RUSSIAN ECONOMY Communist Economic Systems. Russia’s transition to planned economics In a planned...

RUSSIAN ECONOMY Communist Economic Systems

Russias transition to planned economics In a planned economy, the __________ regulates or plans p_____________ and p________ Planned economies are also called _____________economies From the late 19___s to 19___, the Soviet Union operated under a planned economy The ideology of __________________ inspired the use of this system encourages____________ownership of means of production

Conversion to a planned economy began after the end of the ___________________in ______________ The ________________ seized control of Russia after this war __________________ (1870-1924) led the Bolsheviks during the war The Soviet government ___________________ agriculture in the late 19____s and 19____s Collectivization formed communities in which property is shared Property was owned by the ______________, not individuals ______________(1878-1953) spearheaded collectivization succeeded Lenin as leader of the Bolshevik Party The Bolshevik Party became the _________________ Party of the Soviet Union

STALINS REFORMS Stalin aimed to transform Russia into a __________ economy In this economy, ____________ and society belonged collectively to all workers Stalin eliminated the class of people who owned property without contributing ____________ This class is referred to as the ____________ To achieve this goal, the government attempted to __________________all private property This included all factories and equipment, which were known as _________

Russias transition to market-based economics Russia now operates under a market-based economy Transitioning from a planned to market-based economy took _______ years (19___-20___) Most of the transformation occurred in the 1990s Russia no longer operates under communism ECONOMIC GROWTH: Russia experienced rapid growth from 19___ to 20__ Growth ended abruptly with the ________________________in 2008 Russia faces significant challenges Several problems stall Russias development in the global economy

Forms of Property Three forms of property comprise the classical socialist system state-owned firms, budgetary institutions, and cooperatives

Three Organization Types

State-owned firms There were both NATIONAL FIRMS REGIONAL FIRMS

State-owned Firms National firms under the jurisdiction of national-level ministries Regional firms under the jurisdiction of provincial and local governments THE BIG BUT: Economist Janos Kornai: categorizing firms as state-owned = meaningless because subnational governments were controlled by the national government All income from production contributed to STATE COFFERS Firms could not be bought or sold

These firms provided employment and housing on a massive scale The place of employment included all essential -- social services Workers had access to apartments, daycare, schools, and other social services This system gave rise to the communist ___________to________ system of social services

These firms provided employment and housing on a massive scale State-owned firms encompassed most __ ________ ___industry auto plants and defense factories The Soviet model emphasized economies of scale in every industry Economies of scale describes the gains a firm achieves from Expanding production Individual plants commonly employed over 100,000 workers

Due to this living and working situation, laborers lacked ____________. In order to move, workers had to acquire a new job, residence, and housing permit A housing permit was called a _____________ The process of moving took years Low worker mobility _____________the process of devising production plans Government planners needed to keep track of labor at every individual firm _____________________ of state-owned firms started in 1992

Budgetary institutions Budgetary institutions included universities, research and educational institutions, Training centers, trade schools, hospitals, and museums ____________or_______________________budgets funded budgetary institutions Budgetary institutions had no obligation to make ____________cover___________________

Cooperatives Cooperatives operate similarly to state- owned firms but were mostly located in _________________ The cooperative, or collective farm, was called a _______________ Like state-owned firms, cooperative farms operated on a ___________ scale Farms included social services such as ___________ In the 1930s, Stalin collectivized agriculture by stripping all citizens of _______________ The state assumed ownership of all _________ Comrade, come join the KOLKHOZ!

COLLECTIVIZATION ECONOMIC MOTIVES: steady supply of grain for________ The state believed larger farms would produce more ________________ than smaller farms POLITICAL MOTIVES: bureaucratic control of farmers prevented them from fighting back Farmers could not become a social, political, or economic force They fit seamlessly into the body of the Soviet system They could not leave the farm or outsource labor Essentially, farmers always remained members of the collective

Summary of socialism Socialism replaces __________ownership with __________ ownership The state owns all property Capitalists could no longer __________workers All members of society collectively worked and owned property Public ownership of production transferred the responsibility of allocating resources from __________mechanisms to ________________ economic planning

CENTRAL PLANNING SYSTEM

The Planning System: The role of bureaucracy The bureaucracy planned all economic activity top-down fashion Fulfilling plans was compulsory planned economy sought to eliminate the anarchy of the market state would organize the economy on a national scale bureaucracy, not the market forces, controlled the vitality of a firm Bureaucratic planning sought to distribute goods more equitably goal followed the ideals of Marxism

Five-year plans dictated the Soviet economy Each five year plan was split into annual plans Five-year plans functioned as statements of policy intent rather than specific plans The first plan: 1928 The last plan: deteriorated in the late 1980s

CENTRAL PLANNING Planning involved determining inputs and estimating outputs for each individual factory This task was enormous, especially since the Soviet Union spanned 13 time zones Flawed estimations often resulted in shortages A lack of inputs caused a lack of outputs

CENTRAL PLANNING Plans determined each firms level of technical development, capital investment, and trade

CENTRAL PLANNING A system of bureaucracy-controlled price lists designated prices of all goods Gosplan manually calculated every aspect of the entire Soviet economy For most of this period, planners lacked access to computers

BUREAUCRATIC RESPPONSIBILITIES

The role of managers and labor Plans required coordination of the Communist Party, State ministries, and individual firms

The role of managers and labor Gosplan strategies to break these systems down into manageable parts Planners disaggregated the plan in a downward flow of information Higher levels sent directions to lower levels State plans did not recommend or suggest actions The term command economy derives from this process Planners received an upward flow of information While drafting a plan, planners received information from lower levels Lower levels contributed nonbinding recommendations about target output levels

The role of managers and labor The bureaucracy chose managers at every level of the economy Each manager held a specific and mandatory role in each plan Plans specified the amount of labor allocated to each sector and factory

Incentives and attitudes Plans required firms to produce exactly the amount stated in the plan managers lacked motivation to innovate No reward for producing a surplus But the state punished managers for failing to meet plan targets Managers could be removed from office, sent to a labor camp, or accused of sabotage An accusation of sabotage could lead to a death sentence

Central Planning and Central Management Motivation: intrinsic ideological sense of duty to the Communist Party Motivation: extrinsic - bonuses for good work awards and privileges In addition, political power and prestige provided sources of motivation For some, material benefit and fear were motivators

Central Planning and Central Management BIG BUT: the penalties of taking risks outweighed the potential rewards Without ownership, managers lacked incentive to exceed the bare minimum Janos Kornai states Among managers, SERVILITY and a HEADS DOWN MENTALITY prevailed.

Economic distortions A chronic shortage economy emerged in almost every sector The planning system misestimated the supply and demand for goods In a free market economy, changes in price eliminate excess demand and supply This shortage condition affected consumer goods

Managers had built-in incentives to underreport production: Ensured that plan targets for the next year would not exceed the firms capabilities A firm that could produce 150% of the target plan might produce only 101% This signaled improvement but not enough to cause expectations of it to increase Managers hid extra output and sold it on the black market

Outputs differed in proportion to inputs Target plans only specified that firms meet a goal, not fully utilize the allocated inputs As a result, excess inputs existed in some sectors while shortage existed in others This caused poor allocation of resources and waste

STATE PRIORITIES: Socialism overemphasized rapid growth Quantity of production took precedence over quality Inferior quality of goods still impedes Russias ability to compete in world markets The state prioritized industrial production over consumer production

SUMMARY of PROBLEMS:

SHADOW ECONOMY / BLACK MARKET RESPONSE to the chronic shortage state A black market is called a shadow economy economic activity that lacks official state approval In the socialist system, private property and private means of production do not exist Black market participants circumvented price lists and other restrictions of the system Some analysts believed the black market kept the system alive The black market remedied some of the failures of the planning system It also fueled corruption at every level of the economy Russia still feels the effects of the black market today

MIKHAIL GORBACHEV: VITAL STATS Born: 1931 Became General Secretary of the Communist Party: March 1985 Ousted from office: 1991

Problems facing Gorbachev upon entering office Soviet Russias stagnating economy was the greatest challenge planning system lacked flexibility complexity of calculating economic needs exceeded the capabilities Tim COLTON believed planners could not anticipate the need for computerization As the economys size and complexity increased, so did planning failures Values and motivation suffered under the overbearing state Morris and Anna Feldberg Professor of Government and Russian Studies and the Chair of the Department of Government at Harvard University TIM COLTON

Reform and reconstruction Gorbachev immediately recognized a need for an overhaul of the economy This goal = perestroika, literally translating to reconstruction did not intend to establish a market-based liberal system sought to reform the existing communist system

Criticism Many critics argued that Gorbachev ignored the Soviet economy They compared his actions to Chinese leader Deng Xiaopings actions in the 1980s They accused him of sequencing reform This practice involves favoring easier political reforms In contrast, Gorbachev began his reforms with the economic challenge Gorbachevs economic policies between 1985 and 1991 Followed 4 phases

Phase 1: 1985-86 Recovering Worker Productivity and Infrastructure

Anti-alcohol campaign First, Gorbachev tackled worker absenteeism and low labor productivity He initiated an anti-alcohol campaign to reduce chronic alcoholism among workers The campaign closed down some alcohol factories Some Russians resorted to producing bootleg liquor This created the unintended sugar shortage The consumption of bootleg liquor also meant that productivity remained low

Uskorenie Gorbachev attempted to invest in old infrastructure launched an uskorenie, literally meaning acceleration acceleration of investment in old plants and factories The Soviet Union lagged behind the Wests technological progress Poor infrastructure impeded labor productivity

The two programs were fundamentally incompatible, because one reduced government revenue and the other demanded more government spending.

Failure of both reforms Both initiatives failed socially economically The anti-alcohol campaign worked against the investment project Closed alcohol factories reduced state revenue Decreased revenue hindered increases in investment Neither initiative improved worker discipline, economic productivity, or infrastructure Workers still consumed bootleg liquor The budget deficit increased

Phase II: 1987-88: Glasnost and Demokratizatsiia

Glasnost A policy that allowed greater public discussion Gorbachev initiated it at the in 1987 Central Committee of the Communist Party PLENUM A plenum is a planning meeting allowed citizens to openly discuss the merits of the communist and market systems The Soviet Union had never allowed this level of free speech Glasnost enabled the Soviet media and politicians to discuss issues freely Politicians of this time comprised a new super parliament in 1989 jumpstarted discussion on private property The subject had always remained taboo

Demokratizatsiia introduced limited accountability into Soviet politics The term demokratizatsiia translates to democratization It enabled greater participation of interest groups in the political process

Introduction of private property rights Cooperative enterprises introduced quasi-property rights These firms operated in the commercial and service sectors Cooperative enterprises lacked clear governance or ownership structure They offered business initiative among a small group of entrepreneurs Gorbachev granted managers more autonomy on what to produce Managers still had limited opportunities to explore new markets Gorbachev maintained the collective farming system He refused to reinstate private farming Intermittent food shortages persisted

MANAGERS JUST WANT TO HAVE FUN Gorbachev gave managers more freedom from bureaucratic control. As a result, managers privatized firms behind planners backs increased activity on the black market acquired money that they later used to participate in privatization HALF-MEASURES These partial reforms worsened the economic situation. Gorbachev passed up his chance to implement sweeping reforms before the onset of stagflation in 1989.

No sweeping economic reform Gorbachev tended to compromise with conservative members of his Politburo The Politburo consisted of a cabinet of elite communist party officials Compromising stalled implementing far-reaching economic reforms He missed the chance to initiate reforms before the onset of stagflation Stagflation describes inflation with zero or negative economic growth This presents the worst possible situation for an economy Normally high growth accompanies inflation This concern still plagues Chinas economy Gorbachev may have lacked the means to initiate widespread economic reform may have lacked enough control within the Communist Party may have lacked desire for change He believed in the communist system, not liberal capitalism

Phase III: 1989: Stagflation and the Fall of Communism in Eastern Europe Stagflation the Fall of Communism in Eastern Europe

Phase III: 1989 Collapse of communism in Eastern Europe Gorbachevs reforms met a receptive audience in Eastern Europe The Berlin Wall fell in November 1989

ECE Satellite Governments Fell Several satellite communist governments in Eastern Europe followed suit The collapse destroyed guaranteed markets for inferior Soviet goods This loss further damaged the Soviet economy

Gorbachevs indecision Gorbachev attempted to please both radical reformers and conservatives As a result, his inconsistent policies deepened the economic crisis Reform efforts created larger budget deficits Sustained subsidies to industry drained the states funds Inflation plagued the economy even as growth declined The economy experienced stagflation Too much currency was circulating High wages also caused inflation

PROBLEMS The state lacked a mechanism to collect taxes Restrictions on the development of cooperative movements prevailed The practice of barter grew Barter involves trade without currency Agriculture experienced limited reform The Soviet Union faced widespread food shortages This problem had not plagued Russia since World War II The economy experienced negative growth rates Production fell by about 10% per year until 1991 The Soviet Union collapsed in 1991

SUMMARY

Phase IV: 1990-91: Boris Yeltsin and Reform Alternatives

The Five Hundred Day Plan summer of 1990 a group of young Russian economists devised a plan dubbed it the Five Hundred Day Plan

The Five Hundred Day Plan Gorbachev adviser and economist Stanislav Shatalin led the project Economist Grigori Yavlinsky also helped produce the plan

SHOCK THERAPY sought to imitate successful example of economic shock therapy Borrowed idea from Poland

The 500 Day Plan

GORBYS RESPONSE He rejected the 500 Day Plan by the fall of 1990 favored a slower and more conservative approach to change wanted to retain price controls for another two to three years Gorbachev appointed a likeminded conservative prime minister

Elections across the Soviet Union The Soviet Union began to lose legitimacy as an economic and political union Its 15 constituent republics, including Russia, started electing new leaders Gorbachev authorized these elections

Boris Yeltsin (1931-2007) June 1991: became Russias first popularly elected president Gave Yeltsin greater political legitimacy than Gorbachev Gorbachev remained the unelected President of the Soviet Union the unelected General Secretary of the Communist Party

YELTSIN held various positions before becoming president Member of the Politburo Provincial Communist Party boss Elected speaker of a new Russian parliament in 1990 Yeltsin disagreed with Gorbachevs lagging rate of reform He initiated much more rapid reform, leaving Gorbachev behind

Gorbys Last Days Yeltsins popularity and power rivaled Gorbachevs challenge pressured Gorbachev to pursue radical market solutionsbut it was too late Gorbachevs Politburo attempted a coup in August 1991 effectively removed Gorbachev from office

Gorbys Last Days By December 1991, the Soviet Union completely collapsed The union dissolved into 15 new and separate countries Russia was the largest of these new countries It adopted the title of the Russian Federation

Gorbachevs Legacy Gorbachevs half-measures and indecisive reforms deepened the Soviet Unions economic crisis By the end of 1990, political motives diverted reform efforts from economic needs By the end of 1991, shortage and inflation persisted The inflation rate loomed at over 100%

The Economy Before the Collapse Pre-existing problems Although Gorbachev may have fallen short, the Soviet Unions system deteriorated on its own Production levels declined throughout the late 1970s They hit a free fall in the late 1980s under Gorbachev

Growing State Sector Presented Problems The state controlled almost every economic activity By 1991, most people were on the state payroll Although the economy appeared fully employed, many people did nothing We pretend to work and you pretend to pay us became a popular saying Post-Soviet policymakers feared increasing unemployment Minimal pensions and wages necessitated that people work after retirement

Problems with STATE SECTOR Chronic shortages caused by sub-optimal planning was an enduring problem Industrial production far outstripped consumer production This imbalance contributed to the low standard of living Economic growth under the planning system carried high costs The system created inefficiency Because of the systems emphasis on economies of scale, MONOPOLIES dominated the economy Massive firms operated efficiently as monopolies

LACK OF INCENTIVES The Soviet economic system discouraged technological innovation the West developed computer hardware and telecommunications Even with a strong post-secondary education system, Soviet Russia fell far behind The lack of incentive to improve production yielded poor- quality goods Soviet Russias manufacturing sector could not compete globally Instead, the Soviet economy relied on natural resource exports, especially oil and gas But global oil and gas prices were falling The Soviet economy could no longer protect itself from world competition Before 1989, the Soviet Union rarely traded with non-communist countries These conditions exposed the Soviet Union to the resource curse

Flaws of the Soviet system Money had no real value since prices did not reflect supply and demand Price lists determined prices for everything sold in the Soviet Union Additionally, the ruble could not be converted in international markets About 3,000 different exchange rates existed for almost every item in foreign trade The state controlled conversion rates Two types of rubles with different values existed in the economy Enterprise accounts used one type Consumers used the other The Soviet economy lacked important financial institutions and markets These missing essentials included a private banking system, a real estate market, a stock market, and private companies

Negative growth rates Exacerbated by Gorbachevs reforms, these conditions stunted growth By the collapse of the Soviet Union on December 25, 1991, growth rates hit -17% Growth rates had declined from +3% in 1989

REFORM UNDER BORIS YELTSIN The fifteen newly independent states of the former Soviet Union diverged in their methods of economic reform. This section will focus on Russias reform process as implemented by President Boris Yeltsin. Between the fall of the Soviet Union in 1991 and the end of Yeltsins presidency in 2000, Russia made great strides in breaking down the planning system and opening the door to privatization.

Shock Therapy in Theory The return of shock therapy Fall of 1991, Boris Yeltsin surveyed reform options He settled on the plan put forth by a group of young economists led by Yegor Gaidar Yeltsin appointed Gaidar prime minister Gaidar advocated rapid transition to a market economy through shock therapy

SHOCK THERAPY demanded three immediate and simultaneous reforms

SHOCK THERAPY in THEORY These three key policies inflicted a short-term shock on the population Prices increased suddenly Inflation quickly reached high levels Unemployment rose as the state allowed unprofitable industries to fail Market mechanisms would eventually kick in Gaidar expected the economy to grow within three years The economy would stabilize well before Yeltsin was up for re-election

Shock Therapy in Practice Elimination of price controls Shock therapy began with the sudden freeing of prices on January 2, 1992 Average prices increased by 245% overnight Production dropped as expected With relaxed import controls, foreign goods filled the market Larger cities imported the most foreign goods Freed price controls and relaxed import controls solved the chronic shortage state But prices mostly surpassed the average Russians budget Gaidar assured Yeltsin that market mechanisms would push prices down He believed Russian manufacturers would try to match the quality of foreign goods He also believed they would offer lower prices to Russian consumers

BACKLASH! By April 1992, industrial enterprise managers opposed shock therapy They were referred to as red managers They opposed the end of subsidies to their firms Some refused to restructure to accommodate market mechanisms Others lacked the means to restructure even if they wanted to Debt accumulated as managers traded for industrial inputs without money In the early 1990s, barter economies existed in both agriculture and industry

The end of shock therapy To assuage opposition, the state issued Central Bank credits to firms in the spring of 1992 They also increased printing of the ruble This compromise caused spikes in the budget deficit and inflation These effects especially hurt consumers This violation of fiscal austerity and deficit control signaled the end of shock therapy All other areas of the reform plan receded as well Russia opted for more gradual reforms after 1992 This path necessitated abandoning several aspects of liberal market reform

Privatization in Theory: 3 Main goals of privatization 1 st : creation of a middle class 2 nd : creation of a market economy 3 rd : separation of ownership from management

Privatization in Theory: 1 st goal of privatization First, creation of socioeconomic stratification, particularly a middle class Private property rights and ownership would allow classes to form Economically, middle classes provide a reliable source of taxation Politically, they represent varied interests that support political pluralism Political pluralism contributes to the creation of a democracy

Privatization in Theory: 2nd goal of privatization Second, creation of a market economy Yeltsins main political legacy is destroying the communist economic system The introduction of private property prevented an easy return to the old system Economist Anders Aslund believes two thirds of an efficient market economy must be private No more than one third of national employment can exist in the public sector

Privatization in Theory: 3rd goal of privatization Third, separation of ownership from management In the planned economy, managers did not legally own their firms They only controlled them because of their access to information about the firm Newly empowered managers lacked oversight from a board of directors They pocketed extra money from selling excess products on the black market

Yeltsin hoped to introduce managerial accountability to a board of directors This principle was referred to as corporatization He intended to incentivize managers with the principles of supply and demand Directors would assess managers on profit and loss, instead of political criteria Competitive managers would replace poor-quality, command-era managers

Privatization in Practice Gaidar and Yeltsin passed the privatization legislation in June 1992 They initiated the program a month later, in July 1992 The program attempted to satisfy conflicting ownership claims between managers, local governments, and workers

State Committee on Property: created the State Committee on Property to oversee the process This committee was also called the Goskomimushchestvo They classified firms eligible for privatization Small firms employed less than 200 employees Medium firms employed 200-1,000 employees Large firms employed over 1,000 employees The committee divided firms into federal, provincial, and municipal property They forced specific firms to privatize Wholesale trade Retail trade Food services Construction Consumer services

SUMMARY: Firms classified by the State Committee on Property

Privatization options Firms could choose between three different paths of privatization These options differed in the percentage of shares owned by insiders Insiders include managers and workers of the firm The firm auctioned off their remaining shares or traded them for vouchers All three options granted insiders favored access to shares They allowed for over 25% insider ownership Gaidar made this sacrifice to incentivize managers to participate in privatization This decision was political, not economic Critics called this a giveaway They believed this concession prevented separation of ownership and management

Privatization in Theory: VOUCHERS

First stage of privatization: voucher program firms had the option of auctioning off shares Share auctions began in December 1992 Thousands of auctions occurred every month between December 1993 and June 1994 Firms traded shares for vouchers through the voucher program The voucher program began in August 1992 This phase of privatization was brief Vouchers had to be claimed by the end of January 1993 and invested by July 1, 1994

VOUCHERS The state distributed privatization vouchers to every man, woman, and child The effort hoped to involve public sector workers in the process of privatization Doctors and teachers did not privatize their firms but could still participate Citizens could trade their vouchers for shares of privatizing firms This feature aimed to create a vibrant stock market Initially, each voucher held a value of 10,000 rubles in shares When the first privatization legislation passed in June 1992, vouchers were worth $84 Russians received an average of $50 a month in wage Vouchers held considerable value

Russians could use their vouchers in various ways Buy shares of the firm they worked for (as long as it underwent privatization) Buy shares of other privatizing firms Buy shares through mutual funds This diversified their portfolio and spread risk across different firms Buy shares in a voucher fund Sell them Give them away

VOUCHER PROGRAM Firms resisted the voucher program because they did not receive money from it In May 1993, Yeltsin stated that firms must sell 29% of all shares for vouchers This proved moderately successful as the average came closer to 20% Citizens invested most vouchers by 1994 The first stage of privatization finished that year

Second stage of privatization: auctions of state holdings July 1994 auctioning off remaining state holdings for cash Firms received part of the proceeds as capital for restructuring The government received the rest of the proceeds The government aimed to finance its budget deficit without increasing inflation They anticipated billions of dollars of revenues The government also intended to create larger blocks of shares for foreign investors Foreign investors could then increase their role in corporate governance During the second stage of privatization, the benefits to insiders decreased

The second stage of privatization failed in many ways Vladimir Polevanov, the more conservative Minister of Privatization, froze privatization Nationalists and communists in parliament influenced this decision Polevanov advocated the re-nationalization of many firms This prospect scared off foreign investors

Loans for shares scheme failure of the second stage of privatization made the government desperate for revenue In 1995, the Russian government settled on the loans for shares scheme They auctioned off 12 blue-chip companies to a group of commercial banks

Loans for shares scheme: All interested bidders, foreign and domestic, could participate The bank offering the largest loan to the government won a block of shares Banks could not sell the shares until September 1, 1996 They could only keep a third of the capital gains after they sold the shares The government made 1 billion dollars

Corruption in the loans for shares scheme On the surface, bidders appeared to support the government However, banks mainly wanted to control Russias largest companies Ultimately, the Russian government could not repay the loans The banks assumed ownership of the companies

The loans for shares scheme spawned a backlash Few banks had the strength to participate Participating banks organized auctions themselves This system presented a conflict of interest between auction participants By the end of the process, banks openly quarreled The process tainted the reputation of privatization It transferred a large portion of the economy to a small group of wealthy business people This group became known as the oligarchs

SUMMARY: Loans for Shares

THE OLIGARCHS

1n 1991 Baturina founded INTECO (), Construction, though it began as a plastics business. husband Yuri Luzhkov, became the mayor of Moscow in 1992, corruption he awarded municipal contracts to his wife's company. For instance, the contract to produce 85,000 seats for Luzhniki Stadium, Moscow's largest stadium, in 1995Luzhniki Stadium controlled 20% of construction in Moscow Baturina then bought shares in Gazprom and Gazprom Sberbank. Sberbank

Other corruption Organized crime groups often purchased shares from failing firms at little cost This practice stripped the firm of value Purchasing shares this way did nothing for capital stock or the economy in general

The effects of the privatization program By 1996, 75% of large and mid-sized firms successfully underwent privatization Almost 90% of industrial output also privatized Conservatives called privatization a crime against the nation Privatization succeeded in redistributing assets They did not reach the middle class as originally intended The efforts did not provoke major social revolt However, many people took issue with the speed of its implementation Privatization also occurred at the same time as other pervasive negative changes As a result, the public linked privatization and negative changes

PRIVATIZATION by the Numbers

Causes of the 1998 Economic Crisis Non-inflationary measures Growing DEBT

Non-inflationary measures By 1996, inflation and the ruble exchange rate stabilized The years 1996 and 1997 were characterized by stabilization and low inflation The ruble reached a semi-convertible state Russia achieved stabilization by stopping the Central Bank from printing money Reducing the money supply decreased inflation

Non-inflationary measures The government borrowed money to handle the growing deficit issued short-term treasury bills and some longer-term treasury bills received loans from the International Monetary Fund Federal revenues decreased and the state reduced spending Federal and regional governments failed to collect taxes This setback benefited large oil and electrical firms They provided energy to firms who could not afford it In return, the state allowed them to export without paying taxes and tariffs Over time, these firms accrued tax debts to the government

Non-inflationary measures The state also withheld wages from state- sector employees In 1996 and 1997, the state fell behind on payment of wages and pensions Russians worked for no pay

Growing debt By late spring and summer of 1998, the state started borrowing foreign currency These loans financed their troubling domestic short-term debt In the first eight months of 1998, Russias foreign debt increased by 18.5 million dollars This reduced the foreign currency reserves required to support the ruble On July 20, 1998, the International Monetary Fund offered Russia aid The package they offered aimed to finance wages and domestic short-term debt Instead, Russia used the package to attempt to save the ruble and failed

Effects of the 1998 Financial Crisis The financial crisis occurred on August 17, 1998 Russia devalued the ruble defaulted on its domestic and international debts The crisis eliminated all savings in Russia Devaluation of the ruble made imported goods too expensive Russians returned to purchasing domestic products This increase in consumption boosted the recovery of domestic industry By 1999, Russias economy started to grow for the first time since the collapse of the Soviet Union The recovery of domestic manufacturing played a part Increases in prices for raw material exports also contributed greatly Growth continued until the global financial crisis in 2008

VLADIMIR PUTIN & DMITRI MEDVEDEV Economic Growth from 2000 to 2008 President Vladimir Putin (elected in 2000) In his first term (2000-2004), he enacted a series of reforms drafted by Yeltsin Flat income tax of 13% New legal code Systems to prevent money laundering Regime for liberalizing currency Reduction of taxes on profits from 35% to 24% New land code allowing Russians to own commercial and residential land

Putins Reforms

GDP reaches 8.5% in 2000! GDP reached an all-time high of 8.5% in 2000 and sustained high levels growth

Economic growth Between 1999 and the summer of 2008, Russias economy grew rapidly The result: budget surpluses, no foreign debt, and sizeable hard-currency reserves Inflation remained modest GDP growth reached an all-time high in 2000

RUSSIAN GDP

Rising oil prices Russias growth coincided with a rise in prices for Urals crude oil This crude oil blend was Russias chief export Price of barrel increased from $12 USD in 1998 to $70 in 2007 increased government and personal income Higher incomes increased demand for manufactured goods and commercial services

Professor Philip Hanson Professor of the Political Economy of Russia and Eastern Europe, Retired Emeritus Centre for Russian and East European Studies University of Birmingham It is by their indirect effects that oil and gas price rises fuelled Russian growth.

RUSSIAN OIL

THE RESOURCE CURSE The resource curse describes negative effects associated with abundant natural resources Some economies experience increasing debt, nationalization of resources, government corruption, and negative growth Russia experienced many negative consequences due to its supply of natural gas and oil

SUMMARY: Resource Curse

Dutch disease Russias heavy volume of mineral exports invoked a sharp inflow of foreign currency This influx created a high exchange rate As a result, domestic manufactured goods became too expensive Russians purchased imported goods instead This phenomenon is called Dutch disease

SUMMARY: Dutch Disease

Decay of other industries Russia was excessively dependent on oil exports While Russia grew with the record growth of oil prices, Putin loosened fiscal policy He began permitting oil companies to take on debt Imports increased with the onset of Dutch disease

STABILIZATION FUND In 2003, the state established a Stabilization Fund to store resource extraction tax revenues This store of money was intended to serve as an emergency fund if oil prices fell The state could use the money to fight inflation or defend the ruble

STABILIZATION FUND In 2008, the government divided the Stabilization Fund into two separate parts The Reserve Fund and the National Prosperity Fund government did not use the money to improve the poor manufacturing sector Russias manufacturing received little attention even after the collapse The economy lacked alternative industries when oil prices plummeted in 2008

Critique by Analyst Evgeny Gontmakher The state did not invest in improving oil extraction technology and infrastructure This problem greatly hindered Russias ability to recover from the 2008 financial crisis When oil prices crashed in 2008, so did the Russian economy Russias economy mirrored the conditions of the period following the 1998 crisis

Analyst Evgeny Gontmakher This is all a result of --incorrect economic policy, --oil dependence, --and rampant corruption. Until the system changes, these problems will persist.

Increased government ownership Government ownership of the economy increased between 2003 and 2007 The state pressured firms to invest instead of allowing market forces to provide incentives State ownership of oil expanded considerably The state-controlled natural gas company Gazprom purchased Sibneft The government also took over gas company Yukos and oil company Rosneft Government control of oil rose from 19% in 2004 to over 50% by 2008 The Russian gas industry has not undergone privatization yet

GAZPROM swallowed Sibneft

Yukos swallowed Rosneft

The growth rate of oil production fell between 2004 and 2007 Exports fell proportionally

The 2008 Global Financial Crisis: Calm before the storm Dmitri Medvedev: presidency, spring 2008 Russia was in an unprecedented period of prosperity The stock market thrived Foreign direct investment grew rapidly But investment remained low compared to other emerging markets Real disposable income increased by over 10% a year Consumer spending increased remarkably Unemployment fell from 12% in 1999 to 6% in 2008 Poverty fell from 41% at subsistence minimum to 12%

The BRIC Russia became a part of four notable emerging markets, collectively known as BRIC Brazil Russia India China

The Global Financial Crisis began in September 2008 Between June 2008 and January 2009, Russias stock market lost 70% of its value The ruble lost 1/3 of its value against the dollar The Central Bank increased spending to save the ruble but failed Russias foreign reserves fell from rising corporate debt, bank trouble, and credit issues Inflation hit a 14-month high of 13.9 by February 2009 According to Bank of America Securities-Merrill Lynch, industrial output fell by 16% between October 2008 and February 2009

REVENUE & GROWTH Government revenue fell by 28% in the first quarter of 2009 A decrease in commodity prices, including Urals crude oil, caused this reduction Urals crude oil was Russias primary mineral export GDP growth declined to -0.2% in 2009 Russia experienced budget deficits for the first time since the 1998 economic crisis

Global Financial Crisis: Russia by the Numbers

Stunted recovery By the first quarter of 2009, Russia exhibited the same ailments as it did in the 1990s Negative growth High unemployment High inflation Low oil export prices Weak manufacturing

1998 Recovery Prudent fiscal policy rising oil prices aided Russias transition out of the 1998 crisis Boris Yeltsins administration established these policies before Putin entered office

Putins Authoritarianism Putin introduced a more authoritarian developmental model He implemented more autocratic state-led economic policies Russias growth did not result from these policies In fact, Putins approach stunted Russias ability to transition out of the 2008 crisis

RECOVERY Recovery depended on several factors that would prove difficult to achieve Domestic consumer demand would have to increase High unemployment and inflation strongly worked against this goal World oil prices would have to rise The global recession suppressed demand for oil The state would have to implement prudent fiscal policy

Russia Today Enduring problems Russias manufacturing sector fails to compete in the global marketplace Russia can only compete in raw materials exports Russias GDP over-relies on oil and gas The economy is at the mercy of world markets

MODERNIZATION & MEDVEDEV Dmitri Medvedev initiated a new modernization The effects of the global economic crisis necessitated that Russia diversify its economy Dependence on oil exports made Russias economy fragile

Skolkovo Innovation District Medvedev launched the construction of a Russian Silicon Valley called Skolkovo This project intended to use Russias educated labor force to innovate new products Medvedev located the site in a new economic zone outside Moscow Skolkovo will probably not contribute significantly to GDP for years or decades

MEDVEDEVS PROMISED REFORMS Medvedev promised to stabilize Russias legal regime approach to property This change would encourage and protect foreign investors

RUSSIAN ECONOMY Communist Economic Systems. Russia’s transition to planned economics In a planned...

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Transcript of RUSSIAN ECONOMY Communist Economic Systems. Russia’s transition to planned economics In a planned...