, eventually, “repo”32
markets on which GKOs were held, as well as the nature of the domestic financial
institutions that acted as trade conduits. The post-Soviet banking system was dominated
early on by FIGs (financial industrial groups), which led the privatized industrial sector.
The seven major “bank-led” FIGs—Menatep Bank, ONEK-SIMbank, Alfa Bank, Most
Bank, LogoVAZ, Rossyiskiy Kredit Bank, Inkombank, and SBS-Agro33—worked within
the GKO markets, manipulating the rates of return into massive profits and then
transforming those profits into ownership across industries including everything from
media to consumer goods to natural resources. These extensions eventually led to
accumulation of vast political power through three main channels: influence over the
32
The “repo” market refers to market for “repurchase agreements” often created by governments in
addition to the primary market for government debt. The United States Federal Reserve defines repurchase
agreements as transactions that “bid on borrowing money versus various types of general collateral” with
primary dealers.; “Repurchase and Reverse Repurchase Transactions,” United States Federal Reserve Bank
of New York, August 2007, http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html.
33
Granville, 213 - 237.
66
media, influence through campaign finance, and through positioning for government
roles through Yeltsin’s administrative revolving door.
The political connections between new Russian “industry” and the government
elite worked two ways. The Yeltsin administration was able to profit from the massive
amounts of capital controlled by the FIGs and their leadership, while the firms were able
to benefit through rigged auctions throughout the period of privatization. While much has
been written about the connections between the Russian “oligarchs” and Yeltsin’s cabinet
in the orchestration of the “loans-for-shares” program, for the purposes of this thesis, just
the existence of explicit political connections between Russian government leaders,
industry leaders, and the financial markets are most important.
BEYOND THE GKO: FOREIGN DIRECT INVESTMENT
Much of the Western policy advice that was offered to the Russian government at
the start of the transition rested upon the need for massive inflows of foreign capital.34
Whether through investment or pure injection, the money was necessary for full
realization of the liberal expectations, the advisers said, setting up their projected reforms
based on the assumption of foreign capital.35 In reality, with each passing benchmark, the
goals were consistently missed. Foreign investors were not interested in directly
supporting enterprise in a nation with weakly enforced rule of law, legislative
34
Jeffrey Sachs, “What I did in Russia,” (March 2012), http://jeffsachs.org/2012/03/what-i-did-in-russia/.
35
Ibid.
67
inefficiency, and regional disintegration. But by 1996, the oil industry was logging more
foreign investment that any other set of enterprise in the country, despite the
aforementioned barriers to entry. In many ways, the Russian oil industry during the
transition represents a microcosm of the wider dynamics discussed earlier about the
aggregate economy.
As early as 1992, the first steps were taken to change the Soviet organization of
the oil market—a horizontal scheme that aggregated products slowly and, according to
the new logic, inefficiently—to a vertical market in the model of its Western peers.36 The
industry’s top leadership, more or less, comprised of the same government leaders who
had run the business for the Soviet planners and were able to achieve their market goals
through presidential decree from Yeltsin.37 Initially the firms were privatized with 38
percent state control through capital for the first three years, with an additional 51 percent
control in the holding companies under which the subsidiary energy firms were
developed.38
With an eye toward the productivity levels achieved by American firms, the new
Russian firms set out to privatize into strong, integrated firms that would take full
advantage of the country’s resources. The private firms were initially Lukoil, Yukos, and
Surgutnetfgaz, with the federal government also setting up a company named Rosneft to
36
Daniel Yergin, “The Quest: Energy Security and the Remaking of the Modern World," (The Penguin
Press 2011), 28 - 29.
37
Presidential Decree No. 1403, November 1992; Henderson, James, “International Partnership in Russia,”
15.
38
Ibid.
68
serve as the state-owned holding company for the remaining pieces of the oil industry.39
By 1995, six “mini-majors” and three regional firms formally joined the nascent
market—resulting in the following organization outlined in table 3.4 leading into the
1998 default.40
Table 3.4 Oil Industry Organization, 1995
Russian Oil Firms
Majors
Mini-Majors
Regional firms
State-owned
Lukoil
Eastern Oil
Bashneft
Rosneft
Surgutneftgaz
Onako
Komitek
Yukos
Sibneft
Tatneft
Sidanco
Slavneft
TNK
Source(s): Daniel Yergin, “The Quest: Energy Security and the Remaking of the Modern World," (The
Penguin Press 2011); Thane Gustafson, “Wheel of Fortune,” (Belknap Press, 2012).
The period between 1995 and the debt default saw the auctioning off of portions
of Rosneft during the loan-for-shares program41 organized around Yeltsin’s re-election.
Michael Alexeev and Shlomo Weber, eds., The Oxford Handbook of the Russian Economy, 1st ed.
(Oxford University Press, 2013),
http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199759927.001.0001/oxfordhb9780199759927.
39
40
Gustafson, “Wheel of Fortune,” 100.
41
“Loans for Shares” refers to the popular term used to describe the serious of state auctions held in the
months prior to Yeltsin’s second term, in which wealthy Russians traded upwards of millions of rubles for
stakes in 12 different state-owned or state-controlled enterprises under the guise of loans that were
subsequently defaulted on by the federal government—resulting in a full transfer of ownership; Treisman,
Daniel, “Revisiting Loans for Shares,” National Bureau of Economic Research, 2010.
69
By 1998, only two of the original majors—Lukoil and Surgutneftgaz had maintained
original ownership. Yukon, and the next three largest mini-majors TNK, Sidanco, and
Sibneft, were bought out by financial entrepreneurs.42 And Rosneft, the state-owned
enterprise, was reduced down to producing less than a quarter of the industry’s aggregate
output.43
And though the Western influence, at first, only served as entrepreneurial
inspiration, partnerships became more and more attractive as the industry realized the
need for wide-scale technological innovation. Nevertheless, through this period, the
largest Western import for the new Russian firms was, first, the transition to vertically
integrated models of industrial organization. In the Soviet era, oil was produced along a
horizontal model, in which the points of production were segregated and contracted out to
quasi-autonomous groups.44 In this model, production was organized around
communication between only the heads of each respective group, who would decide how
to appropriately aggregate materials at the end of production based on a strict
bureaucratic order.45 In the West, a vertical integration of production involves a
centralized supply chain. As the first three majors began their development, leadership
assumed the Western belief in the increased efficiency allowed by centralized production,
especially in terms of management of cost structures. While lower margins were
absorbed across the production process in the 1970s given an international oil market
42
Gustafson, 100.
43
Ibid.
44
Gustafson, 71 – 72.
45
Ibid.
70
with record-high prices, the 80s brought a collapse in pricing, straining the inefficient
Russian market.46
International joint ventures were allowed beginning in the perestroika period
under Gorbachev.47 These arrangements included capital and knowledge transfer between
the Western majors and the nascent Russian firms. At face level, the ventures were an
almost one-sided win for the Russian firms, who received the investment they needed to
engage in exploration and development in addition to a partner with an extensive human
capital inventory. In certain projects, the human capital proved even more essential than
the capital investments. As interest in the joint ventures solidified in real action in 1994,
this vehicle became the main method for foreign investment during the transition period
up until the debt default. The main projects that launched during this period were the
“Polar Lights” field in the northern Arctic that was the partnership between LUKoil and
American firm ConocoPhillips, the Sakhalin-1 and Sakhalin-2 projects that involved
Shell and ExxonMobil with smaller Russian firms, and the BP-Sidanco-TNK partnership
in the Samotlor fields.48 Table 3.5 summarizes these projects and the foreign investment
they represented. The Sakhalin projects are notably more capital intensive and involved
significant technological development given the climate and geography of the island.
Table
3.5 FDI in Russia, 1995
46
Daniel Yergin, “The Prize,” (Simon and Schuster, 2008), 763-764.
47
Gustafson, 41 – 46.
48
Ibid.
71
Polar Lights
Sakhalin-1
Sakhalin-2
Samotlor
Location
Northern
Arctic, Western
Urals
Far East,
Pacific Ocean
Far East,
Pacific Ocean
West Siberia
Foreign Capital
Invested
$40 million
(initial)
$7 Billion
$20 billion
$571 Millions
Source(s): Gustafson, “Wheel of Fortune,”; James Henderson and Alastair Ferguson, “International
Partnership in Russia."
Initially, despite the newly privatized companies, there were legal barriers to
entry into the Russian oil market for foreign investors. Two large factors strip away some
of the barriers, leading to the introduction of foreign capital into remote Russian regions.
Up until 1995, there was little progress in the legal sphere for foreign firms interested in
entering partnerships with Russian companies—“investors had no way of protecting
themselves against … legal instability.” July of 1995 marked the legislative success of
the “law on oil and gas,” with a subsequent “law on production sharing agreements.”49
And in that same year, guidance from the IMF associated with a massive loan pushed the
Russian government to phase out the punitive export tax and replace it with an increase to
the excise tax, with the hopes of attracting foreign investment. Anders Aslund has called
the organization of the oil market during this transition period the “liberal model,” in that
49
Gustafson, 35 – 45.
72
the neoliberal advisement offered to Russian throughout the transition was most
successfully carried out in this particular industry.50
A study in the direct aftermath of the default explored the motivations behind
investors who chose to place capital into Russian enterprise, drawing the following
results51—particularly notable is the difference in responses for those investing outside of
Moscow, predominantly where oil entrepreneurs focus. For investors who invest in
companies located in Moscow, the size of the Russian market and existing investments
with Russian firms are some of the most notable motivations, while investors who focus
outside of Russia cite “special production factors” as their main motivation for interest.
Halfway through the transition, it became obvious that the Eastern regions of the
new Russian Federation contained “special production factors” that were enticing
investment from Western oil firms in that they were large enough benefits to overcome
the remaining costs associated with the continuing legal difficulty of operating in Russian
given the inflationary environment and bureaucratic disorganization, as well as the
continuing “violent entrepreneurship” across all of the regions. The rest of the economy
remained struggling, but the oil market, by 1996, was on an upturn.
50
“Putin’s State Capitalism Means Falling Growth | Opinion,” The Moscow Times, (May 2013),
http://www.themoscowtimes.com/opinion/article/putins-state-capitalism-means-fallinggrowth/480301.html.
Rudiger Ahrend, “Foreign Direct Investment into Russia - Pain Without Gain? A Survey of Foreign
Direct Investors,” Russian Economic Trends 9, no. 2 (June 2000),
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4325568&site=ehost-live.
51
73
CONCLUSION
This chapter explored the monetary and fiscal decisions of the transition in an
attempt to motivate an understanding of the investment environment in Russia prior to
the default. Politicians and policymakers entered the transition period with intentions of
cultivating foreign investment through Western recommended policies that would
invigorate the domestic economy and open up trade routes with international partners.
But this idealized reality was never fully achieved, falling victim to private interests and
corrupt criminal networks. And while the rates of investment never reached the aspired
goals, notable foreign interest grew in the markets for Russian government debt and
energy through disparate paths. The next two chapters will continue the story introduced
here, tracing investment in Russian financial markets in addition to direct investment in
Russian enterprise in the aftermath of an internally costly debt default that hit the Russian
Federation in 1998, culminating in the decision of the Central Bank of Russia to default
and devalue its currency on August 25, 1998.
74
CHAPTER FOUR
TRACING THE AFTERMATH OF CRISIS
Я хочу попросить у вас прощения. За то, что многие наши с вами мечты не
сбылись. И то, что нам казалось просто, оказалось мучительно тяжело.
I want to beg forgiveness for your dreams that never came true. That which we
believed to be simple was resolved to be cruelly difficult.
—President Boris Yeltsin, 1999 Resignation Speech, Office of the President
This chapter serves two distinct purposes: First, it synthesizes the Russian
economy in the weeks leading into and leading out of the decision to default on
government debt that took place on August 17. This synthesis frames the subsequent
analysis of the aftermath of the default across the variables of interest identified in
Chapter One—real GDP, trade flows, and borrowing costs. This analysis substantiates the
critical junctures that comprise the bottom level of the post-default framework, first
introduced in Chapter One and illustrated again in figure 4.3 of this chapter. The critical
junctures weave together to comprise the foundation of the “political-industrial
framework” that develops during the Putin Administration. First, Vladimir Putin is
appointed as prime minister within the Yeltsin administration, a juncture that places the
young politician in a position to ascend to the presidency. Second, Putin strengthens and
centralizes federal power, while constructing a strong fiscal regime and re-establishing
state power over Russian energy reserves after a decade of neoliberal market
construction. Third, the global energy markets see a significant surge in oil prices,
leading to increased federal revenues and a stronger domestic economy. The political-
75
industrial framework is the resulting political norm in Russia by 2005 due to the
combined effects of these critical junctures.
THE WEST SPECULATES COLLAPSE
At the beginning of August 1998, the Central Bank of Russia effectively lost
hundreds of millions of U.S. dollars per day through the declining value of their
government fixed income debts. Despite a $22.5 billion dollar rescue package from the
International Monetary Fund in July,1 Russia had accumulated $55 billion of debt that
was furiously bid up over the course of the summer as speculators moved to sell-off
Russian holdings.2 Investors pushed up interest rates on GKO products, which lay around
30 percent in May of 1998, to almost 100 percent by that July as the federal government
visibly struggled to make the appropriate incremental repayments on the loans.3 During
the first half of 1998, monthly payments on government loans rose to 50 percent of
monthly federal expenditures.4 Figure 4.1 traces the trajectory of the yields on GKOs
relative to the weekly revenues of the Ministry of Finance. March 1998 was a notable
1
Paul Blustein, “The Chastening,” (New York, NY: Public Affairs, 2001), 235.
Elmar Koch and Iikka Korhonen, “ The Aftermath of the Russian Debt Crisis,” (Bank of Finland: Institute
for Economies in Transition, July 2000),
https://helda.helsinki.fi/bof/bitstream/handle/123456789/12590/94782.pdf?sequence=.
2
3
“OECD, OECD Economic Surveys: Russian Federation 2000, vol. 2000 (Paris: Organisation for
Economic Co-operation and Development, 2000), http://www.oecd-ilibrary.org/content/book/eco_surveysrus-2000-en, 41 – 43; Darrell Duffie, Lasse Heje Pedersen, and Kenneth J. Singleton, “Modeling Sovereign
Yield Spreads: A Case Study of Russian Debt,” The Journal of Finance 58, no. 1 (February 1, 2003): 119–
59, doi:10.1111/1540-6261.00520.
4
Ibid, 43.
76
point in the months leading up to the default—revenues were progressively declining
below zero and the yields on government debt were rising toward 100 percent.
Figure 4.1 Average Monthly GKO Yields, 1997-1998
Source(s): VEDI Statistics, http://www.vedi.ru/w_fm_e/fm7000.htm.
The Russian government—and the international actors monitoring the Russian
markets—remained hopeful for another bailout from the IMF until the very days prior to
the official default decision that took place on August 17,1998.5 But financial assistance
to the struggling debtor nation never arrived. The Russians claimed to have no other
choice than to default on their currency’s value in order to reestablish stability in the
domestic markets and, then, look toward repayment in the future.6
5
Blustein, 240.
6
Homi Kharas, Brian Pinto, and Sergei Ulatov, “An Analysis of Russia’s 1998 Meltdown: Fundamentals
and Market Signals,” Brookings Papers on Economic Activity 32, no. 1 (2001): 1–68.
77
The Russian Federation established a 90-day memorandum on debt repayment in
order to stabilize the domestic economy, Prime Minister Sergei Kirienko announced
August 17.7 The debt restructuring plan that was also announced by the government on
that day, and fully explained a week later, did include some support from the IMF, with
the Fund stepping in to support the restructuring in the form of international arbiter of
trust—an attempt to establish an objective bridge between Russian leaders and the
sovereign’s global lenders.8 In the immediate aftermath, the default announcement left
much to be desired by investors and the full details of Russia’s default decision were not
realized for months subsequent to the announcement.9
In the two weeks following the default announcement, Russia’s financial markets
were shocked to standstill and actors who previously stood behind Yeltsin in the
background of monetary and fiscal decisions during the first-half of the market
transition—including politicians like Sergei Kirienko and Deputy Prime Minister Boris
Nemtsov—moved to the forefront of Russian politics as rumors began circulating of
Yeltsin’s likely resignation short of the end of his second term,10 which would have been
set to complete in 2000. The CBR announced in September that it would no longer
7
Kotz, David and Fred Weir, “Russia’s Path from Gorbachev to Putin: The Demise of the Soviet System
and the New Russia,” (Routledge, 2007), 236 - 237.
8
Harold Finger and Mauro Mecagni, “Sovereign Debt Restructuring and Debt Sustainability: An Analysis
of Recent Cross-Country Experience,” (International Monetary Fund, 2007),
http://www.imf.org/external/pubs/cat/longres.aspx?sk=19634.
9
Alexander Nadmitov, Russian Debt Restructuring: Overview, Structure of Debt, Lessons of Default,
Seizure Problems and the IMF SDRM Proposal (Harvard Law School, 2004).
10
Lilia Shevtsova, Putin’s Russia (Carnegie Endowment, 2010), 14.; “Rumors of Yeltsin’s Resignation
Underscore Inadvisability of Clinton Trip to Moscow at This Time,” Center for Security Policy, accessed
April 3, 2015, http://www.centerforsecuritypolicy.org/1998/08/27/rumors-of-yeltsins-resignationunderscore-inadvisability-of-clinton-trip-to-moscow-at-this-time-2/.
78
support the ruble, and Sergei Dubinin left his post atop the bank only a week later,
making way for Gerashchenko to reclaim the position.11 September also marked the
realization of contagion across global financial markets, with the effects of the ruble’s
collapse reaching from Europe to Latin America to the U.S. hedge fund industry.12
In the domestic economy, prices rose 40 percent and the banking system was
shattered. The Central Bank instituted a currency band, floating the ruble against the
dollar in an attempt to protect the domestic economy from the potentially disastrous
effects of pure market forces in the aftermath of a very public announcement by the
Russian government about its inability to afford payments on its debt.13 With this
announcement, the ruble settled at 65 percent of its prior exchange rate relative to the
dollar.14 The institution of the band and an overall freeze in government expenditures
through the end of the year led to an approximately 5 percent decline in real output in
Russia during 1998 relative to the prior year. Table 4.1 summarizes the levels of the
macroeconomic variables of interest. The year 1998 ended with a clear trade surplus. The
calculated borrowing costs represent the average yield on GKO’s during the active
trading period, which lasted eight months as the markets were locked in the aftermath of
the default decision in order to pursue stabilization, officials said at the time.
11
Aslund, 189 – 190.
12
Mardi Dungey, Renee Fry, Brenda Gonzlez-Hermosillo and Vance Martin, “The Transmission of
Contagion in Developed and Developing International Bond Markets,” (Bank for International Settlements,
2002).
13
14
Koch and Korhonen, 5.
Kotz and Weir, 246.
79
Table 4.1 1998 Macroeconomic Overview
VARIABLES OF INTEREST
Output
(GDP, Real,
Trillions of
Rubles)
1998
1,321.4
Borrowing
Costs
Imports
(Millions of
Rubles)
Exports (Millions
of Rubles)
645,633.8
821,043.4
42.55 percent
Current
Account
(% of
GDP)
0.0810
175, 409.6 Surplus
Source(s): Goskomstat, http://www.gks.ru/bgd/free/b01_19/IssWWW.exe/Stg/d000/i000020r.htm; IMF World
Outlook Database, Russian Federation; EconStat, http://www.econstats.com/weo/CRUS.htm.
This chapter picks up the storyline at the start of 1999—the post-crisis period, as
substantiated by the amount of continuing turmoil that plagued both Russian markets and
politics through the end of 1998. Determining the duration of a crisis is a contested
practice in the literature on financial crises. 15 Though the default officially took place in
August, the full details associated with the restructuring plan were not fully announced to
the market until the end of the year, and, as I proceed to show, Russian policymaking was
effectively locked during the second half of 1998 due to global criticism and oversight by
international organizations.16 But by 1999, the government was determinedly in reaction
mode as evidenced by the policy package launched at the start of the year, substantiating
15
Prakash Kannan, Alasdair Scott, and Marco Terrones, “From Recession to Recovery: How Soon and
How Strong,” (International Monetary Fund: World Economic Outlook, April 2009),
https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf.
16
Aslund, 190 – 191.
80
the perspective, taken here, that January of 1999 represents a shift from “crisis” to
“aftermath” when discussing Russia’s sovereign debt default.
Tracing empirical reality in Russia across the short-term and medium-term
aftermath of the debt default across the three variables of interest—real output, borrowing
costs, and volume of trade flows—, the focus of this chapter is the construction of a
reliable and objective timeline of outcomes, as represented in figure 4.2. The process
tracing presented here is organized around three critical junctures that take place in the
short-term aftermath of the default—first, Yeltsin’s appointment of Vladimir Putin as the
final prime minister of his declining administration, second, the surge in prices in the
global energy markets, and third, the fiscal revolution achieved as a result of the two
aforementioned forces.
Through identifying these junctures and their importance and simultaneously
tracing them across the variables of interest, I develop the first level of my argumentative
framework—pictured in figure 4.3. Putin’s entrance into the political elite, the new
administration’s effects on the industrial organization of the energy sector, and the price
shift in the global energy market established two important political economic dynamics
in Russia: the overturn of Yeltsin’s neoliberal attempt and the economic strengthening of
the domestic economy’s energy sector.
81
Figure 4.2 Process Tracing Default Outcomes
2000
1999
2004
2002
2001
1999 - 2000
Ascension of Putin
Federal State Strengthened
2003
2000 - 2001
Oil and Natural Gas Prices Rise
Figure 4.3: Levels 1 and 2 of Post-Default Framework
82
REVOLVING DOORS: PUTIN ENTERS RUSSIAN POLITICS
In the aftermath of the August default decision, Yeltsin shifted the prime minister
of the Russian Federation four times, ultimately choosing to step down from the
presidency approximately a year short of his term end. Not one of the last four prime
ministers of the Yeltsin administration lasted even a year in office, as evidenced by the
duration figures presented in table 4.2. This analysis is important context for the election
of Vladimir Putin as president of Russia in early 2000, as well as for the policies
associated with Putin’s tenure that drive foreign investment. Of Yeltsin’s last four prime
ministers Putin was the least experienced and the least known—both to Yeltsin and the
Russian people—but despite his peculiar entrance into national politics, Putin went on to
change domestic policymaking markedly relative to Yeltsin’s tenure.
A Political Transition: Yeltsin to Putin
Yeltsin was known, during his second term especially, for his propensity to take
public reprieves that were never fully substantiated to the public, the press, or often times
even his cabinet.17 Having experienced five heart attacks by the time of the 1998 default,
Yeltsin was constantly under media attention, as pundits searched for hints on whether he
would push for a third term in office amidst the popular concerns about his ability to
17
Kotz and Weir, 265-267.
83
govern given his declining health.18 The combination of Yeltsin’s unannounced
disappearances with the nation’s failing economic climate fueled rampant rumors over
the probability that, in fact, Yeltsin would not even make it through his second full term.
А руководитель президентской администрации Валентин Юмашев,
встречаясь во вторник вечером с главными редакторами, обмолвился, что
"есть опасность осложнений", поскольку "болезнь пошла вниз" (видимо,
имеются в виду лёгкие). … Состояние здоровья президента по-прежнему
вызывает беспокойство у лечащих врачей.
One of the President’s administrative aids, Valentin Yumashev, met with editors
Tuesday, and confirmed there is “possibility of complications” as the “disease has
moved downward” (like to the lungs). …The state of the President’s health
remains of concern to physicians.19
With hindsight, it seems likely that Yeltsin had not made his mind up about a third
presidential term and that health problems forced his early retirement and mad-dash to
find a suitable successor—by first finding the most suitable second in command.
18
In Kommersant, there were 357 articles that associated the President and the topic of health between the
period of January 1, 1998 and December 31, 2000.
19
Igor Khlochov, “Болезнь президента пошла вниз,” (Kommersant, March 1998),
http://kommersant.ru/doc/194753?isSearch=True.
84
Table 4.2: Primes Ministers of the Yeltsin Administration
Tenure
Duration
Reason for dismissal
Chermondiyn
May 1992 March 1998
5 years, 3 months Declining domestic
economy
Kirienko
March - August
1998
5 months
1998 Debt Default
Primakov
Sept 1998 - May
1999
9 months
Political Disagreements with
Yeltsin
Stepashin
May - August
1999
3 months
Unannounced
Putin
August - Dec.
1999
4 months
Assumes Presidency
Source(s): Author’s calculation.
During Yeltsin’s second term, the president spent a significantly larger amount of
his time—when truly visibly governing—focusing on and pursuing international
relations, leaving the Prime Minister to maintain domestic policy.20 And despite any
inconsistencies in effort, between 1997 and 1998, Yeltsin was able to achieve significant
headway for the Russian Federation, establishing a presence in the G-7 coalition and
pushing adamantly for inclusion in the World Trade Organization.21 In terms of global
partnerships, the purpose of the Russian state was developing export markets, where
refiners could feasibly and profitably send oil and natural gas products that had built up
in reserves over the transition decade. But this focus undoubtedly left the domestic
economic climate at the hands of the prime minister, who arguably took on substantially
20
21
Kotz and Weir, 265-267.
Andrew Felkay, “Yeltsin’s Russia and the West,” (Praeger, 2001), 174
85
more direct governing power compared to even the first half of the transition when
Yeltsin worked hand-in-hand with Gaidar and Chubais on the immediate economic
reform policies of shock therapy and privatization.22
In March of 1998, Yeltsin, feeling external pressure given the ongoing
degradation of the GKO market,23 removed Chernomyrdin from the prime minister’s
office after four years of service24, choosing to focus on consolidating support from
regional leaders with his selection of Sergei Kirienko, a former first deputy prime
minister, to the post. Kirienko’s appointment essentially coincides with the political
moment when Yeltsin begins to take the back set to his cabinet and the Duma because
gaining additional powers and influence.25 In May, the parliament embarked on the first
of a series of attempts to impeach Yeltsin.26 Between 1993 and 1998, Yeltsin
progressively lost the “charismatic personalism”27 in domestic politics that had won the
1991 presidential election for him. Yeltsin became obsessed with crafting a close-knit
group of allies near the presidency while maintaining an increasingly authoritarian
regime with “patriarchal” authority allowed by the super presidential position he had
crafted for himself with the dissolution of the USSR.28
22
Ibid; Kotz and Weir 267-268.
23
Ibid, 159 - 169.
24
Medvedev 292.
25
Felkay, 174 – 175.
26
Ibid, 178.
27
George Bresleauer, “Boris Yeltsin as Patriarch,” Contemporary Russian Politics, 78 - 79.
28
“Super presidentialism” refers to the political precedent crafted by Yeltsin through the construction of the
Russian constitution, by which the powers of the executive were defined above and beyond the other
86
Kirienko was managing a nation that was slipping very quickly toward fiscal
disaster. And when the final decision came down, Yeltsin dismissed Kirienko, along with
the rest of his cabinet, six days after the default decision was announced. All in all,
Kirienko lasted roughly 5 months atop Yeltsin’s cabinet. To fill the interim opening, the
Duma begrudgingly allowed Chernomyrdin back into the office until a replacement,29
Yevgeny Primakov, was approved for the role. Many perceived Yeltsin’s desire to bring
Chernomyrdin back into the leadership circle just 5 months after he was dismissed as a
strange political move and the Duma shut down the attempt in two separate votes.
Primakov came into the job with a history at the Foreign Ministry, a seemingly smart
move for a nation under intense international scrutiny. The new government’s main focus
was preventing the mass hyperinflation predicted for the economy in the aftermath of the
default, though policy options were extremely restricted in the immediate 6-month period
following the default given advisement from the IMF and World Bank associated with
the debt restructuring.30 But starting in 1999, the Primakov government focused on the
goal of fiscal rehabilitation through short-term fiscal adjustment, pursuing strict
expenditure cuts and even stricter corporate tax reform. But Primakov was, in Yeltsin’s
view, too popular and too likely to present legitimate opposition, especially given an
branches of government; Neil Robinson, “The Politics of Russia’s Partial Democracy,” Political Studies
Review 1, no. 2 (April 1, 2003): 149–66, doi:10.1111/1478-9299.t01-1-00001.; Stephen Fish, “Democracy
Derailed,” Cambridge University Press, 2004, 193 – 227.
29
Felkay, 179.
30
Jorge Martinez-Vazquez et al., IMF Conditionality and Objections: The Russian Case, International
Center for Public Policy Working Paper Series, at AYSPS, GSU (International Center for Public Policy,
Andrew Young School of Policy Studies, Georgia State University, June 1, 2000),
http://econpapers.repec.org/paper/aysispwps/paper0003.htm.; “Russia: From Rebirth to Crisis to
Recovery,” International Monetary Fund. “Russia in Default,” (The Economist, February 6, 1999).
87
increasingly public relationship with Moscow Mayor Yury Luzhkov, who was
developing a political party called FATHERLAND-ALL RUSSIA by the end of the 90’s
with connections and loyalties developed over almost a decade atop Moscow.
Over the course of 1999, “conflicts between Yeltsin and Primakov were
mounting. Primakov showed no loyalty to Yeltsin, whom he clearly intended to succeed
as president, but his anti-Western and procommunist values were alien to Yeltsin.”31
Primakov’s tenure in office is cited by many as the few months of reprieve from Yeltsinera neoliberalism during the 90’s in Russia. Unabashedly, the Prime Minister pushed for a
greater role for the federal government in assuring rule of law and opportunity in the
markets, and the media quickly became fixated on the alleged corruption trials that
Primakov launched.32 Focus, most often, in these articles was on the charges levied
against Boris Berekovksy, close Yeltsin ally and oft-cited member of the President’s
inner circle. Berekovsky was a close friend to Yeltsin’s daughter Tatyana, which many
claim allowed him unfair and often illegal advantages during the privatization programs
of the transition period. But the Berekovsky case was just one of “thousands of criminal
31
Aslund,198.
32
Medvedev, 343 – 348.
88
cases” instigated on corruption charges “at first in the port cities and the provinces, later
in Moscow as well.”33
Primakov tackled Russia’s taxation problems with the objective to “reduce the tax
burden and create an enabling environment for the resumption of growth,” according to
the IMF reports on stabilization in Russia post-default. The main conduit for reforming
the tax environment would have been a reduction of the VAT (value added tax) and a 5
percent reduction to the corporate profits tax. The President vetoed the VAT change,
allowing the corporate profits to roll through. But the Duma then increased the marginal
income tax up to 45 percent.34 The Primakov fiscal reform attempt further defined the
difficulty of achieving policy changes during the Yeltsin era. Tax reform had been an
IMF-imposed goal since 1996 but would not be changed enough to inflict both real policy
and social responsibility changes until after the Yeltsin era had closed.
Primakov’s tenure lasted only until May of 1999, at which point Yeltsin ushered
in former interior minister Sergei Stepashin. Stepashin served from May until August of
1999. Widely believed to have been Yeltsin’s chosen successor, Stepashin served an
illustrious 82 days in office during 1999.
In August 1999, Yeltsin brought in an effectively unknown young bureaucrat,
Vladimir Putin, into the office. Putin would be Yeltsin’s last prime minister. This
33
Ibid.
34
Vasiliev, “Overview of Structural Reforms in Russia after the 1998 Financial Crisis,” International
Monetary Fund, Feburary 2000, https://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/vasil.pdf
89
appointment represents a critical juncture in the Russian political economy. Much has
already been written on Putin’s effects on Russian governance patterns, though I argue
here that the unexpected nature of his appointment and Putin’s subsequent ascension to
the presidential seat represent a political shock that reinvigorated foreign investment
interest in a nation that had previously been assumed to operate under the purview of
Yeltsin’s “family”—the President’s inner circle of “close relatives, advisers, and
confidants.”35
It is difficult to pinpoint the exact variables that evolved into Yeltsin’s seemingly
last-minute decision to accelerate Putin’s political career and though these variables are
not entirely relevant for the purpose of this argument, the scholarly consensus does assert
Putin’s ascension was both highly unexpected and fast-tracked.36 Unlike the majority of
Russia’s highly technocratic political force, Putin was not a particularly exceptional
student or KGB officer, where he graduated to after finishing his studies in St.
Petersburg. After the collapse of the USSR, Putin returned to Petersburg, where he began
a political career in a bureaucratic role in Mayor Anatoly Sobchak’s office. When
Sobchak lost re-election, Putin headed to Moscow where he would eventually work his
way into the Presidential staff by 1997.37 In this position, Putin came to the attention of
the “Family” as an apparent loyalist to both the state and his personal mentors. Almost
simultaneously, the family began to question Stepashin’s ability to carry the state and
35
Peter Truscott, “Putin’s Progress,” (Simon and Schuster, 2004), 86.
36
Aslund; Medvedev; Kotz and Weir; Thane Gustafson, “Capitalism Russian Style | Russian and East
European Government, Politics and Policy,” Cambridge University Press, accessed January 12, 2015,
http://www.cambridge.org/US/academic/subjects/politics-international-relations/russian-and-easteuropean-government-politics-and-policy/capitalism-russian-style.
37
Kotz and Weir, 268.
90
Yeltsin’s poor health necessitated a president who would be able to take over the reins of
the state in their interest. Stepashin made very public his intentions to take on the Russian
oligarchs, or “business tycoons” as he would call them in the West.38 Launching several
criminal investigations into potential wrongdoing and corruption, Stepashin refused to
back down at the bequest of the Kremlin and after just three months in office was, as a
result, asked to step down. And, at the time, Putin was seen as a solution to this problem
of unnecessary meddling.
While speculation into Yeltsin’s choice of successor are rampant, it is clear that in
1999, the “Family” believed Putin was a loyalist to both the Russian state and the
overarching agenda of the Yeltsin administration. In practice, Putin’s governance strategy
both diverged from Yeltsin’s style, sympathies, and goals. “Putin’s values seemed to be
subordinate to Yeltsin but as Yeltsin belatedly would realize when he became healthier
after retirement, they were the opposite of Yeltsin’s,” wrote political scientist Anders
Aslund.39
The appointment of Putin as Prime Minister was a critical juncture that changed
the political course of Russia. The Russian media was focused on the likelihood of
Yeltsin stepping down from the position, leaving Stepashin in charge—a move that
would not have developed any beliefs on the probability of anticipated policy shifts over
the short term of the next administration. Stepashin was seen as someone who was very
much ingrained both politically and ideologically within Yeltsin’s “family,” the informal
party of close confidants and loyalists that Yeltsin maintained throughout the entirety of
38
39
Medvedev, 349 – 350.
Aslund, “Russia’s Capitalist Revolution,” 201 - 202.
91
his tenure.40 That being said, the public and press understood all of Yeltsin’s handpicked
successors in that way. Instead, Putin’s chosen actions in the short term of his ascension
to the presidency change the course of Russian politics. I show in the next section how
important the appointment was as a determinant of electoral success during the first
quarter of 2000 prior to the March presidential election.
AN ACTING PRESIDENT WINS PUBLIC FAVOR
Vladimir Putin’s presidential tenure has long been, and continues to be, associated
with the classic tradeoff between centralized state power and civic liberties.41 During his
now third term as president, many fixate on the policy trends associated with his regime
as a lens through which they may predict Russia’s future geopolitical moves. And the
evidence proves that Putin, over the entirety of his tenure atop the Russian political
system, has run an increasingly centralized and dominant federal government. While this
pattern instigates certain geopolitical conversations as aforementioned, it also represents
a clear break from the neoliberal leanings of the Yeltsin administration, which were
entrenched during the market revolution of the early transition years. The shift away from
the neoliberal order preached by the Western economists and policymakers represents
one third of the first level of my argumentative framework—one that relies upon the first
40
Daniel Treisman, “The Return,” Free Press, 2011, 92.
41
John Locke, “The Two Treatises on Civil Government,” (Hollis, 1689); Thomas Hobbes, “Leviathan,”
1651.
92
critical juncture of this chapter: Putin’s path to the presidency. And this path really begins
at the August 1999 critical juncture, I argue. Through the end of 1999 and the start of
2000, the prime minister position gives Putin the upper hand over his opponents in the
following ways. First, it introduces the relatively unknown politician into the political
arena and public dialogue. Second, it offers him the upper hand in the presidential
election as the incumbent when Yeltsin chooses to resign from the position early during
December 1999. And, even more importantly, I show that Putin’s victory in 2000 places
him high in the public favor, allowing him to slowly reverse much of the neoliberal
thinking of the Yeltsin years through his first two tenures.
An Unorthodox Transition
Going into 1999, there was remaining discussion in the media and amongst
politicians over whether Yeltsin’s constructing a revolving door for the prime minister’s
office symbolized his continuing ambition to stay in office. But between January 1999
and December 2000, there were 629 articles published in the newspaper
<<Коммерсанть>> of the potential and realization of Putin’s participation in the
presidential election compared to just 21 articles that were associated with a similar query
that substituted Yeltsin’s name as the subject.42 With Putin’s appointment to the Prime
Minister’s seat on August 9, 1999, Boris Yeltsin publicly announced his interest in seeing
Putin succeed through to the President’s office. Later that day, Putin announced his
intention to run for President during the 2000 elections.
42
Kommersant archives, query: “президент + выбор + Путин / Ельцин”—This search allows for the
linguistic variations that would arise in Russian given the particular constructions native to the language.
93
As Putin geared up for the upcoming election, on December 31, 1999, Boris
Yeltsin announced that he would end his term just six months short of the scheduled end
to his tenure, pleading with the Russian people in a televised speech—“I want to beg
forgiveness for your dreams that never came true. And also I would like to beg
forgiveness not to have justified your hopes.”43 In his speech, Yeltsin repeatedly stressed
the importance of upholding and following closely the Constitution as a means of
continuing Russia’s development as a democratic state. Despite the somber and defeated
tone of Yeltsin’s exit, the decision left Putin with a very explicit upper hand for the
subsequent year’s election against the increasingly large presence of the
FATHERLAND-ALL RUSSIA party with its consolidation of regional powers.
Specifically, this three-month opportunity to charge the federal government officially
allowed Putin the opportunity to become further entrenched into the national political
conscience through his success against Chechnyan dissidents and the increasing
economic health of the nation.
Table 4.3 summarizes the variables of interest for 1999, representing the health of
the domestic economy as Putin took over as interim president. In less than one year, the
government’s borrowing costs were slashed almost in half, representing international
confidence in the government’s immediate actions with ruble stabilization and fiscal
austerity. That being said, given the frozen markets at the end of 1999, the fallen yields
43
“Russian President Boris Yeltsin Resigning,” (CNN, 1999),
http://archives.cnn.com/1999/WORLD/europe/12/31/yeltsin.resign.01/; Yeltsin, Boris, “Statement by Boris
Yeltsin,” 12/31/1999, http://eng.kremlin.ru/transcripts/8564
94
could also feasibly represent interest that was locked out of the market at the end of the
year or a variety of equally rational alternatives. But exports and overall output also
increased markedly in 1999, again likely a function of the devalued currency in addition
to the slow increase in global oil prices at the end of 1999.
Though the variables traced from 1998 to 1999 show a slow growth trajectory that
market mechanisms would not predict, there are some explanations for this dynamic that
could mark the Russian case as a non-exemplary case of, for instance, the J Curve theory
that is associated with currency crises in particular.44 With Russia’s almost 70 percent
devaluation of the ruble against the dollar, the J Curve, which predicts that exports will
rise after a small decline in productivity as foreign consumers adjust to the relative
attractiveness of products produced under the devalued currency, could explain away
some portion of this immediate growth in Russia. While no notable studies of the Russian
case in 1998 from the perspective J Curve theory exist currently in the scholarship, the
model is constructed as an explanation of the long-term potential benefits of a currency
devaluation—not debt default—for a sovereign. For this reason, along with the relative
complexity of the Russian case into the medium term, the J Curve model cannot fully
explain the case, but it important to note, nevertheless, in this immediate to short term
period of the process tracing narrative. The crux of the growth under analysis here is not
the immediate growth that was seen in 1998 and 1999, but rather the short term to
medium term growth that launches with the end of 1999. No matter the origins of the
increase, it is important to note that Putin begins his tenure in the presidential seat on the
44
Mohsen Bahmani-Oskooee, “Devaluation and the J-Curve: Some Evidence from LDCs,” The Review of
Economics and Statistics 67, no. 3 (August 1, 1985): 500–504, doi:10.2307/1925980.
95
semblance of macroeconomic recovery, from both the domestic and international
perspectives.
Table 4.3 1999 Macroeconomic Overview
VARIABLES OF INTEREST
Imports
Exports
1262349.2
2084585.1
Current
Output (Real
GDP,
Borrowing
Source(s): Goskomstat,
http://www.gks.ru/bgd/free/b01_19/IssWWW.exe/Stg/d000/i000020r.htm;
World (%
(Millions of
(Millions of IMF
Account
Trillions
of Rubles)
Costs http://www.econstats.com/weo/CRUS.htm.
Outlook Database,
Russian
Federation; EconStat,
Rubles)
Rubles)
of GDP)
1999
1405.3
24.05 percent
12.57
822,235.9 Surplus
Lacking the charisma and political experience of Russia’s first elected president,
Putin likely won the 2000 presidential election given the simultaneous collision of
multiple positive forces that worked in the new politician’s favor. But an in-depth
exploration or explanation of those dynamics is really not called for in the context of
answering the present question. It is, however, important that Putin was able to win the
election with strong public favor. Most analysts agree that the second conflict between
Russia and Chechnya that sparked just in light of Putin’s ascension to the president’s
office played the largest role in turning public interest toward his favor.45 And his success
45
Peter Baker and Susan Glasser, Kremlin Rising: Vladimir Putin’s Russia and the End of Revolution
(Simon and Schuster, 2005), 6.
96
within the context of the Chechnyan conflict is additionally important in that it worked to
separate him from the Yeltsin legacy—one that the majority of Russia, across all income
brackets and social distinctions, found regrettable. By 1999, Yeltsin’s approval rating had
dropped to just 9 percent—a figure made even more shocking considering the fact that
Russia’s first president was voted into office with a 81 percent approval rating in 1991.46
As explained in the preceding chapter in an outline of Russia’s market transition,
Yeltsin’s administration was continuously and repeatedly associated with significant
negative social outcomes that either resulted from or were popularly believed to have
resulted from the macroeconomic focus that the reformers assumed under the leadership
of President Yeltsin. Yeltsin, for his part, launched that nation into the first conflict with
Chechnya and was unable to fully end the question of the region’s independence. Putin’s
attempt at quenching the dissent that arose in the region was popularly viewed as
significantly more successful. “We achieved the nearly impossible, saving hundreds and
hundreds of people. We proved that Russia cannot be brought to its knees,”47 he said at
the time.
Additionally, with the onset of the second conflict in Chechnya, Russians
popularly ignored Putin’s political record or even stance on economic issues, choosing to
focus instead on his clear and present actions in Chechnya and developing the popular
imagination of Putin as a true Russian patriot. Survey data from ISI, reported in their
“Presidential Pre-election Survey Report,” in 2000 shows that prior to the election voters
46
Tresiman, Daniel, “Presidential Popularity in a Hybrid Regime: Russia Under Yeltsin and Putin,”
American Journal of Political Science, (July 2011), 590.
47
Blaker and Glasser, 172.
97
expressed opinions that proved, “Chechnya as an issue has helped Putin tremendously,
other issues that could potentially hurt Putin have not seemed to have an effect.”48
In an article published at the end of 1999 in Kommersant, prior to Yeltsin’s
resignation, many regional leaders identified confidence in Putin’s political capacity.
Alexander Lebedev, chairman of the National Reserve Bank, commented on record49:
Путин вызывает у меня такую уверенность. И с каждым днём она только
растёт.
Putin gives me such confidence. And every day that confidence only grows.50
The 2000 election did not focus on concrete economic policies or political
strategies that Putin would assume if fully elected to the role—the crux of what actually
comprises the Putin presidential legacy. There was relatively vague talk about the
importance of a strong Russian state—but, of course, this sentiment was widely purported
by all the candidates given the generalized political climate in Russia based in strong
nationalistic value system. Political scientist Anders Aslund claimed, in hindsight,
48
International Republican Insitute, “Presidential Pre-election Survey Report,” 8,
http://www.iri.org/sites/default/files/fields/field_files_attached/resource/russias_2000_presidential_election
_pre-election_assessment_report.pdf.
49
“Прямая Речь // Всю Прошлую Неделю Отечественные Политики Наперебой Отмечали Заслуги
Владимира,” accessed April 4, 2015, http://kommersant.ru/doc/230929.
50
Ibid.
98
“Russians were no longer interested in politics,”51 after the turmoil and disappointment of
the transition years.
STRENGTHING STATE POWER
Putin’s first major legislative action as President focused on the topic of
reconsolidating federal governmental powers. To some degree, the economic crisis was
already reasserting that power inherently, as it was the federal government that worked
with international organizations and negotiated with debtors in order to stabilize the
domestic economy that all regions of the country were struggling under. Some scholars
place significant weight on this point but I argue that it was Putin’s overall popularity
combined with the following policy push that led to the redevelopment of a strong state
voice in the Russian economy.
On May 19, 2000, President Putin spoke in a televised speech about the
importance of the government to “restore an effective vertical chain of authority” in
conjunction with a “dictatorship of law.”52 His proposed legislation had six major
points53:
51
Aslund, 205.
52
Vladimir Putin, 2000a. Television address by the Russian President to the Country’s citizens,
Rossiiskaya Gazeta, 19 May. Translated in the Current Digest of the Post-Soviet Press 52(20), p. 5.
53
Cameron Ross, “Putin’s federal reforms and the consolidation of federalism in Russia: one step forward,
two steps back!,” Communist and Post-Communist Studies, Volume 36, Issue 1, March 2003, Pages 29-47,
ISSN 0967-067X, http://dx.doi.org/10.1016/S0967-067X(02)00057-0.
(http://www.sciencedirect.com/science/article/pii/S0967067X02000570)
99
(1) the creation of seven new federal super-districts;
(2) a reform of the Federation Council;
(3) the creation of a new State Council;
(4) the granting of new powers to the President to dismiss regional governors and
dissolve regional assemblies;
(5) new rights for regional governors to dismiss municipal officials;
and (6) a major campaign to bring regional charters and republican constitutions
into line with the Russian Constitution (34).
Putin’s reforms during this first portion of his first term began to finally clarify his
political philosophy for both the Russian people and the international world. First, the
Russian federal state would be a strong coalition of Putin loyalists and technocratic
experts. And, second, the Russian state would forge and protect interests—political,
economic, and territorial.
The neoliberals told Yeltsin that the Russian economy would thrive when industry
was privatized, markets were liberalized, and the government backed away from the
actual operation of the economy. Under the Putin administration, power shifted from
regional actors to the federal government, the fiscal regime was tightened and redirected
to federal coffers, and Russia’s expanse of natural resources was slowly nationalized, as
the lines between public officials and private market actors increasingly blurred.
Putin’s Fiscal Regime
When Putin took over as prime minster and then as president, both Primakov and
Stepashin had both pushed forward programs for federal fiscal strengthening. But it was
Putin who would reap the political rewards of those initial decision makers, moving the
debate away from merely plans and toward a concrete set of reforms in the tax code that
100
would affect domestic firms, foreign firms, and private individuals when he took on the
presidency. Moreover, with the political capital he earned through the election and
through the every increasing fundamentals of the domestic economy, Putin succeeded in
passing reforms that many, including Primakov and Stepashin, unsuccessfully attempted
during the transition years. From 2000-2004, Putin’s administration achieved a relatively
effectual reform of the Russian fiscal regime by introducing a significantly more clear
16-tax system, in which federal revenue streams were prioritized over regional collection.
The first portion of the tax reform referred to here stems back to the
aforementioned Primakov administration in 1999, during which time the IMF teamed
with Russian policymakers to past the foundational basis of the tax code that was
formally first drafted prior to the crash in 1997.54 This first section of the code served
primarily definitional purpose and worked to shift the social perceptions of the tax system
in the country, but did not truly result in increase revenue streams. In fact, the majority of
the success that Primakov and the IMF achieved in the direct aftermath of the crisis in
terms of reforming the fiscal climate should be credited to cuts in federal expenditures
that further slashed social programs and led to even larger public resentment of the
Yeltsin administration.
In 2001, less than a year into Putin’s presidency, the most extensive of the tax
reform legislation was passed, introducing a Value Added Tax, a personal income tax, an
excise tax, and a social tax. The personal income tax was the most dramatic of the
54
Jorge Martinez-Vazquez and Sally Wallace, “THE UPS AND DOWNS OF COMPREHENSIVE TAX
REFORM IN RUSSIA,” Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting
of the National Tax Association 92 (January 1, 1999): 5–14.
101
reforms, as the PIT was turned into a flat tax of 13 percent. Multiple studies55 that explore
the productivity of the flat tax scheme suggest that the move was politically golden for
the Putin administration. By decreasing the tax rate on the highest earners in Russia56, the
administration was able to slowly but surely chip away at the social infrastructure that
allowed missed payments and establish, in its place, fiscal responsibility at the individual
household level in Russia. From 2001 to 2002, real revenue from the PIT increased by 26
percent.57 2002 marked the passage of a corporate profits tax. At a general level, the
reforms that Putin was able to pass in the first years of his administration were slowly
repealed by an average of approximately 10 percentage points. However, the levels of
these taxes are less important for the purposes of this argument when compared to the
overall sentiment that Putin was able to pass this type of overarching, simplifying reform
that then led to greater social responsibility and a strong fiscal regime.
Table 4.4 synopsizes the 2004 final version of the reformed tax code.58 This
success of this code, according to some, stemmed from the ability of the Putin
administration to clear through the double tax burden that reigned for much of the
Yeltsin-era, as both the central government and regional governments stretched for
55
“Lessons from the Russia’s 2001 Flat Tax Reform,” VoxEU.org, accessed April 4, 2015,
http://www.voxeu.org/article/effects-russia-s-flat-tax.; Anna Ivanova, Michael Keen, and Alexander
Klemm, “The Russian ‘flat Tax’ Reform,” Economic Policy 20, no. 43 (July 1, 2005): 398–444,
doi:10.1111/j.1468-0327.2005.00143.x.
56
The previous tax code set the PIT at 12, 20, and 30, with the rate depending on the particular income
tranche an individual fell into.
57
Ibid, 398.
58
Robert W. McGee and Galina G. Preobragenskaya, Accounting and Financial System Reform in Eastern
Europe and Asia (Springer Science & Business Media, 2006).
102
greater revenues.59 In the Putin-era, this effect is dwindled at the expense of the regional
governments.
Table 4.4 Russia’s Reformed Tax Code
Source(s): Robert W. McGee and Galina G. Preobragenskaya, Accounting and Financial System Reform
in Eastern Europe and Asia (Springer Science & Business Media, 2006).
Putin’s attempt and success at driving through the tax reform represents a shift in
the Russian state’s history in the aftermath of the USSR. During the Yeltsin
administration, the choice to pursue shock therapy led to the aggregation of a team of
economic policy makers and experts who placed almost unilateral attention on the
markets at the expense of the state’s institutions. The implementation of a functioning
59
Ibid, 282.
103
fiscal regime reversed this ideological framework by insisting that the state’s power, at a
centralized level, was also important despite the market economy.
Table 4.4 summarizes the variables of interest across the years 2000 to 2002. In
less than two years, borrowing costs had fallen to approximately a quarter of their
average value in 1998 and output was increasing at over 20 percent each year. And
notably, 2001 represents the point at which domestic consumers feel, on aggregate, the
positive effects of the economic growth, as imports increase markedly.
Table 4.5 Macroeconomic Summary 2000 – 2002
VARIABLES OF INTEREST
Output
(Real
GDP,
Millions
of
Rubles)
Borrowing
Costs
Imports
(Millions of
Rubles)
Exports
(Millions of
Rubles)
Current Account
(% of GDP)
2000
7305.6
12.6 percent
1755804.7
3218866.3
18.04
2001
7677.6
12.7 percent
2165927.7
3299561.7
11.07
2002
8041.8
11.7 percent
2646204.1
3813694.6
8.436
Source(s): Goskomstat, http://www.gks.ru/bgd/free/b01_19/IssWWW.exe/Stg/d000/i000030r.htm; IMF World
Outlook Database, Russian Federation; EconStat, http://www.econstats.com/weo/CRUS.htm.
TRANSFORMING OLIGARCHICAL CORPORATISM
104
In the last chapter, I outlined the short history of foreign investment in the
Russian oil sector through the Gorbachev-era vehicle of the “joint venture.” It’s important
to reinforce the idea that almost every firm that invested in Russian oil extraction during
the transition period focused on upstream operations at a trial-level, managing potential
losses in a highly unpredictable “emerging” economy. Even the projects in Sakhalin and
the Polar Lights field, arguably the largest ventures in terms of foreign capital and time
invested, were partnerships that diversified risk. And yet these investments were made
because the rationale underlying the upturn was not based just pure profits—an additional
payoff in Russian operating capital–and understanding of the cultural and social norms
that govern underneath the legitimate remained whether the venture turned profitable or
not. This certainly was not a phenomenon only seen in Russia, as Western investors have
pursued local knowledge as a differentiating factor in “emerging market” investment for
decades across nations with investment potential. But investment in Russian oil changed
with the 1998 default across two points I substantiate in this section. Firstly, the effect of
the devaluation of the ruble transforms from a huge hit to the oil firms’ operating income
into a massive opportunity for redevelopment in the aftermath of almost a decade of
industry establishment. This period of redevelopment was starkly different then the first
phase in the aftermath of the Soviet collapse. Post-1998 development was about branding
and legitimizing the oil business in Russia, rather than a mad dash for ownership
105
interests, as was the case in the Yeltsin-era. The second transformation was externally
applied, as 1999 brought a slow rise in oil prices that propelled the newly developed
firms forward and turned a new page for the Russian state under President Putin’s energy
plan. This section explains these two transformations across the period beginning in 1999
and ending in 2005, drawing through firm level effects to effects on the domestic industry
and then exploring how the domestic industry changed within the perspective of the
global energy market.
Firm Level Effects
With the 1998 crash of the financial markets, the progress attained in the oil
industry was at risk of derailment given the collapse of foreign interest and investment in
the Russian markets, in general. The popular investment perception was that Russia had
hit rock bottom, and many were waiting for a positive sign before reengaging. But the top
energy firms in Russia were preemptive, resigning to stark re-development plans that
focused on continuing Westernization of the industry. For the oilmen, the domestic
economic problems were exacerbated by record-low prices in the global market as a
result of the emerging market failures during the second-half of the 90’s.60 Until a
reversal in prices, the reigning domestic firms outlined in Chapter 3 engaged in a
widespread consolidation of expenses, structural reform, and brand redevelopment that
60
Daniel Yergin, “Energy Security in the 1990s,” Foreign Affairs 67, no. 1 (October 1, 1988): 110–32,
doi:10.2307/20043677.
106
was made easier by the decision to devalue the ruble, which made all exports. But with
the reversal in price trends that solidified mid-way through 1999 combined with Putin’s
re-imagination of the Russian state led to a dominant state interest in the natural resources
sector of the economy—another example of the neoliberal turnover, further stimulation of
federal revenues that could slowly finance relative increases in social spending, and a
private sector purge. This increase in the prices and the associated reorganization of the
energy market comprises the remaining first level basis of my argumentative framework.
Some, in the aftermath of nationalization, have re-analyzed the energy sector and
pulled out two different categories of firms that developed in the aftermath of the crisis as
prices rose.61 In the first group, which I explore here through a quick study of Yukos
Group, were firms who were created and fueled by the financial industrialist oligarchs
and were immediately profitable as prices rose given their control over unutilized
reserves from the transition period and before. Essentially, these firms were selling off
supply with large margins because the true profit-pressing work of the industry—
exploration and development—was, more or less, not incorporated into their businesses.
And moving forward, these firms would pay for their lack of initial research and
development investment. In the other category were the firms created by the old Soviet
oil generals who crafted the traditional technocratic business model with borrowed
Western standards and technologies—notably LUKoil, Surgutneftgaz, Sibneft, and,
ultimately, Rosneft. I model the practices of this latter group through the development of
61
Clifford G. Gaddy, “Perspectives on the Potential of Russian Oil,” The Brookings Institution, accessed
April 4, 2015, http://www.brookings.edu/research/articles/2004/07/russia-gaddy.
107
Sibneft. Subsequently, the end of this section delves into the federal re-imagination of the
national oil company framework for Russia.
Redeveloping Yukos
Mikhail Khodorkovsky, the mastermind behind Yukos Oil, initiated a two-part
redevelopment plan in 1998, reflecting that the crisis was an “opportunity” for the firm—
“It has forced us to work better and find new means to cut costs,” he said at the start of
1999.62 Ultimately, the firm cut production costs by two-thirds by the turn of the century,
a move that involved laying off 30 percent of the employees and insetting a 30 percent
pay cut for those remaining. Throughout the process Khodorvovksy, whose bank fell
during the debt default’s subsequent banking crisis, maintained focus on Yukos as the
profitable arm of the Group Menatap holding company and would have pushed the
corporate austerity measures further if not for the potential social unrest that plagued all
oil towns in the aftermath of the ruble’s devaluation.63
The redevelopment campaign was partially inspired by Khodorkovsky’s desire to
“clean up” the image of the firm, and his holding company Group Menatap, in the
aftermath of the Loans for Shares scandal and the popular discontent toward the concept
of the Russian “oligarch.” Yukos began complying with the Western General Accepted
62
Dean Gaddy, “Russian oil major Yukos implements western-style reorganization,” Oil and Gas Journal,
June 1999,
http://www.ogj.com/articles/print/volume-97/issue-24/in-this-issue/general-interest/russian-oil-majoryukos-implements-western-style-reorganization.html.
63
Gustafson, 197 – 199.
108
Accounting Principles in 1999, releasing fully audited financial statements beginning
with the 1997 fiscal year.64 And emulating IOC’s (International Oil Company) like global
giant British Petroleum, Yukos redefined its internal organization. Khordorkovsky also
brought in top Western oil executives to fill the firm’s management.
With his redevelopment, Khorodorkovsky’s goals were twofold: On one hand, the
firm needed to modernize to meet its global competitors as a serious presence in the
market and, on the other hand, the firm had to shake off its stereotypes and corruption
accusations through utter transparency in business practices. Both of these goals would
play into the greater plan that Yukos, like every other business seeks, stockholder
interest. However, Khorodorkovsky wasn’t just looking for any capital, he was
particularly interested in foreign capital, which is why he chose to pursue the
“westernization” of Yukos as his first priority in the aftermath of the default.65
To some extent our struggle for business ethics is of a mercenary
character. Through improving corporate governance we were able to
greatly increase stock market players’ interest in us. … This is why we are
trying to embrace the norms suggested by Western society.
But in terms of realized business expenditure, Yukos was not actively working to
develop new oil fields. “Much of the operating stock held by the Russian oil industry in
the late 1990s consisted of fields that had been badly damaged by Soviet-era practices
64
Sixsmith, Martin, “Putin’s Oil,” 47.
65
Sixsmith, 189.
109
and had then been allowed to run down in the first half of the 1990’s.”66 And Yukos,
unlike some of the other top names in the sector, chose to run after the Soviet
“brownfields,” as older, developed oil fields are referred as. “Of total Russian oil
production in 2000, new oil from Yukos accounting for only 0.3%”67 This meant that in
the short term Yukos was logging profits greater than any of its domestic competitors.
Table 4.4 summarizes relevant financial statistics from the Yukos 2002 filing for 1999 to
2001.
Table 4.6 Yukos Financial Summary, 1999 - 2001
*millions of US dollars
1999
2000
2001
Net Income
3724
3156
3058
PPE Investment
N/A
589
984
Source(s): Yukos 2002 Annual Report (GAAP).
Sibneft: Growing Russian Oil
Russian scholar Thane Gustafson made the connection between Yukos and
Sibneft in his 2012 survey of the Russian oil industry. As both firms were privatized
during the “loans for shares” program of the Yeltsin administration prior to the secondterm reelection campaign, the firms’ initial management structures could have been
66
Gustafson, 189.
67
Gaddy, “Potential of Russian Oil.”
110
remarkably similar. And both sets of management did initially begin on a similar path
toward westernization and assimilation into foreign capital markets. But the story of
Sibneft, unlike the story of Yukos, is a gradualist path toward those goals.
Early on, Sibneft—along with LUKoil and Surgutneftgaz—became a large
proponent for the horizontal drilling technology adopted from the West. Taking this
technology, the firm moved toward creating new fields, focusing on “greenfields,” as
untapped reserves as called when marked for development. Maintaing its focus on
establishing new fields in its Western Siberia home base, Sibneft grew steadily for years
in the aftermath of the default.
Table 4.7 Sibneft Financial Growth, 2000 – 2003
(thousands of U.S. dollars)
Total Revenues
Long- term Investments
Oil and Gas Properties*
2000
2001
2002
920,469
1,311,288
533, 556
930,889
1,159,064
1,921,221
2, 19,285
2,847,840
3,351,536
3,748,650
4,776,691
Source(s): Sibneft Annual Reports (GAAP); asterisk denotes separate line item.
111
2003
6,716,540
In 2005, Gazprom, the state natural gas monopoly that survived the transition with
increasing levels of agency and power68, was under entirely new management after a
Putin administration-sanctioned purge of its ranks placed a political ally, Alexei Miller,
into top management. The next year, Putin’s re-imaged Gazprom purchased a majority
interest in Sibneft, accumulating an oil arm into the natural gas operation.69 Sibneft was
renamed Gazprom Neft that same year.
Russia’s Oil Company
In Chapter Three, I introduced the firm Rosneft as many commentators saw it
during the 1990’s: an aggregate pool of ownership shares from which the Yeltsin
administration and his energy advisors parsed out and sold firms to the highest bidder
during the transition. In this chapter, I trace Rosneft’s transformation in the aftermath of
the default.
On the other hand, the state-owned Rosneft, which had just barely escaped
extinction with the onset of the financial crisis that diverted attention from the planned
dismantling of the firm, was suffering under months of backlogged wages in 1998 when
it’s accumulation of tax arrears led to collectors blocking its accounts. With the record68
Gustafson, 266.
69
Daniel Treisman, “Putin’s Silovarchs,” Orbis 51, no. 1 (December 2007): 141–53,
doi:10.1016/j.orbis.2006.10.013.
112
low oil prices that plagued the global market in 1997 and 1998, Rosneft was relying upon
its production subsidiaries for desperately needed revenue to sustain overall operation. By
October 1998, management had lost control of 19 of its 30 subsidiaries through dubious
legal fights with creditors.70 Within this structure, Sergei Bogdanchikov took on
leadership, forcing through wage cuts and cutting the firm’s debts to tax collectors
especially.71 The nascent “crisis management” that Bogdanchikov launched in the
aftermath of the debt default would foreshadow approximately four years of restructuring
for Rosneft as oil prices launched up at the turn of the century.
Table 4. 8 Rosneft Financial Summary 2000 – 2003
Total Revenues
Long- term
2000
2001
2002
2003
2,466,773
2,322,457
2,960,625
3,641,032
145,695
157,657
392,176
288,629
1,736,214
1,902,843
2,063,165
3,232,261
Investments
Oil and Gas
Properties
Source(s): Rosneft Annual Report 2000 – 2003 (GAAP); figures in thousands of U.S. Dollars.
70
71
Gustafson, 327.
Ibid, 328.
113
Table 4. 7 shows Rosneft’s progression in revenues, increasing as Bogdanichov’s
reforms take effect in the first few years of the 2000’s. By 2003, the firm was on a
significant upturn relative to its performance and structure during the transition years.
And in battles for ownership and development, the publically held firm was beating out
private Russian majors like LUKoil and easily asserting power over the smaller Russian
firms.72
A Global Energy Surge
From the beginning of 1997 to the end of 1998, global oil prices—as measured by
the standard European “Brent”73 measure—dropped by approximately 42 percent.74 Over
700 stories in the Wall Street Journal between the beginning of 1996 and the end of 1998
referenced the decline in prices, a dynamic that hit all global firms hard. But in Russia,
where oil exports were already dominating the industrial landscape at the end of the
1990’s, the price effects were particularly sharp for both private industry and the
government coffers.
72
Gustafson 333 – 336
73
Brent and the West Texas Intermediate indices are the two most popular measures used to gauge the
global oil markets, with WTI taking a more U.S.-centric perspective and Brent taking on a more Eurocentric perspective; “Frequently Asked Questions,” US Energy Information Agency,
http://www.eia.gov/tools/faqs/faq.cfm?id=11&t=6.
74
Author’s calculation, US Energy Information Agency.
114
Table 4.9 Brent Oil Spot Prices
Jan.
Feb.
Mar April May June July Aug. Sept. Oct.
ch
Nov. Dec.
1997
$23.54
20.85
19.13
17.56
19.02
17.58
18.46
18.60
18.46
19.87
19.17
17.18
1998
15.19
15.19
15.19
15.19
15.19
15.19
15.19
15.19
13.34
12.70
11.04
9.82
1999
11.11
10.27
12.51
15.29
15.23
15.86
19.08
20.22
22.54
22.00
24.58
25.47
2000
25.51
27.78
27.49
22.76
27.74
29.80
28.68
30.20
33.14
30.96
32.55
25.66
2001
25.62
27.50
24.50
25.66
28.31
27.85
24.61
25.68
25.62
20.54
18.80
18.71
2002
19.42
20.28
23.70
25.73
25.35
24.08
25.74
26.65
28.40
27.54
24.34
28.33
2003
31.18
32.77
30.61
25.00
25.86
27.65
28.35
29.89
27.11
29.61
28.75
29.81
2004
31.28
30.86
33.63
33.59
37.57
35.18
38.22
42.74
43.20
49.78
43.11
39.60
2005
44.51
45.48
53.10
51.88
48.65
54.35
57.52
63.98
62.91
58.54
55.24
56.86
Source(s): U.S. Energy Information Administration.
Production of oil in the Russian market increased markedly with the increase in prices
across the industry, as figure 4.4 shows.
Figure 4.4 Total Russian Oil Production 1992-2012
115
Source: Energy Information Agency, US Department of Energy
This spike in the price of Russian oil translated into profits for the firms for the first
realizable time since the transition parsing of the industry. And integrally the Sakhalin
projects introduced new technology relevant to cold-water offshore extraction that
inspired greater investment in exploration for reserves. Figure 4.6 shows that proven
reserves, a function of exploration investment began to rise markedly in 2002.
Figure 4.5 Total Russian Oil Reserves 1992-2012
Source: Energy Information Agency, U.S. Department of Energy
116
Putin’s Oil Institution
These increases and flows are inherently important to the story, as they are part of
the growth recorded. However, it is also important to note the reaction of the state to the
flows and the institutionalization of the energy resources in the Russian state during this
same period. During the Putin administration, the ideology of the state moved from the
disassociation with the private market that had reigned under Yeltsin to a particular brand
of cultural agency over geography that has become globally popular since the 1970’s.
As the exploration of Rosneft’s development over both Chapter Three and this
chapter shows, the state-owned oil company underwent a drastic shift after Putin’s
election. The firm was given the political heft of the Kremlin in mergers and
117
acquisitions75 and essentially re-patriotized as the national interest. This imagination of
the Russian interest and possession over its geography and the land’s resources is very
much the antithesis of neoliberal thought. In many ways, it harks back to a Soviet-style
production regime in the industry that the majority was uncomfortable with during the
transition years. But it’s success lies in the growth Russia experienced given the increase
in energy prices, resulting in hefty federal coffers that, in turn, resulted in increased social
spending in increases in quality of life.
In the aftermath of Putin’s first term in office, many political scientists and
historians have backtracked into the politician’s earlier life in attempts to gleam
motivation behind Putin’s insistence on strong state power. Harley Balzer’s 2013 article
on Putin’s dissertation thesis from the 1990’s shows a highly nationalistic perspective on
economic growth. 76
A contemporary strategy for rational use of resources cannot be based
exclusively on the possibilities of the market. This applies even more to
conditions of economic development in a transition, and, thus, to the
Russian economy. … Strengthening the state must be aimed at resolving
the following problems: perfecting legislation pertaining to natural
resources …establishing criteria and requirements for delimiting state and
other types of natural resource property; and similarly creating a federal
reserve of valuable minerals and other types of natural wealth.77
75
Gustafson, 330 – 340.
76
Harley Balzer. "The Putin Thesis and Russian Energy Policy." Post-Soviet Affairs 21.3 (2005): 210-225.
77
Ibid, 218.
118
Putin’s political perspective on the importance of natural resource wealth to the
Russian state fed into the creation of what I call the “political-industrial complex” in
Russia during this period. The “global oil miracle”78 and the solidified state interest in the
energy sector created a cyclical power structure in Russia, in which the political regime is
supported by the profits of the energy industry through mass social improvement. The
growth traced through this chapter has resulted in a larger GDP per capita and strong
relative increases in personal income. Even more importantly in the Russian case, the
Putin government has translated into income stability, a dynamic almost unheard of
during the Yeltsin period given the prevalence of wage arrears plaguing both public and
private workforces.
Table 4.9 summarizes the final macroeconomic variable set for this chapter,
tracing across 2003 to 2005. During this final snapshot, the country dissolves the GKO
market given a lack of financing demand at the federal level. Exports shoot up to almost
double the 1998 figure.
Table 4.10 Macroeconomic Summary, 2003 – 2005
VARIABLES OF INTEREST
78
Output (Real
GDP,
Millions of
Rubles)
Borrowing
Costs
Imports
(Millions of
Rubles)
Exports (Millions of
Rubles)
Current Account (% of
GDP)
2003
13208.2
5.4 percent
3153920.2
4655880.3
8.229
2004
17027.2
2.7 percent
3773863.5
5860396.9
10.07
2005
3328.00*
n/a
4648275.4
7607256.5
11.06
Gustafson, 185 – 188.
119
CONCLUSION
This chapter process traced the aftermath of the debt default across this project’s
three variables of interest and highlighted the importance of three critical junctures in
determining those measurements. Putin’s rise into the presidency and the subsequent
policies of his administration that worked to overturn the neoliberal precedent of the
Yeltsin administration combined with the surge in oil prices, inspiring foreign investment
Source(s): Goskomstat, http://www.gks.ru/bgd/free/b01_19/IssWWW.exe/Stg/d000/i000030r.htm; IMF World
Outlook Database, Russian Federation; EconStat, http://www.econstats.com/weo/CRUS.htm; *2005 figure
comes from the World Bank given insufficient data in Goskomstat archives.
in the Russian economy unlike what was seen during the transition. Table 4.9 offers a
summary of the FDI and Portfolio Investment trend in Russia, highlighting the collapse in
1998 and 1999 and then the subsequent climb upward that parallels the increases in the
variables of interest traced throughout the chapter.
Table 4.11 International Investment, 1997 - 2004
Foreign
Direct
Investment
1997
1998
1999
2000
2001
2002
2003
2004
13612
12912
18303
32204
52919
70884
96729
122295
120
Portfolio
Investment
$5,459,
961,000.00
$9,037,
984,000.00
n/a
($1,017,80
0,000.00)
$1,321,003,
000.00
$5,745,
$851,812,0
387,000.00
00.00
$4,757,746,
000.00
Source(s): UNCTAD, Mundi.
In Chapter Five, I remove these critical junctures and conduct a counterfactual
case simulating the empirical experience in Russia from 1999 – 2005 without the
influence of the critical junctures identified here.
121
CHAPTER FIVE
COUNTERFACTUAL ANALYSIS
Today's financial crash does not require you to abandon your march toward
freedom and free markets.
— U.S. President Bill Clinton
Sept. 1998: Moscow, Russia
This chapter manipulates the empirical trajectory presented in Chapter Four into a
counterfactual example that theoretically removes the critical junctures around which I
traced the empirical chain. In working toward the ultimate goal of explaining the
empirical outcomes measured in the Russian case, I now attempt what political scientist
James Fearon calls a fundamental tenet of the “logic of inference.” “The analyst, in
explaining why some particular event E occurred, cannot help but explain why E
occurred rather than some other possible outcome or outcomes.”1 In this “imagined”2
case of outcomes, the critical junctures are now assumed null and void, in so far as we
can assume they and their associated effects did not play out.
To recap the evidence presented in Chapter Four, there are three junctures that
create the political industrial complex that propelled foreign investment in Russia’s
economy and therein propelled Russia’s macroeconomic growth. First, Putin’s
appointment as prime minister at the very end of the Yeltsin administration, placing him
in the political forefront prior to the 2000 elections and solidifying his particular brand of
1
James Fearon, “Counterfactuals and Hypothesis Testing,” World Politics, Jan 1991,
http://faculty.washington.edu/swhiting/pols502/Fearon_Counterfactuals.pdf
2
By definition, a counterfactual is a manipulated imagination derived from the logical basis of political
science established by John Stuart Mill; Jasjeet Sekhon, “Quality Meets Quantity: Case Studies,
Conditional Probability, and Counterfactuals,” June 2004.
122
leadership for Russia. Second, the Putin administration constructed a strong federal state
and overturn of Yeltsin-era neoliberalism. And, third, the surge in global energy prices
that resulted in a stronger domestic energy sector and increased state revenues.
In order to imagine a case wherein these critical junctures do not play the
empirical roles evidenced in Chapter Four, I process trace an imagined narrative without
these junctures using projected data from the OECD reports on Russia written in
December 1998 and 1999. Again, the variables of interest are output, trade flows, and
borrowing costs. Projecting off December 1998 allows the analysis to incorporate the
impact of the debt default without running into confounds with dynamics associated with
the critical junctures. The first of the three points does not take into affect until mid way
through 1999—the breaking point being Yeltsin’s decision to replace Prime Minster
Stepashin with Putin.
Table 5.1 summarizes the OECD projections for Russia at the end of 1998, using
1997 baseline statistics. Table 5.2 summarizes the same set of projections completed one
year later, using 1998 baseline statistics. Using these two sets of projections from the
OECD immediately voids the effects of the second critical juncture—the surge in global
energy prices—given the assumptions built into these projections which rely on data from
1997 and 1998, during which time the prices were relatively similar across both years.
123
Table 5.1 OECD Projections Dec 1998
1997
1998
1999
2000
Real GDP Growth
0.8
-6.0
-6.0
1.0
Inflation
11.0
70.0
150.0
80.0
Unemployment
11.3
12.0
12.5
12.5
Fiscal Balance (%
of GDP)
-8.4
-4.0
-3.0
-2.0
Current Account
Balance (US $bn)
2.9
0.0
9.0
13.0
Current Account
Balance (% of
GDP)
0.6
0.0
2.2
3.1
Source: “OECD Economic Outlook: December 1998,” OECD.
Table 5.2 OECD Projections Dec 1999
1998
1999
2000
2001
Real GDP Growth
-4.6
2.0
1.0
1.0
Inflation
84.4
40.0
30.0
20.0
Unemployment
13.3
12.0
11.0
11.0
Fiscal Balance (% of
GDP)
-6.0
-4.0
-4.0
-2.0
Current Account
Balance (US $bn)
2.4
18.0
15.0
12.0
Current Account
Balance (% of GDP)
0.5
10.0
7.5
5.4
Source: “OECD Economic Outlook: December 1999,” OECD.
124
REIMAGINING THE POLITICAL LANDSCAPE
The empirical chain rests upon two major political dynamics. The first is the
decline of the Yeltsin administration and the simultaneous rise of the Putin administration
at the 1999 juncture. And second, the establishment of Putin’s political persona and
regime and the associated policies I argue should be seen as both a strengthening of the
federal state and a repeal of the Yeltsin’s “neo-liberal” attempt. This second dynamic is
shown in Chapter Four to begin at the end of 1999 and last through the end of the chosen
timeframe, 2005. While it would be difficult to substantiate the perspective that Yeltsin
may have stayed in power for longer than the end of his second term given his health
problems and single-digit approval ratings by 1999, I instead assume that Yeltsin-era
politics extend through into 21st century Russia in this counterfactual. For the purposes
of this case, that means I extend the policy trends from the Yeltsin administration, which
include 1) a detached super presidential regime 2) disregard for elected Duma officials
and 3) minimal state involvement in domestic industry, as was shown in Chapter Three.
Under a Yeltsin-supported political regime, it is unlikely that any of the
institutional reform that I explored in Chapter Four would have transpired. Because I am
projecting off a historical precedent established in Chapter Three, I offer the following
substantiation for this perspective now. Firstly, I admit that it is both empirically and
theoretically difficult to parse out the various dynamics at play during the transition that
led to the outcomes recorded in Chapter Three. The political and economic variables in
that analysis are so confounded together that no single effect could truly be qualitatively
isolated. However, without even falling into methods of isolation, it is a valid claim to
125
suggest that Yeltsin era policies represented botched attempts at the various Western
advised economic paths—such as privatization and shock therapy. Here, I rely on the
comparison made often between post-Soviet Poland and Russia. “Russia and Poland
adopted similar packages of reforms … While Poland started two years earlier, both
reform packages were radical.”3 The comparison of the two cases, in which political
leadership in both respective nations received direct Western policy advisement, I argue,
involves two differentiating variables. The first is a matter of scale, as Poland’s economy
is significantly smaller across all essential macroeconomic indicators. However, this
variable can easily be theoretically reconciled through proper scaling of the policy goals.
The second variable is implementation, which here I define through leadership. Though
both sets of leadership in Poland and Russia received similar theoretical advisement from
leading Western economists,4 Polish leadership set strong institutional goals within their
transition agenda and many have argued that the baseline institutional story in Poland
was higher from the onset of the shock therapy policies.5 The Balcerowicz Plan— the
legislation that passed Poland’s shock therapy plan into law—included a social safety net
3
Frye, Timothy, and Andrei Shleifer, “The Invisible Hand And The Grabbing Hand,” (American Economic
Review Papers And Proceedings 87, 1997), 354.
4
Thomas Hall and John Elliott, “Poland and Russia One Decade after Shock Therapy,” Journal of
Economic Issues, Vol 33 No 2 (June 1999), 305 – 314, http://www.jstor.org/stable/4227441; Lawrence
King, “ Postcommunist Divergence: A Comparitive Analysis of the Transition to Capitalism in Poland and
Russia,” Studies in Comparative International Development, Fall 2002, Vol. 37, No. 3, pp. 3-34
5
Jeffrey Sachs, “The End of Poverty: Economic Possibilities for Our Time,” 115.
126
for private employees and a guarantee of employment for public employees.6 It is not
necessary to delve into why the institutional goals were not incorporated into the Russian
agenda, but rather important to know that at no point during the transition did the Yeltsin
administration succeed in developing strong state institutions.7
Domestic Politics
During the Putin era, the role of institutions, at least as defined through power and
control, has been a selective focus of the administration. As Chapter Four showed, the
administration chose to pursue state interests through the reformed fiscal regime and
quasi nationalization of the oil sector. I now pull back the institutional focus of the Putin
regime in order to view a counterfactual in which Yeltsin-era political thought persists.
Many have commented on Primakov’s inability to fit into the Yeltsin-era
framework. But significantly less has been written about Stepashin and the reasons for his
dismissal. During the previous chapter, I wrote sparsely on Stepashin’s dismissal, as little
is objectively understood about the dynamics that lead into Yeltsin’s choice of Putin after
the significant media attention that Stepashin received as the chosen “heir.”8
6
Ibid.
Thomas Hall and John Elliot, “Poland and Russia One Decade after Shock Therapy,” Journal of
Economic Issues, Vol. 33, No. 2 (Jun., 1999) , 305-314 http://www.jstor.org/stable/4227441
7
8
Shevtsova, Putin’s Russia, 28 - 30. Celeste Bohlen, “Yeltsin Dismisses Another Premier; K.G.B. Veteran
Is In,” New York Times, August 1999; ROBYN DIXON, “Cabinet Shuffle Signals Yeltsin’s Choice of an
Heir,” Los Angeles Times, August 10, 1999, http://articles.latimes.com/1999/aug/10/news/mn-64277.
127
In 1994, Yeltsin appointed Stepashin, who studied politics, law, and finance at top
Soviet institutes, as head of the Federal Security Ministry, where he lasted for
approximately one year. His resignation was filed almost immediately after the
Budyonnovsk hospital hostage crisis, in which 1500 civilians were kept hostages by
Chechnyan rebels as part of the ongoing first war with Chechnya during the Yeltsin
administration.9 Until being appointed prime minister, Stepashin also served as a justice
minister and interior minister. These political movements, under the guiding hand of
Yeltsin, show that Stepashin was a useful political ally to have around but not particularly
exceptional in any way other than his ability to fill roles neatly and without problem.10
And before his death, Yeltsin commented that he had hoped Stepashin could succeed into
the presidency but later resolved that the position would not fit. As Sergei Khurshev
wrote in 2000, “Despite being rather mild and dependent, he did not inspire real trust in
the Kremlin, in the Family.”11
Stepashin’s dismissal, in contrast to either Primakov or Chernomyrdin who were
ousted in publically political motions, substantiates that the political regime that Yeltsin
and the Family hoped to create was one that would maintain their direct influence. Under
a Yeltsin-era government in the post-default period, the same lack of interest in
9
Michael Specter, “Chechen Rebels Said to Kill Hostages at Russian Hospital,” The New York Times, June
16, 1995, sec. World, http://www.nytimes.com/1995/06/16/world/chechen-rebels-said-to-kill-hostages-atrussian-hospital.html.
10
Shevtsova, 28-29.
11
Khrushchev, Sergei. "Russia after Yeltsin: A Duel of Oligarchs." Mediterranean Quarterly 11, no. 3
(Summer2000 2000): 1. Academic Search Premier, EBSCOhost, 12.
128
institutional development would have carried through into the 2000’s. This translates into
a weak fiscal regime lacking the true reform that the Putin administration pushed through
and a weaker financial sector.
Fiscal Reform
At the fiscal level, this chapter assumes that, per the pattern of the transition
years, fiscal reform was not successfully passed in the aftermath of the default. And
therein the culture of fiscal responsibility instigated by the Putin administration flat tax
and associated structural changes.
That being said, it is likely that the fiscal climate in Russia would have improved
inherently given a push from the energy sector. As the large firms moved to assimilate
into Western capital markets—an essentially inevitable move after the Russian financial
collapse given the capital-intensive nature of the industry and global interest—adherence
to taxation regulations would have strengthened. But even this would have not yielded
the same level of state revenues because of the lower rates that were popular and
accepted during the Yeltsin administration. The era’s neoliberal leanings prescribed an
attractive environment for private enterprise through low barriers to entry and an
incentivizing tax scheme.12 At the very start of the Putin administration, the executive
and legislature settled on a 35 percent corporate profits tax, though the rate was
negotiated down as the 2000’s progressed and is today at a record low.
Even more important than the specifics of the Putin tax regime was the culture of
fiscal responsibility that it slowly inspired in the country. This sense of obligation was
12
Duane Swank, “Tax Policy in an Era of Internationalization: Explaining the Spread of Neoliberalism,”
International Organization 60, no. 04 (October 2006): 847–82, doi:10.1017/S0020818306060280.
129
concertedly missing from the Yeltsin era and would have not developed in this
counterfactual case. Looking back to the transition period for a trend to project in this
counterfactual, table 5.3 shows that tax revenues were declining throughout the Yeltsin
administration, especially relative to the level of government expenditure.
Table 5.3 Yeltsin’s Fiscal Regime
Source(s): Ngaire Woods, “The Globalizers: The IMF, the World Bank, and their Borrowers”(Cornell
University Press, 2006), 124.
Investment Environment
In Chapter Three, I introduced the two-pronged framework for investment in
Russia during the Yeltsin era: government debt and foreign direct investment in the
energy markets. In this counterfactual case, I imagine that FDI would have strengthened
and stabilized despite Yeltsin-era policymaking given the ROI schedule that was
explained in Chapter Four. The investments made during the 1990’s by multinational
firms through the joint venture vehicle proved to be smart bets as the global oil market
swung up despite the domestic political and economic turmoil in Russia before 2000.
This would have happened no matter the political framework in place, but the point I
130
made in Chapter Four was that Putin was able to harvest the profits from this upturn for
state growth by institutionalizing Gazprom and Rosneft as instrument for the Russian
state. Even without this final dynamic, natural resource exports out of Russia would still
have been extremely attractive to the European market and would have had a large
domestic market. I incorporate this export expectation into the counterfactual data
presented in the subsequent section.
However, I argue that the financial markets would not have recovered in the way
that they did in the empirical chain. Interest in both government securities and corporate
equity was driven by the belief of a strong domestic Russian economy. This belief rested
upon the framework created by the Putin administration as I showed in Chapter Four.
REIMAGINING RUSSIAN MACROECONOMIC GROWTH
In order to consolidate the empirical literature on sovereign debt default with the
counterfactual case that removes the drivers of growth, I reimagine the macroeconomic
fundamentals of the Russian Federation using OECD growth projections derived in 1998
and 1999 prior to the onset of the critical junctures.
Output: Gross Domestic Product
In order to measure output, I call first upon the 1998 real GDP reported by
Goskomstat. Using the OECD reports compiled in 1998 and 1999, I determine that a 1
percent growth rate is a rational estimate of the GDP trajectory in the aftermath of
131
default. The OECD predicted a 0.8 to 1.0 percent annual increase, and I deliberately
choose the higher endpoint of that range. In addition to adding in the projected growth, I
decrease real GDP by a projected default penalty based in the results of the most recent
and comprehensive overview of sovereign debt default costs compiled by Biana de Paoli
et al at the Bank of England. According to de Paoli’s results13, a triple crisis—as in the
case of Russia—should, on average, result in an annual decrease of 21.7 percent of real
GDP and a debt crisis with restructuring should, on average, result in an annual decrease
of 8.3 percent of real GDP. In order to incorporate the effects of the default, currency
crisis, and banking crisis, for the first year post default, I impose a 21.7 percent penalty.
However, after the initial year, I impose just the 8.3 percent penalty given that the
Russian government worked closely at the end of 1998 with the IMF to establish a clear
and, from the investor’s standpoint, trustworthy restructuring plan. This partnership with
the IMF in addition with the currency band put in place by the CBR and the bailout of
key domestic banks were all immediate dampening effects taken swiftly by Russian
officials that should be taken into consideration. That being said, this adjustment is an
optimistic choice. I pull out the output costs for four years—the minimum at which a
country should, on average, see the repercussions of a default decision. Table 5.4
summarizes the computations made in this section.
Table 5.4 Calculating Counterfactual GDP
1999 Counterfactual GDP =
13
Bianca. De Paoli, Costs of Sovereign Default (London: Bank of England, 2006).
132
1999 Counterfactual GDP =
(1998 Reported Real GDP) + (OECD Projected Growth) - (Projected Default Penalty)
The following figure, Figure 5.1, synopsizes the counterfactual output as calculated
through the aforementioned process for years 1999 to 2005. The graph clearly shows the
sharper initial penalty recorded as the muddled effects of a triple crisis hit the economy’s
productivity, while smaller effects trickle through the short term and the beginning of the
middle term until a point at which growth exceeds penalty costs. Two scenarios could
produce this outcome: First, particularly accelerated economic growth could exceed the
estimated costs, on average, or, second, costs could dwindle down in the medium term
until zero, at which point any growth would exceed the reputation of the default. Table
5.5 summarizes the calculated penalties that are incorporated into the imagined GDP.
133
Figure 5.1 Counterfactual GDP
Annual GDP (millions of rubles)
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
1998
1999
2000
2001
2002
2003
2004
2005
Series1 21,190. 16803.8 15,577. 14,440. 13,385. 12,408. 11,502. 10,663.
Source: Gaskomstat, Author’s Calculations.
Table 5.5 Calculated Magnitude of Output Cost
Penalty
Cost
1999
2000
2001
2002
2003
2004
2005
4, 598.270
1,394.718
1,292.904
1,198.522
1,111.030
1,029.924
954.740
Source(s): Author’s Calculations.
In the empirical chain recorded in Chapter Four, GDP rose by a factor of 3.5 over the
timeframe. This counterfactual analysis shows that, if market penalties had drawn out,
GDP would have declined by approximately half.
Trade Flows
134
I use the current account as a proxy to measure trade flows. The current account
of a nation expresses “the difference between the value of exports of goods and services
and the value of imports of goods and services,” according to the International Monetary
Fund.14 Though they are multiple ways in which to interpret the balance of payments
represented by the current account, in accordance with this definition, a current account
deficit would indicate that a country is importing more than it is exporting and a current
account surplus would indicate that a country is exporting more than it is importing. For
the purposes of this analysis, I do not pass a normative judgment about which way the
flows should be moving as a healthy trend. Instead, I construct movements to compare
later in the conclusion with the empirical movements presented in Chapter Four. Here
again I use the 1998 baseline statistics from Goskomstat and the OECD Projected growth
rates from 1998 and 1999. I also incorporate trade penalty costs from Andrew Rose’s
2005 article on debt repayment mechanisms that proves a generalized 8 percent trade
penalty for 15 years to bilateral trade.15
Table 5.6 Calculating Trade Counterfactual
1999 Counterfactual Trade Flows =
(1998 Current Account) + (OECD Projected Growth) - (Projected Default Penalty)
14
Atish Ghosh and Uma Ramakrishnan, “Current Accounting Deficits: Is there a Problem?” IMF Finance
and Development, (March 28,2012).
15
Andrew K. Rose, One reason countries pay their debts: renegotiation and international trade, Journal of
Development Economics, Volume 77, Issue 1, June 2005, Pages 189-206, ISSN 0304-3878,
http://dx.doi.org/10.1016/j.jdeveco.2004.03.006.
(http://www.sciencedirect.com/science/article/pii/S0304387804001543)
135
The OECD predicted erratic shifts in the current account over the two reports relevant to
this chapter. In order to consolidate their prediction, I take the average over four years of
projected growth, which results in a $5.5 billion export surplus on average per year. I use
the 1998 average exchange rate (9.71 rubles/dollar16) to transform the growth into rubles,
as the data from Goskomstat is reported in millions of rubles. Table 5.7 summarizes the
trajectory of Russian imports and exports over the counterfactual timeframe.
Table 5.7 Russian Foreign Trade
1998
1999
2000
2001
2002
2003
2004
2005
Imports
645,633.80
640,383
589,152
542019.81
498658.23
458,765.57
422064.32
388299.17
Exports
821,043.40
755,926.13
696018.47
640903.42
590197.58
543548.21
500630.78
461,146.75
Source(s): Author’s Calculations.
Figure 5.2 Russian Imports and Exports, 1998 - 2005
16
Penn World Table 7.1.
136
900,000.00
800,000.00
700,000.00
600,000.00
500,000.00
Imports
400,000.00
Exports
300,000.00
In this
200,000.00
counterfactual case, the
100,000.00
rate of imports dropped
0.00
1998
1999
2000
2001
Source(s): Author’s Calculations.
2002
2003
2004
2005
approximately 66
percent over the timeframe compared to the empirical case
in which there was an almost 6 times increase in imports.
For exports, the counterfactual shows a 78 percent decrease despite the conservative
growth incorporated, though the empirical attests to a 9 times increase in exports. It is
clear that the vast discrepancy between the empirical and the counterfactual in these
figures is due to the rather conservative growth I incorporated into my counterfactual
calculations.
Borrowing Costs
To test the effects on borrowing costs, I first take the yearly average of monthly GKO
yields across 1996 and 1997 in order to reach a baseline borrowing cost and then
incorporate the projected default penalty. I choose a two-year average, as 1997 stands out
in multiple other macroeconomic indicators as an extreme set relative to the transition
137
years. I use a study by Ozler (1993) that derives the result of a 50 basis point17 penalty for
defaulters in credit markets. Harking back to the Ozler piece for this section of the
counterfactual is necessary as there are few empirical studies that explore penalty costs
through a borrowing framework.18 Unfortunately, the data set that Ozler incorporates into
her study is a post-World War Two aggregation of interest rates. She herself admits that
the historically tight spreads during the 1970’s skewed the results downward, which
justifies my decision to operate with the higher end of her calculated penalty range.
Table 5.8 Calculating Borrowing Cost Counterfactual
Counterfactual Yield on Government Loans =
(Derived GKO Yield Average 1996-1997) + (Projected Default Penalty)
Figure 5.2 shows the trajectory of borrowing costs in Russia across 1996 and 1997,
beginning in 1/96 and flowing monthly through 12/97. The average yield during this
period is 43.3 percent, though as the figure clearly shows there were extreme outliers
during this period as well.
17
One basis point is equal to one hundredth of a percentage point.
18
Andrew Rose and Mark Spegeil, “A Gravity Model of Sovereign Lending,” International Monetary
Fund Staff Papers, 2004, 51. https://www.imf.org/external/pubs/ft/staffp/2003/00-00/rs.pdf
138
Figure 5.3 GKO Yields, 1996 – 1997
120
100
80
60
40
20
12.97
11.97
10.97
9.97
8.97
7.97
6.97
5.97
4.97
3.97
2.97
1.97
12.96
11.96
10.96
9.96
8.96
7.96
6.96
5.96
4.96
3.96
2.96
1.96
0
Projecting out the baseline borrowing cost across the timeframe of 1999 to 2005
does not result in a large shift in annual yields, moving the average from 42.8 to 39.8
over that period. Given the lack of empirical evidence on this cost, I assume this data into
the counterfactual and also assume that after the default, Russia’s credit ratings move in
the same direction toward the average of BBB over 1996 and 1997.19
This approximately 40 percent average yield stands in contrast to the record low
2.4 percent interest that GKO’s were paying out in 2004 in the empirical chain when the
market was shut down.
19Source(s):
EconStats, http://www.econstats.com/weo/CRUS.htm
Stefan Hedlund, Russia’s Market Economy: A Bad Case of Predatory Capitalism (Routledge, 2002), 227
- 228.
139
CONCLUSION
The results of the counterfactual case constructed in this chapter show a starkly
different macroeconomic picture than the one recorded across the empirical realty in
Chapter Four. While the counterfactual case allows for what are arguably low levels of
growth predicted conservatively by the OECD in the immediate aftermath of the debt
default, the discrepancies are large enough to prove that the empirical Russian case is an
extremely deviant chain of events relative to the predicted outcomes in the aftermath of
debt default.
The market mechanisms that were intended to reinforce payment in lieu of formal
infrastructure did not operate, as they would have been predicted. And, in accordance
with the rescheduling organized by the Russian state with IMF guidance, international
investors took significant haircuts in the government debt market during the short term.
This exercise proves that there was some external force or combination of forces that
impacted the chain of events in Russia in order for it to have seen the growth that was
empirically recorded.
140
141
CHAPTER SIX
CONCLUSION
Today increasingly large—and free—movements of capital, commodities, and
services support a global financial architecture that leans toward neoliberalism. And
though this global system is still developing, the patterns are clear: at the sovereign level,
oversight is not fully enforced and sovereign nations are treated akin to private entities in
the global markets. This dynamic plays through until the market fails to operate, which is
the case with sovereign debt default. Unlike private entities that are bound by domesticlevel oversight that requires repayment by law, sovereign nations are bound by no similar
infrastructure.
Over the period of time since the end of the Bretton Woods Order, the number of
internationally impactful financial crises has been unprecedented. And unlike private
defaults, the architecture does not exist to regulate the restructured payment schemes of a
sovereign nation—instead this is left to the market, as economic literature from the 1980s
and 1990s explains. However, these market mechanism models, crafted on datasets
reaching into the Bretton Woods system and prior, today fail to incorporate the
considerable speculative capital and direct investment of the globalized economy.
These dynamics lead to cases like that of Russia in 1998, where I’ve shown
foreign capital invigorated the domestic economy at a pace that out measured the
projected losses predicted by market mechanism models. The empirical reality across
which I traced involves two distinct forces: on one hand, the development of a political
economic status quo under the Putin administration that made foreign investment
attractive as an option and, on the other hand, the surge in the global oil industry that
142
made bets on Russia even more attractive. Foreign capital in the short term allowed the
Russian government to establish the political feasibility for the development of a quasinationalized oil sector, fully modernized in line with Western business and technology
standards, to extend the output and trade growth seen into the medium term.
At the beginning of this thesis, I asked what variables were salient forces in reinvigorating growth in the aftermath of a domestic financial crisis. Through process
tracing the Russian case and comparing against the constructed counterfactual, I explain
that it was precisely the variables that developed Russia into a leading “emerging market”
nation for investment that also allowed for its remarkable growth trajectory in the short to
mid term aftermath of its default. But it is precisely that “emerging market” intrigue that
placed Russia into the credit situation it defaulted upon in August 1998. This cyclicality
of investment interest within the current loose international financial architecture is the
main lesson to take away from this work.
IMPLICATIONS FOR RUSSIA
Though this work never distinctly touches upon the considerable literature in
political science and economics on the purported phenomenon of the “resource curse,”1
1
Angela V. Carter, “Escaping the Resource Curse,” Canadian Journal of Political Science/Revue
Canadienne de Science Politique 41, no. 01 (March 2008): 215–17,
doi:10.1017/S0008423908080177.Halvor Mehlum, Karl Moene, and Ragnar Torvik, “Institutions and the
Resource Curse*,” The Economic Journal 116, no. 508 (2006): 1–20, doi:10.1111/j.14680297.2006.01045.x.James A. Robinson, Ragnar Torvik, and Thierry Verdier, “Political Foundations of the
Resource Curse,” Journal of Development Economics, Special Issue in honor of Pranab Bardhan Special
Issue in honor of Pranab Bardhan Conference in honor of Pranab Bardhan, 79, no. 2 (April 2006): 447–68,
doi:10.1016/j.jdeveco.2006.01.008.“China Is Playing Hardball With Russia Over Two Massive Gas
143
there are some interesting overlaps in the implications of my findings and the advisement
researchers have developed for Russia and similar nations that are seen as potential cases
of the resource-curse phenomenon. Economists and political scientists argue for the
development of strong institutions outside the resource sectors of these economies as
conduits of non-“resource cursed” development. I show that the Yeltsin administration, in
contrast to Putin’s regime and leadership in other post-Soviet states, failed to focus on the
institutional development of the Russian state in its market capitalist form. Putin’s regime
achieved international interest by strengthening federal strength over the energy sector
that became profitable at the turn of the century through a partial nationalization of the
industry and an overall strengthening of Russia’s fiscal regime. But this translated to
disproportionate state guidance in the oil sector often at the expense of the economy’s
other sectors. And given the mass negligence of state institutions during the Yeltsin era,
Putin’s perspective only amplified a decade of negligence for portions of the court and
the bureaucratic order. In order to reverse back the effects of the “resource curse,”
scholars would agree that economic diversity, especially in terms of its fiscal revenue
streams, is necessary.
Over recent years, the Russian government has attempted to move away from a
perceived reliance on consumers in the European energy markets and a parallel reliance
on production from the European markets for consumer goods. Part of this shift is an
attempt to create new markets in Asia, particularly through the every-expanding Chinese
demand for natural gas and oil. The other half of this shift is incentivizing the production
Pipeline Projects,” VICE News, accessed April 4, 2015, https://news.vice.com/article/china-is-playinghardball-with-russia-over-two-massive-gas-pipeline-projects.
144
of consumer goods domestically at attractive prices for the Russian consumer base.2 The
results of these attempts have been mixed. The “Strength of Siberia” pipeline, constructed
to transport natural gas between Russia and China, relies on a weakly negotiated deal
between the two nations that is not far-reaching into the long term. And with the nation’s
2012 integration into the World Trade Organization,3 there is significant potential
currently untapped for domestic industry and manufacturing.
IMPLICATIONS FOR TOMORROW’S EMERGING MARKET
If one were to combine the theoretical research on the benefits of international
financial participation and the massive literature on best practices for developing nations,
an ideal point could be reached at which institutional strength could instigate inclusion in
international financial markets. However, the scholarly theory does not resolve the
entirety of the question posed at the start of this thesis. Emerging nations’ increasing
participation in the international financial system is likely to produce positive flows for
those nations in the long term. But what this thesis argues for is infrastructure that
monitors and inspects these flows in order to prevent instances of default, as was the case
in Russia in 1998, in the short term. The aftermath of Russia’s debt default shows us that
emerging market investment can be a cyclical flow. Without the institutional integrity
necessary at a domestic level, international finance proves a dangerous tool for the
2
Rudiger Ahrend, “Can Russia Break the ‘Resource Curse’?,” Eurasian Geography and Economics 46, no.
8 (December 1, 2005): 584–609, doi:10.2747/1538-7216.46.8.584.
3
“Lurching into the Fast Lane,” The Economist, July 14, 2012, http://www.economist.com/node/21558588.
145
emerging market and economic crises, like default, will eventually ensue. In the
aftermath of crisis, as a nation’s fundamentals are low, international investors regain
interest in that nation as an opportunity for growth. And it is this very interest that propels
the natural growth forward. And, once again, the nation can fall into a weak institutional
trap and begin the cycle all over again.
Tomorrow’s emerging market should be a focus of both international
development scholars and policy makers and a focus of the respective domestic actors.
As the Russian transition shows, it is not enough to announce domestic markets and
invite the world in. Tomorrow’s emerging economies needs domestic institutions strong
enough to diversify risk away from the financial markets, at a country-wide level.
FURTHER RESEARCH OPPORTUNITIES
Moving forward, a large-n statistical study of the “emerging market” defaults
during the 1980s to the 2000s is a necessary addition to the literature on sovereign
default. Continuing to study these incidents, even as the memories of their direct impacts
on the global economy fades, ensures that policymakers and investors continue to think
critically about the lessons connected to these rich cases. But more important, I argue, is
the integration of this critical thinking to the policy framework of the international
system. It falls upon the IMF, amongst other international organizations, to develop a
framework for sovereign debt repayment enforcement.
146
By crafting a policy structure that includes supervision and regulation of
financing flows of capital to sovereign nations, these organizations can overturn the
neoliberal precedent that implicitly governs the current international order. But what
remains prior to this step is a thorough analysis that analyzes the pathways through which
effective oversight can be implemented. This research is needed for every step of this
potential policy: Who should be governing? At what level and how often should
oversight be sought out by this organization? Through research and analysis, combined
with effective practice, the question of effective regulation can slowly be solved.
As a starting point, I offer a policy that was mentioned in passing in this thesis:
Anne Krueger’s 2002 proposal for a new architecture for global credit markets. In her
proposal to the IMF, Krueger stressed the importance of developing a formal “sovereign
debt restructuring mechanism” (SDRM)—not to be confused with the implicit market
mechanisms outlined across this thesis.4 In theory, the SDRM would have protected the
rights of creditors—whether domestic lenders or foreign speculators—against the
interests of a sovereign seeking a quick, simplified restructuring in the name of domestic
economic stability. By upholding the interests of creditors, the SDRM sought to decrease
the number of defaults by formally increasing the costs of restructuring for a sovereign
nation. The SDRM was not passed by IMF member states and analysts have suggested a
strict institutional reform of global credit markets cannot feasibly pass through the current
IMF structure.5 The academic literature should begin by testing the SDRM and move
toward constructing a policy compromise that the IMF can feasibly implement.
4
Anne Krueger, “A New Approach to Sovereign Debt Restructuring,” (International Monetary Fund, 2002)
5
Brand Stetser, “The Political Economy of the SDRM,” (Council on Foreign Relations, 2008).
147
WORKS CITED
Abiad, Abdul, Petya Koeva-Brooks, Irina Tytell, Daniel Leigh, and Ravi Balakrishnan,
"What’s the Damage? Medium-Term Output Dynamics After Banking Crises."
International Monetary Fund, (2009).
“Argentina, Elliott Finally May End Bond War,” CNBC, December 29, 2014,
http://www.cnbc.com/id/102298800.
Acemoglu, Daron and James Robinson, Why Nations Fail: The Origins of Power,
Prosperity and Poverty. New York: Crown, 2012.
Acemoglu, Daron, Simon Johnson, and James A. Robinson, “The Colonial Origins of
Comparative Development: An Empirical Investigation,” The American
Economic Review 91, no. 5 (December 1, 2001): 1369–1401.
Acemoglu, Daron and Simon Johnson, Unbundling Institutions, National Bureau of
Economic Research, (September 2003), http://www.nber.org/papers/w9934.
Ahrend, Rudiger “Can Russia Break the ‘Resource Curse’?,” Eurasian Geography and
Economics 46, no. 8 (December 1, 2005): 584–609, doi:10.2747/15387216.46.8.584.
Ahrend, Rudiger, “Foreign Direct Investment into Russia - Pain Without Gain? A Survey
of Foreign Direct Investors,” Russian Economic Trends 9, no. 2 (June 2000),
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4325568&site=
ehost-live.
Alexeev, Michael, and Shlomo Weber, eds. The Oxford Handbook of the Russian
Economy. 1st ed. Oxford University Press, 2013.
http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199759927.001.0
001/oxfordhb-9780199759927.
Allen, Franklin and Douglas Gale, "Financial Contagion." Journal of Political
Economy 108, no. 11 (2000): 1-33, http://www.nber.org/cycles/recessions.html,
(accessed December 13, 2014).
Arner, Douglas, Financial Stability, Economic Growth, and the Role of Law. Cambridge
University Press, 2007.
Arner, Douglas and Michael Taylor, The Global Financial Crisis and the Financial
Stability Board: Hardening the Soft Law of International Financial Regulation?
Social Science Research Network, (June 1, 2009).
148
Arner, Douglas, M Yokoi-Arai, and Z Zhou (eds), Financial Crises in the 1990s: A
Global Perspective, London: British Institute of International and Comparative
Law, 2001.
Aslund, Anders, How Capitalism Was Built : The Transformation of Central and Eastern
Europe, Russia, and Central Asia, Cambridge University Press, 2007.
Aslund, Anders, Russia’s Capitalist Revolution: Why Market Reform Succeeded and
Democracy Failed, Peterson Institute Press, 2007.
Bahmani-Oskooee, Mohsen, “Devaluation and the J-Curve: Some Evidence from LDCs,”
The Review of Economics and Statistics 67, no. 3 (August 1, 1985): 500–504,
doi:10.2307/1925980.
The New Palgrave Dictionary of Economics Online,
http://www.dictionaryofeconomics.com/resources/default/bailout.
Baker, Peter and Susan Glasser, Kremlin Rising: Vladimir Putin’s Russia and the End of
Revolution, Simon and Schuster, 2005.
Beck, Thomas, A. Demirguc-Kunt, and Robert Levine, “Finance, Inequality, and
Poverty: Cross-Country Evidence,” World Bank Working Paper (May 2005).
Beers, David and John Chambers, “Default Study: Sovereign Defaults At 26-Year Low,
To Show Little Change In 2007,” Standard & Poor’s CreditWeek, (2006).
Berins Collier, Ruth and David Collier, Shaping the Political Arena: Critical Junctures,
the Labor Movement, and Regime Dynamics in Latin America. Notre Dame, Ind:
University of Notre Dame Press, 2002.
Blustein, Paul, “The Chastening,” New York, NY: Public Affairs, 2001.
Bohlen, Celeste “Yeltsin Dismisses Another Premier; K.G.B. Veteran Is In,” New York
Times, August 10, 1999.
Booth, G. Geoffrey, Fred R. Kaen, and Peter E. Koveos, “R/S Analysis of Foreign
Exchange Rates under Two International Monetary Regimes,” Journal of
Monetary Economics 10, no. 3 (1982): 407–15, doi:10.1016/03043932(82)90035-6.
Bordo, Michael, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad MartinezPeria, “Is the Crisis Problem Growing More Severe?,” Economic Policy, no. 32
(April 1, 2001).
Bresleauer, George, “Boris Yeltsin as Patriarch,” Post-Soviet Affairs Vol. 15 No. 2 (April
149
– June 1999).
Brodksky, Boris, “Dollarization and Monetary Policy in Russia,” Review of Economies in
Transition, (November 1997).
Buckley, Ross, Emerging Markets Debt: An Analysis of the Secondary Market. Kluwer
Law International, 1999.
Buckley, Ross and Douglas W. Arner, From Crisis to Crisis: The Global Financial
System and Regulatory Failure, Kluwer Law International, 2011.
Bulow, Jeremy and Kenneth Rogoff, “A Constant Recontracting Model of Sovereign
Debt,” Journal of Political Economy 97, no. 1 (February 1, 1989): 155–78.
Bulow, Jeremy and Kenneth Rogoff, “Sovereign Debt: Is to Forgive to Forget?,” The
American Economic Review 79, no. 1 (March 1, 1989): 43–50.
Calomiris, Charles W., Banking Crises and the Rule of the Game. National Bureau of
Economic Research, Working Paper No. 15403, (October 2009).
Camdessus, Michael “The Role of the IMF: Past, Present, and Future,” IMF Speech 98/4,
Remarks at the Annual Meeting of the Bretton Woods Committee, Washington,
DC, 13 Feb. 1998.
Campbell, John and Ove Pederson, The Rise of Neoliberalism and Institutional Analysis,
Princeton, N.J.: Princeton University Press, 2001.
Carter, Angela, “Escaping the Resource Curse,” Canadian Journal of Political
Science/Revue Canadienne de Science Politique 41, no. 01 (March 2008): 215–
17, doi:10.1017/S0008423908080177.
“China Is Playing Hardball With Russia Over Two Massive Gas Pipeline Projects,” VICE
News, https://news.vice.com/article/china-is-playing-hardball-with-russia-overtwo-massive-gas-pipeline-projects, (accessed April 4, 2015).
Claessens, Stijn and M. Ayhan Kose, “Financial Crises Explanations, Types, and
Implications,” IMF Working Paper (2013).
Cohen, Daniel, “The Debt Default, Post Mortem,” National Bureau of Economic
Research, Macroeconomics Annual, (1992).
Dabrowski, Marek, Wojciech Paczynski, and Łukasz Rawdanowicz, “Inflation and
Monetary Policy in Russia: Transition Experience and Future Recommendations,”
CASE - Center for Social and Economic Research No. 241 (August 2002),
http://www.case-research.eu/en/node/54944.
150
Dahlberg, John-Thor, “Russia to End Most Price Controls by End of March : Economy:
Moscow Adopts a 1992 Reform Plan Vital to Yeltsin’s Hopes of Winning More
International Assistance,” Los Angeles Times, February 28, 1992,
http://articles.latimes.com/1992-02-28/news/mn-3072_1_price-controls.
De Paoli, Bianca, Glenn Hoggarth, and Victoria Saporta, “Output Costs of Sovereign
Default,” Sovereign Debt, ed Robert Kolb, John Wiley and Sons, 2013.
Dell’Ariccia, Giovanni, Isabel Schnabel, and Jeromin Zettelmeyer, “How Do Official
Bailouts Affect the Risk of Investing in Emerging Markets?,” Journal of Money,
Credit and Banking 38, no. 7 (October 1, 2006): 1689–1714.
Desai, Padma, Conversations on Russia : Reform from Yeltsin to Putin, Cary, NC, USA:
Oxford University Press, 2006,
http://site.ebrary.com/lib/alltitles/docDetail.action?docID=10160514, 32.
Desai, Padma, “Why Did the Ruble Collapse in August 1998?,” The American Economic
Review 90, no. 2 (May 1, 2000): 48–52.;
Detragiache, Enrica, “Public versus Private Borrowing: A Theory with Implications for
Bankruptcy Reform,” Journal of Financial Intermediation 3, no. 4 (September
1994): 327–54, doi:10.1006/jfin.1994.1009.
Dixon, Robyn, “Cabinet Shuffle Signals Yeltsin’s Choice of an Heir,” Los Angeles
Times, August 10, 1999, http://articles.latimes.com/1999/aug/10/news/mn-64277.
Dooley, Michael P., “Can Output Losses Following International Financial Crises Be
Avoided?,” National Bureau of Economic Research Working Paper, (February
2000), http://www.nber.org/papers/w7531.
Duffie, Darrell, Lasse Heje Pedersen, and Kenneth J. Singleton, “Modeling Sovereign
Yield Spreads: A Case Study of Russian Debt,” The Journal of Finance 58, no. 1
(February 1, 2003): 119–59, doi:10.1111/1540-6261.00520.
Dumenil, Gerard and Dominique Levy, The Crisis of Neoliberalism, Harvard University
Press, March 2013.
Dungey, Mardi, Renee Fry, Brenda Gonzlez-Hermosillo and Vance Martin, “The
Transmission of Contagion in Developed and Developing International Bond
Markets,” Bank for International Settlements, 2002.
Eaton, Jonathan and Mark Gersovitz, “Debt with Potential Repudiation: Theoretical and
Empirical Analysis,” The Review of Economic Studies 48, no. 2 (April 1, 1981):
289–309, doi:10.2307/2296886.
Eaton, Jonathan and Raquel Fernandez, “Sovereign Debt,” National Bureau of Economic
151
Research Working Paper, (May 1995), http://www.nber.org/papers/w5131.
Easterly, William, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have
Done So Much Ill and So Little Good, New York: Oxford University Press, 2006.
Eichengreen, Barry, Financial Crises: And What To Do About Them. Oxford: Oxford
University Press, 2002.
Epstein, Gerald and Martin Wolfson. “Introduction: The Political Economy of Financial
Crises,” The Handbook of Political Economy of Financial Crises, ed Epstein and
Wolfson, Oxford University Press, 2013.
Fearon, James, “Counterfactuals and Hypothesis Testing,” World Politics Vo. 43 No. 2,
(Jan 1991):169 - 195,
http://faculty.washington.edu/swhiting/pols502/Fearon_Counterfactuals.pdf
Felkay, Andrew, Yeltsin’s Russia and the West, Praeger, 2001.
Finger, Harold and Mauro Mecagni, “Sovereign Debt Restructuring and Debt
Sustainability: An Analysis of Recent Cross-Country Experience,” International
Monetary Fund, (2007),
http://www.imf.org/external/pubs/cat/longres.aspx?sk=19634.
Fish, Steven, Democracy Derailed in Russia: The Failure of Open Politics, Cambridge
University Press, 2005.
“Foreign Direct Investment in Emerging Market Countries,” International Monetary
Fund: Capital Markets Consulting Group, (September 2003),
http://www.imf.org/external/np/cmcg/2003/eng/091803.pdf.
Friedman, Milton, "A Theoretical Framework for Monetary Analysis," Journal of
Political Economy, University of Chicago Press, vol. 78(2), (1970):193-238.
Friedman, Milton, "A Monetary Theory of Nominal Income," Journal of Political
Economy, University of Chicago Press, vol. 79(2), (1971): 323-37.
Frye, Timothy, and Andrei Shleifer, “The Invisible Hand And The Grabbing Hand,”
American Economic Review Papers And Proceedings 87, (1997).
Gaddy, Clifford G., “Perspectives on the Potential of Russian Oil,” Eurasian Geography
and Economics Vol. 45 No. 5 (2004): 346-351,
http://www.brookings.edu/research/articles/2004/07/russia-gaddy.
Gaddy, Dean, “Russian oil major Yukos implements western-style reorganization,” Oil
and Gas Journal, June 1999.
152
Ghosh, Atish and Uma Ramakrishnan, “Current Accounting Deficits: Is there a
Problem?” IMF Finance and Development, (March 28,2012).
Giannaros, Demetrios, “Twenty Years After The Economic Restructuring Of Eastern
Europe: An Economic Review,” International Business & Economics Research
Journal (IBER) 7, no. 11 (February 16, 2011),
http://www.cluteinstitute.com/ojs/index.php/IBER/article/view/3306.
Gilman, Martin G., No Precedent, No Plan inside Russia’s 1998 Default, MIT Press,
2010.
Glick, Reuven and Michael M. Hutchison, “Banking and Currency Crises: How Common
Are Twins?,” EPRU Working Paper Series, Economic Policy Research Unit
(EPRU), University of Copenhagen, https://ideas.repec.org/p/kud/epruwp/9920.html (accessed December 13, 2014).
Glick, Reuven, Ramon Moreno, and Mark Spiegel, “Financial Crises in Emerging
Markets: An Introductory Overview,” Financial Crises in Emerging Markets,
Cambridge University Press, 2001.
Granville, Bridgette and Peter Oppenheimer, Russia’s Post-Communist Economy, ed.
Bridgette Granville and Peter Oppenheimer, Oxford University Press, (2002): 21 27.
Granville, Bridgette “The Problem of Monetary Stabilization,” Russia’s Post-Communist
Economy, ed. Bridgette Granville and Peter Oppenheimer, Oxford University
Press, 2002: 95 – 110.
Gupta, Poonam, Deepak Mishra, and Ratna Sahay, "Behavior of output during currency
crises," Journal of International Economics vol. 72(2): 428-450.
Gustafson, Thane, “Capitalism Russian Style” Cambridge University Press, 1999.
Hall, Peter, “Aligning Ontology and Methodology in Comparative Politics,”in
Comparative Historical Analysis in the Social Sciences, edited by James
Mahoney and Dietrich Rueschemeyer, Chapter 11. Cambridge, UK and New
York: Cambridge University Press, (2003).
Hall, Thomas and John Elliott, “Poland and Russia One Decade after Shock Therapy,”
Journal of Economic Issues, Vol 33 No 2 (June 1999): 305 – 314,
http://www.jstor.org/stable/4227441.
Hashimzade, Nigar, Gareth Donald Miles and John Black, A Dictionary of Economics.
Oxford University Press, 2012.
153
Hedlund, Stefan, Russia’s Market Economy: A Bad Case of Predatory Capitalism,
Routledge, 2002.
Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to
the 1990s, Cornell University Press, 1996.
“Hilton v. Guyot”, United States Reports, Vol. 154, 159.
Hobbes, Thomas, “Leviathan,” 1651.
“Hold-Out Fund Elliott Management Pursuing Sanctions Against Argentina,”
International Business Times UK, http://www.ibtimes.co.uk/hold-out-fund-elliottmanagement-pursuing-sanctions-against-argentina-1473221.
Hoggarth, Glenn, Ricardo Reis, and Victoria Saporta, “Costs of Banking System
Instability: Some Empirical Evidence,” Journal of Banking & Finance 26, no. 5
(May 2002): 825–55, doi:10.1016/S0378-4266(01)00268-0.
Honohan, Peter, “Financial Development, Growth, and Poverty: How close are the
links?”, World Bank Policy Research Working Paper 3202, (Februray 2004).
Huefner, Felix, Robin Koepke, Sonja Gibbs, and Emre Titfik, “Capital Flows to
Emerging Market Economies.” Institute of International Finance, (June 26,
2013).
“IMF Lending Arrangements as of April 30, 2013,” International Monetary Fund,
http://www.imf.org/external/np/fin/tad/extarr11.aspx?memberKey1=ZZZZ&date1
key=2013-04-30.
Ivanova, Anna, Michael Keen, and Alexander Klemm, “The Russian ‘flat Tax’ Reform,”
Economic Policy 20, no. 43 (July 1, 2005): 398–444, doi:10.1111/j.14680327.2005.00143.x.
Joyce, Joseph, The IMF and Global Financial Crises: Phoenix Rising?, Cambridge
University Press, 2014
Kaminksy, Graciela and Carmen Reinhart, “The Twin Crises: The Causes of Banking and
Balance of Payments Problems,” Board of Governors of the Federal Reserve
System, International Finance Discussion Paper 544, (1996).
Kannan, Prakash, Alasdair Scott, and Marco Terrones, “From Recession to Recovery:
How Soon and How Strong,” International Monetary Fund: World Economic
Outlook, (April 2009),
https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf.
154
Kharas, Homi, Brian Pinto, and Sergei Ulatov, “An Analysis of Russia’s 1998 Meltdown:
Fundamentals and Market Signals,” Brookings Papers on Economic Activity 32,
no. 1 (2001): 1–68.
Khlochov, Igor, “Болезнь президента пошла вниз,” Kommersant, March 1998,
http://kommersant.ru/doc/194753?isSearch=True.
Khrushchev, Sergei. "Russia after Yeltsin: A Duel of Oligarchs." Mediterranean
Quarterly 11, no. 3 (Summer 2000): 1.
King, Lawrence, “ Postcommunist Divergence: A Comparitive Analysis of the Transition
to Capitalism in Poland and Russia,” Studies in Comparative International
Development Vol. 37, No. 3, (1997): 3-34.
Klingebiel, Daniela and Luc Laeven, Managing the Real and Fiscal Effects of Banking
Crises. World Bank Publications, 2002.
Koch, Elmar and Iikka Korhonen, “ The Aftermath of the Russian Debt Crisis,” Bank of
Finland: Institute for Economies in Transition, (July 2000),
https://helda.helsinki.fi/bof/bitstream/handle/123456789/12590/94782.pdf?sequen
ce=.
Kolb, Robert, “Sovereign Debt: Theory, Defaults, and Sanctions,” Sovereign Debt, John
Wiley and Sons, 2011.
Koltsova, Olessia, News Media and Power in Russia, Routledge, 2006.
Kotz, David and Fred Weir, Russia’s Path from Gorbachev to Putin: The Demise of the
Soviet System and the New Russia, London; New York: Routledge, 2007.
Krueger, Anne. 2002. “New Approaches to Sovereign Debt Restructuring: An Update on
Our Thinking.” International Monetary Fund (2002).
“Lessons from the Russia’s 2001 Flat Tax Reform,” VoxEU.org, accessed April 4, 2015,
http://www.voxeu.org/article/effects-russia-s-flat-tax.
Lo, Dic, Alternatives to Neoliberal Globalization : Studies in the Political Economy of
Institutions and Late Development, Palgrave Macmillan, 2012.
Locke, John “The Two Treatises on Civil Government,” 1689.
“Lurching into the Fast Lane,” The Economist, July 14, 2012,
http://www.economist.com/node/21558588.
155
Martinez, Jose Vicente and Guido Sandleris, “Is It Punishment? Sovereign Defaults and
the Decline in Trade,” Universidad Torcuato Di Tella Working Paper, 2008.
Martinez-Vazquez, Jorge, et al., IMF Conditionality and Objections: The Russian Case,
International Center for Public Policy Working Paper Series, (June 1, 2000).
Martinez-Vazquez, Jorge and Sally Wallace, “The Ups and Downs of Comprehensive
Tax Reform in Russia” Annual Conference on Taxation and Minutes of the
Annual Meeting of the National Tax Association, (January 1, 1999): 5–14.
Marsh, Christopher, “Social Capital and Democracy in Russia,” Communist and PostCommunist Studies 33, no. 2 (June 2000): 183–99, doi:10.1016/S0967067X(00)00003-9.
McCarty, Nolan , Keith T. Poole, and Howard Rosenthal, Political Bubbles: Financial
Crises and the Failure of American Democracy, Princeton University Press, 2013.
McGee, Robert W. and Galina G. Preobragenskaya, Accounting and Financial System
Reform in Eastern Europe and Asia, Springer Science & Business Media, 2006.
Mederios, Carlos, Mark Gapen, and Larry Zanforlin, “Assessing the determinants and
prospects for the pace of market access by countries emerging from crisis —
further considerations,” International Monetary Fund, International Capital
Markets Department (2005).
Medvedev, Roy Aleksandrovich, Post-Soviet Russia: A Journey Through the Yeltsin Era,
Columbia University Press, 2000.
Mehlum, Halvor, Karl Moene, and Ragnar Torvik, “Institutions and the Resource
Curse*,” The Economic Journal 116, no. 508 (2006): 1–20, doi:10.1111/j.14680297.2006.01045.x.
Minton-Beddos, Zanny, “Why IMF Needs Reform,” Foreign Affairs Vol. 74 No. 24,
(May 1995): 123-133.
Nadmitov, Alexander, “Russian Debt Restructuring: Overview, Structure of Debt,
Lessons of Default, Seizure Problems and the IMF SDRM Proposal,” Harvard
Law School, 2004,
http://www.law.harvard.edu/programs/about/pifs/education/llm/2003--2004/sp26.pdf.
OECD, OECD Economic Surveys: Russian Federation 2000, vol. 2000, Paris:
Organisation for Economic Co-operation and Development, http://www.oecdilibrary.org/content/book/eco_surveys-rus-2000-en.
156
Ozler, Sule,“The Evolution of Credit Terms: An Empirical Study of Commercial Bank
Lending to Developing Countries,” Journal of Development Economics 38, no. 1
(January 1992): 79–97.
Paul, Joel, “The Transformation of International Comity,” Law and Contemporary
Problems 71, no. 3 (July 1, 2008): 19–38.
Payne, Christopher, The Consumer, Credit and Neoliberalism : Governing the Modern
Economy, Routledge Frontiers of Political Economy. Routledge, 2012.
Panizza, Ugo, Federico Sturzenegger, and Jeromin Zettelmeyer, “The Economics and
Law of Sovereign Debt and Default,” Journal of Economic Literature 47, no. 3
(2009): 651–698.
Passell, Peter, “Dr. Jeffrey Sachs, Shock Therapist,” The New York Times, June 27, 1993,
sec. Magazine, http://www.nytimes.com/1993/06/27/magazine/dr-jeffrey-sachsshock-therapist.html.
Peresetsky, Anatoly, Gahar Turmuhambetova, and Giovanni Urga, “The Development of
the GKO Futures Market in Russia,” Emerging Markets Review 2, no. 1 (March 1,
2001): 1–16, doi:10.1016/S1566-0141(00)00016-9.
Peters, Guy, Jon Pierre, and Desmond King, “The Politics of Path Dependency: Political
Conflict in Historical Institutionalism,” The Journal of Politics 67, no. 04 (2005):
1275-1300.
“Poverty In Russia During The Transition,” World Bank Research Observer 13, no. 1
(February 1, 1998): 37–58, doi:10.1093/wbro/13.1.37.
Preobragenskaya, Galina and Robert W. McGee, Taxation and Public Finance in a
Transition Economy: A Case Study of Russia, SSRN Scholarly Paper (Rochester,
NY: Social Science Research Network, December 28, 2003),
http://papers.ssrn.com/abstract=480862.
“Presidential Decree No. 1403,” Russian Federation, November 1992.
“Putin’s State Capitalism Means Falling Growth,” The Moscow Times, May 2013,
http://www.themoscowtimes.com/opinion/article/putins-state-capitalism-meansfalling-growth/480301.html.
Putin, Vladimir, “Television address by the Russian President to the Country’s citizens”,
Rossiiskaya Gazeta, 19 May. Translated in the Current Digest of the Post-Soviet
Press 52(20), p. 5.
Robinson, James A., Ragnar Torvik, and Thierry Verdier, “Political Foundations of the
157
Resource Curse,” Journal of Development Economics 79, no. 2 (April 2006):
447–68, doi:10.1016/j.jdeveco.2006.01.008.
Reinhart, Carmen, Sovereign Credit Ratings Before and After Financial Crises. In
Richard Levich, Giovanni Majnoni, and Carmen M.Reinhart, eds. Ratings, Rating
Agencies and the Global Financial System, New York: Kluwer Academic Press.
(2002): 251-268.
Reinhart, Carmen and Kenneth Rogoff, This Time is Different: Eight Centuries of
Financial Folly. Princeton: Princeton University Press, 2009.
Reinhart, Carmen, Kenneth S. Rogoff, and Miguel A. Savastano, “Debt Intolerance,”
National Bureau of Economic Research Working Paper (August 2003),
http://www.nber.org/papers/w9908.
“Repurchase and Reverse Repurchase Transactions,” United States Federal Reserve Bank
of New York, August 2007,
http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html.
Robinson, Neil ,“The Politics of Russia’s Partial Democracy,” Political Studies Review 1,
no. 2 (April 1, 2003): 149–66, doi:10.1111/1478-9299.t01-1-00001.
Rosenzvaig, Eduardo, and Ronaldo Munck, “Neoliberalism: Economic Philosophy of
Postmodern Demolition,” Latin American Perspectives 24, no. 6 (November 1,
1997): 56–62;
Rose, Andrew K. “One reason countries pay their debts: renegotiation and international
trade,” Journal of Development Economics, Volume 77, Issue 1, (June 2005):
189-206, ISSN 0304-3878, http://dx.doi.org/10.1016/j.jdeveco.2004.03.006.
Rose, Andrew and Mark Spegeil, “A Gravity Model of Sovereign Lending,”
International Monetary Fund Staff Papers, 2004, 51.
https://www.imf.org/external/pubs/ft/staffp/2003/00-00/rs.pdf
Ross, Camero, “Putin’s federal reforms and the consolidation of federalism in Russia:
one step forward, two steps back!,” Communist and Post-Communist Studies,
Volume 36, Issue 1, (March 2003): 29 – 47.
Routledge Encyclopedia of International Political Economy. Taylor & Francis, 2001.
“Russia: From Rebirth to Crisis to Recovery,” International Monetary Fund. “Russia in
Default,” (The Economist, February 6, 1999).
“Russian President Boris Yeltsin Resigning,” CNN, December 31, 1999,
http://archives.cnn.com/1999/WORLD/europe/12/31/yeltsin.resign.01/.
158
Sachs, Jeffrey D., “Economic Transition and the Exchange-Rate Regime,” The American
Economic Review 86, no. 2 (May 1, 1996): 147–52.
———. “What I did in Russia,” March 2012, http://jeffsachs.org/2012/03/what-i-didin-russia/.
———. The End of Poverty: Economic Possibilities for Our Time, Penguin, 2006.
Jasjeet S. Sekhon, “Quality Meets Quantity: Case Studies, Conditional Probability, and
Counterfactuals,” Perspectives on Politics Vol. 2 Issue 2. (2004): 281-293,
doi:10.1017/S1537592704040150.
Shevtsova, Lilia, Putin’s Russia (Carnegie Endowment, 2010), 14.; “Rumors of Yeltsin’s
Resignation Underscore Inadvisability of Clinton Trip to Moscow at This Time,”
Center for Security Policy, accessed April 3, 2015,
http://www.centerforsecuritypolicy.org/1998/08/27/rumors-of-yeltsinsresignation-underscore-inadvisability-of-clinton-trip-to-moscow-at-this-time-2/.
Sixsmith, Martin, Putin’s Oil, A&C Black, 2010.
“Sleepless nights,” The Economist. Nov 9, 2013.
Solow, Robert, “Technical Change and the Aggregate Production Function,” The Review
of Economics and Statistics, no. 3 (August 1, 1957): 312-20,
doi:10.2307/1926047.
Specter, Michael, “Chechen Rebels Said to Kill Hostages at Russian Hospital,” The New
York Times, June 16, 1995, http://www.nytimes.com/1995/06/16/world/chechenrebels-said-to-kill-hostages-at-russian-hospital.html.
Stetser, Brand, “The Political Economy of the SDRM,” Council on Foreign Relations
Working Paper, 2008.
Swank, Duane, “Tax Policy in an Era of Internationalization: Explaining the Spread of
Neoliberalism,” International Organization 60, no. 04 (October 2006): 847–82,
doi:10.1017/S0020818306060280.
The Rise of Neoliberalism and Institutional Analysis. Ed John L. Campbell and Ove K.
Pedersen, Princeton University Press, 2001.
Thelen, Kathleen, “Historical Institutionalism in Comparative Politics,” Annual Review of
Political Science 2, no. 1 (1999): 369-404, doi: 10.1146/annurev.polisci.2.1.369.
159
Tikhomirov, Vladimir, The Political Economy of Post-Soviet Russia. St. Martin’s Press,
2000.
Tomz, Michael and Mark L. J. Wright, Empirical Research on Sovereign Debt and
Default, National Bureau of Economic Research Working Paper, (February 2013),
http://www.nber.org/papers/w18855.
Treisman, Daniel, “Presidential Popularity in a Hybrid Regime: Russia under Yeltsin and
Putin,” American Journal of Political Science 55, no. 3 (July 1, 2011): 590–609,
doi:10.1111/j.1540-5907.2010.00500.x, 8.
Treisman, Daniel, “Revisiting Loans for Shares,” National Bureau of Economic Research
Working Paper, (2010).
———. The Return, Free Press, 2011.
———. “Presidential Popularity in a Hybrid Regime: Russia Under Yeltsin and
Putin,” American Journal of Political Science Vol 55 Issue 3, (July 2011): 590609.
———. “Putin’s Silovarchs,” Orbis 51, no. 1 (December 2007): 141–53,
doi:10.1016/j.orbis.2006.10.013.
Truscott, Peter, Putin’s Progress, Simon and Schuster, 2004.
Van Evera, Stephen, Guide to Methods for Students of Political Science. New York:
Cornell University Press, 1997.
Vasiliev, Sergey, “Overview of Structural Reforms in Russia after the 1998 Financial
Crisis,” International Monetary Fund, Feburary 2000,
https://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/vasil.pdf.
Volkov, Vadim “Violent Entrepreneurship in Post-Communist Russia,” Europe-Asia
Studies 51, no. 5 (July 1, 1999): 741–54.
von Mehren, Robert B., “Foreign Sovereign Immunities Act of 1976, The,” Columbia
Journal of Transnational Law 17 (1978): 33.
Wolfson, Martin and Gerald A. Epstein, eds., The Handbook of the Political Economy of
Financial Crises, New York, NY: Oxford University Press, 2013.
Wright, Mark, “Theory of Sovereign Debt and Default,” Encyclopedia of Safeguarding
Global Financial Stability Volume 2, ed. Gerard Caprio, (2013): Pages 187-193.
160
Yeltsin, Boris, “Inaugural Speech by President Boris Yeltsin of the Republic of Russia,”
Cambridge Journals, Foreign Policy Bulletin 2, no. 01, (July 1991).
———. “Statement by Boris Yeltsin,” 12/31/1999,
http://eng.kremlin.ru/transcripts/8564.
Yergin, Daniel, The Prize: The Epic Quest for Oil Money and Power, Simon and
Schuster, 2008.
———. The Quest: Energy Security and the Remaking of the Modern World, The
Penguin Press, 2011.
———. “Energy Security in the 1990s,” Foreign Affairs 67, no. 1 (October 1, 1988):
110–32, doi:10.2307/20043677.http://www.ogj.com/articles/print/volume97/issue-24/in-this-issue/general-interest/russian-oil-major-yukos-implementswestern-style-reorganization.html
Zweig, Jason, “Here Comes the Next Hot Emerging Market: the U.S.,” The Wall Street
Journal, April 2013.
Zymek, Robert, “Sovereign Default, International Lending and Trade,” SSRN Scholarly
Paper, Rochester, NY: Social Science Research Network, (June 27, 2012),
http://papers.ssrn.com/abstract=2103622.
“Прямая Речь // Всю Прошлую Неделю Отечественные Политики Наперебой
Отмечали Заслуги Владимира,” http://kommersant.ru/doc/230929.
161