The economic crisis in Russia: Fragility and

Robustness of Globalisation

Satoshi Mizobata

KIER, Kyoto University

Workshop in Vietnam,

September 2009

Introduction

• Transition economies and the global crisis: Is transition over?

• The economic growth and the crisis: The crisis spread to the success market. Dual surpluses are the base of the growth, but they become weak points.

• Is the Russian market normal or abnormal?

1.Reconsidered economic growth in the 2000s

High economic growth by energy and resources: an increase of reserve and export revenue

Heavily dependent on the mineral resources: fragility and sensitivity of the Russian economy to the global market

The state budgets depend on the global markets.

Figure 1 GDP change (1990=100)

0

20

40

60

80

100

12019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GDPchange

Macroeconomic indicator

1993 1994 1995 1996 1997 1998 2003 2004 2005 2006 2007

GDPannual growth rate

-8.7 -12.6 -4.0 -5.0 0.4 -4.9 7.3 7.2 6.4 6.7 8.1

Consumer price growth rate 840 215 131 21.8 11.0 56.4 12.0 11.7 10.9 9.0 12.2

Investment increase rate

-12 -26 -13 -18 -6 -5.1 12.5 13.7 10.9 13.7 21.1

Consumption increase rate -0.4 -2.8 -2.6 -3.8 4.1 -2.9 6.7 10.2 11.4 9.9

Federal budget, deficit and surplus

-10.4 -9.8 -5.2 -7.9 -7.0 -3.0 1.3 4.5 8.1 8.4 6.0

Oil production (t, million)

345 310 298 293 297 294 408 453 462 491 491

Export of petroleum and gas in Russia: changing into Middle East

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Crude oil tonnes million　 $

billion

114 118 116 144 165 190 228 260 253 248 259 243

13.4 8.8 12.9 25.3 25.0 29.1 39.7 59.0 83.4 102.3 121.5 161.1

Oil productstonnes million　　 $

billion

60.2 57.5 53.9 62.6 63.3 75.5 77.7 82.4 97.1 103.5 112.3 118

7.0 3.9 5.1 10.9 9.4 11.3 14.1 19.3 33.8 44.7 52.2 79.9

Natural gasCubic meter

billion $ billion

121 125 131 194 181 186 189 200 209 203 192 195

10.7 11.1 11.6 16.6 17.8 15.9 20.0 21.9 31.7 43.8 44.8 69.1

Total $ billion 31.1 23.8 29.6 52.5 52.2 56.3 73.8 100.2 148.9 190.8 218.5 310.1

Share of export (%)

34.9 31.8 39.1 50.0 51.2 52.5 54.3 54.7 61.1 62.9 61.7 65.8

Crude Oil export price $/barrel

23.9 20.8 21.0 23.8 31.0 45.2 56.3 64.3 90.7

Gas export price $/ m3 thousand

85.8 98.3 85.7 105.5 109.1 151.4 216.0 233.7 353.7

Share of export in the main Share of export in the main productsproducts

products Share (%, 2005-2007)

Crude oil 54-58

Petroleum products 46-48

Natural gas 28-32

Coal 49-53

Mineral fertilizer 75-85

Cellulose 80-84

Newspaper 60-65

Rolled iron 45-48

Nickel 90-95

Cobalt 90-95

Aluminum 80-85

Titan 70-75

zinc 30-407

Integrated government finance

1995 1998 2000 2004 2007

Financial deficit and surplus

-11.2(-5.2)

-22.6(-3.0) 12.6(1.9) 14.0(4.5) 23.1(6.0)

Tax on the corporate profits

26.9 14.5 19.0 16.0 8.2

VAT 21.9 24.8 21.8 19.7 29.1

Tariffs on the natural resources use

2.8 3.3 3.7 10.7 14.9

Customs and others

5.7 5.0 10.9 15.8 31.0

Foreign trade in Russia ($ billion)

020406080

100120140160180

200220

2008Q1 Q2 Q3 Q4 2009Q1 Q2

exportimport

Oil export price Oil export price ($/barrel)($/barrel)

10

Export of energy Export of energy ($ billion)($ billion)

11

Foreign trade changes1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 Change 2000-2008

export 78.2 105.0 101.9 107.3 135.9 183.2 243.8 303.6 354.4 469.0 347%

import 46.7 44.9 53.8 61.0 76.1 97.4 125.4 164.3 223.5 292.5 551%

balance 31.5 60.1 48.1 46.3 59.8 85.8 118.4 139.3 130.9 176.5 -

Domestic market heavily depends on import.

• Russian market expanded, and now it is No.1 in Europe.

• Low technology and quality of consumption goods like automobile

• Imported food and medicine, automobile (like Toyota and Nissan)

• Russians cannot live without the global market.

Russia became a Bubble economy

• Skyrocket of asset price like stock and real estate (housing): The stock bubble supported another bubble, residential bubble. (in big cities) The regional gaps are large. Partial Partial bubble economybubble economy

• Continuous inflation

• mismanagement of the government and inflow of cheap money

Balance of paymentsBalance of paymentsyear Current

accountTrade

balanceservices Capital and

financial account

Changes in reserve assets

Errors and omissions

1992 -0.1 3.7 -3.1 2.4 -1.9 -0.4

1993 9.0 12.6 -2.1 -4.4 -3.9 -0.7

1994 7.8 16.9 -7.0 -10.2 1.9 0.5

1995 7.0 19.8 -9.6 12.1 -10.4 -8.7

1996 10.8 21.6 -5.4 -6.4 2.8 -7.3

1997 -0.1 14.9 -5.9 10.8 -1.9 -8.8

1998 0.2 16.4 -4.1 3.8 5.3 -9.4

1999 24.6 36.0 -4.3 -14.4 -1.8 -8.5

2000 46.8 60.2 -6.7 -21.5 -16.0 -9.3

2001 33.9 48.1 -9.1 -16.2 -8.2 -9.6

2002 29.1 46.3 -9.9 -11.7 -11.4 -6.1

2003 35.4 59.9 -10.9 0.1 -26.4 -9.2

2004 59.5 85.8 -12.7 -8.4 -45.2 -5.9

2005 84.6 118.4 -13.8 -15.2 -61.5 -7.9

2006 94.9 139.3 -13.6 3.3 -107.5 9.5

2007 77.0 130.9 -19.6 84.8 -148.9 -12.9

2008 102.4 179.7 -25.1 -135.2 45.3 -12.6

2009 Q1 9.1 19.1 -4.1 -31.8 31.1 -8.3

Balance of payments and external debts Balance of payments and external debts (end of year, $10 billion)(end of year, $10 billion)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Current balance -0.08 0.2 24.6 46.8 33.9 29.1 35.4 59.5 84.4 94.3 77.0 102.4

Trade balance 14.9 16.4 36.0 60.2 48.1 46.3 59.9 85.8 118.4 139.3 130.9 179.7

Export 86.9 74.4 75.6 105.0 101.9 107.3 135.9 183.2 243.8 303.6 354.4 471.6

Import 72.0 58.0 39.5 44.9 53.8 61.0 76.1 97.4 125.4 164.3 223.5 291.9

Foreign direct investment

4.9 2.8 3.3 2.7 2.7 3.5 8.0 15.5 12.9 29.7 54.3 58.7

External debts (to the state)

149.9 158.4 148.9 128.6 111.1 104.3 106.0 97.4 71.4 48.6 46.4 32.8

Ex-USSR 95.1 98.2 96.8 65.8 61.0 55.9 58.3 56.1 34.5 9.4 7.1 4.6

External debts (to the private)

33.0 30.0 29.2 31.4 35.2 48.0 80.0 108.9 176.2 261.9 419.2 450.7

External debts per GDP (%)

44.4 67.8 93.3 65.1 50.5 43.8 39.4 33.5 30.9 31.4 36.0 28.8

External debts of enterprisesExternal debts of enterprises($ billion)($ billion)

17

1993 1994 1995 1996 1997 1998 2003 2004 2005 2006 2007 20082 4 8 14 33 30 80 108 175 262 417 488

Net international investment position ($ billion)

2003 2004 2005 2006 2007

Nonfinancial companies

-56 -117 -202 -307 -513

Russia, total +4 -11 -32 -36 -127

Net capital flows to the private Net capital flows to the private sector ($ billions)sector ($ billions)

19

2004 2005 2006 Q1 Q2 Q3 Q4

Net, total -8.9 0.1 41.4 -5.6 20.6 12.4 14.4

Banking sector 3.5 5.9 27.5 -3.0 9.9 8.8 11.9

others -12.4 -5.8 13.9 -2.7 10.6 3.6 2.4

2007 Q1 Q2 Q3 Q4 2008 Q1 Q2 Q3 Q4 2009Q1

82.4 13.9 54.5 -7.0 21.7 -132.7 -23.6 40.7 -19.2 -130.6 -38.8

45.8 0.1 36.9 -3.5 12.3 -57.6 -9.9 22.1 -13.5 -56.3 -5.8

36.6 13.8 17.4 -3.7 9.1 -75.1 -13.7 18.6 -5.7 -74.3 -32.9

Capital flight and external loans ($ 10bn)

-60

-40

-20

0

20

40

60

80

100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008＄ b

n

capi talfl i ght

l oans topri vatesector

Russian economy drastically changed in the 2000s.

• Economic growth maintained a twin surplus.

• The economic structure becomes a fragile and sensitive to the global market.

• Russia has been integrated into the global economy, and in this point, the transition is over.

2.The global crisis hit

The economic crisis hit the Russian economy, and the Russian gets mired

down in the crisis.

Crisis under transitionCrisis under transitionTransition economy and economic crisisTransition economy and economic crisis

• Contagion to transition economies

Financial crisis and economic crisis (real sector crisis)• Difference of CIS countries and Central Eastern

Europe: high debts and critical case of external debts in Kazakh, Ukraine, Belarus, Moldova, Tajikistan.

• Contagion to non-open economy (Kyrgyz) Global crisis is strained in transition economies.

Dependence on the European markets. Hungary, Latvia, Serbia…But

From financial crisis to economic crisis

When Russian crisis?

• 2008 September: a drop down of stock price

• 2008 July: limited growth of money supply and the increased interest rates

• 2007 November: a decline of M&A transaction

• 2007 August: weakening liquidity (V.Senchagov)

A sudden drop of trading volumes in stock exchanges MICEX

Объем торгов акциями, млрд руб.

0

500

1000

1500

2000

янв2007

мар май июл сен ноя янв2008

мар май июл сен

Объем торгов облигациями, млрд руб.

0

100

200

300

400

янв2007

мар май июл сен ноя янв2008

мар май июл сен

Объем размещений облигаций, млрд руб.

0

25

50

75

100

янв2007

мар май июл сен ноя янв2008

мар май июл сен

Объем РЕПО, млрд руб.

0

1000

2000

3000

4000

янв2007

мар май июл сен ноя янв2008

мар май июл сен

Asset price dropped suddenly after September 2008-Lehman shock

• Stock price declined in MICEX and RTS.

• A decline of real estate price

negative chain functioned and…

a collapse of bubble economy

from financial sector to real sector

A violent change of housing price($/m2)

Average price change of cottage in Q3 2008-Q3 2009 (%)

30

Financing: stock market and Repo marketFinancing: stock market and Repo market

0

10000

20000

30000

40000

50000

60000

70000

2000 2001 2002 2003 2004 2005 2006 2007 2008

currencymarket

bondmarket

Repomarket

Billion Ruble

310

200000

400000

600000

800000

1000000

1200000

1400000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

currencymarket

bondmarket

Repomarket

Billion Ruble

Financing: stock market and Repo marketFinancing: stock market and Repo market

2005 2006 2007Q1 Q2

Stocks 18.3 25.6 50.5 58.0 62.4

Corporate bonds 28.0 50.9 71.2 77.9 77.9

Regional bonds 28.0 60.0 79.9 83.8 86.1

Municipal bonds 31.5 42.1 66.5 72.2 74.6

Share of Repo Transaction in MICEX

2008

Enlargement of Repo market

• Similar to GKO-OFZ in 1998

• Failure of Repo:7.1 billion Ruble of “KIT Finance” 　

34

Margin callsMargin calls ：： Firms with non-Firms with non-performing loans in November 2008performing loans in November 2008

Crisis Phenomena

• Stock prices• Foreign borrowing• Margin calls• Bankrupt of banks• Financial crisis as SvyazInvest• Consumer loans crisis: automobile and construction• The sharp decline in petroleum price, aluminum and metals• Construction, development, and retail• External repayment: repayment $ 160 billion till the end of 2009• Labour market• Regional gaps

Industrial sectors in Crisis

(1) Big shock sectors: banks, developer, retail with high leverage ratio

(2) Export and resource sectors: metallurgy, non-ferrous, oil and gas, diamond, paper

(3) Import substitute sectors: automobile, cement

Some Company cities faced difficulty.

Decline of consumption and investment

Production was diminished by three waves.

1) Reduction of speculation and expensive credit: developers---a decline in employment and income-a chain of reduction

2) Reduction of export profits

3) A decline in the state budget

Changes of export prices in Russia ($ per ton)

0

200

400

600

800

1000

average real export priceaverage world oil 'Urals' price

Export structure of Russia Export structure of Russia (2009.1-6)(2009.1-6)

39

40

Economic crisis in 2008-2009Economic crisis in 2008-20092007 2008 2008Q4 2009Q1

GDP 8.1 5.6 1.1 -9.5

Industrial production

6.3 2.1 -6.1 -14.3

manufacturing 9.5 3.2 -7.7 -20.8

Retail trade 16.1 13.5 8.6 -1.1

investment 21.1 9.8 -2.3 -15

Foreign trade 23.5 32.1 -4.3 -43.5

unemployment 6.1 6.3 7.1 9.5

M&A (value) 194.6 -36.5 -38.6 4.8

41

Perspective of economic growth:Perspective of economic growth:Crisis is serious (pessimist)Crisis is serious (pessimist)⇔⇔no crisis, crisis no crisis, crisis

hit the bottom (optimist)hit the bottom (optimist)

2009 2010

IMF -6.0 0.5

World Bank -4.5 0

OECD -5.6 0.7

EBRD -7.5 2.5

Goldman Sachs -7.3 3.8

Russian Government -2.2 2-3

Defaults of corporate bonds (cases)

2008 2009.January-April

Total

Defaults total 56 77 133

Refinanced loan

8 18 26

Technical defaults

25 14 39

EmploymentEmployment (million) (million)

43

656667686970717273

2008April J uly Oct. 2009.J an. April J uly

employment

Unemployment rate (%)Unemployment rate (%)

44

0

2

4

6

8

10

2008Apr. J une Aug. Oct Dec Feb April J une

unemployment rate

Russian recovery perspective and Russian recovery perspective and positive scenario signalspositive scenario signals

• First Quarter 2009 oil and gas price increase and stabilisation. Urals price $ 55 per barrel in May 2009.

• Ruble Exchange rate stability against the USD/EUR currency basket.

• Russian government and households sectors are not overleveraged.

• Russian corporate sector is restructuring and servicing the debts. Volume of payments $ 114 bln. Per year 2009.

• Reserve Fund and public debt resources are used to support 2009-2010 Budget expenditures.

• Public budget and Central bank of Russian capital and subordinate credit investments supported the Bank System equities.

• Public guarantees and credit placement to refinance corporate debts

• 2009-2010 Public and private capital investments to start GDP recovery.

45

Symptoms of recovery

After the first quarter of 2009, we can observe some symptoms which signal the end of the panic period.

A.Kudrin, the Minister of Finance, considered Russia got out of the crisis in August.

I.Shuvalov, the first vice-prime minister also announced a recovery of the economic growth.

Oil price increased after May 2009, and the ruble exchange rate seems to be stabilised.

Many corporations are restructuring and servicing their debts. The resident house price began to increase. In July 2009, almost all economic indicators were better than

in June. Unemployment also declined to 6.3 million (8.3%).

3.Outcomes of the crisis: A collapse in the growth factors

What did the crisis bring about in the Russian economy? Can Russia hold the growth factors

based on the path in the 2000s?

Specificities of the crisis in 2008

• The economic crisis is greatly influenced not only by the global economy but also by national specificities. Further, the crisis was contagious among not only the weak economies but also those showing strong macroeconomic performance; as a matter of course, the transition economies and emerging markets became the main target. Twin surplus in Russia

• The subsequent dismal economic performance seems to have led Russian economists to describe extreme scenarios. These often included the ‘hard landing’ scenario

Crisis in Russia not once in a hundred years but in ten years

• Reconsidered 1998 crisis: GKO and the East Asian currency crisis

• Fragility of domestic markets

• From deficits in 1998 to surplus in 2008

common features and differences in the crisis

50

International financial flow (1998 crisis)

Foreign reserve

government

State bonds

Global oil and gas markets

International fiancial markets

banks

Enterprises Households

51

International financial flow (2008 crisis)

Foreign reserves

government

Global oil and gas markets

International financial markets

banks

Enterprises Households

Domestic microeconomic Domestic microeconomic response to globalisationresponse to globalisation

• Speculative behaviour (M&A oriented)

• Natural resource

• Diversified paths to gat chap money

IPO

However,

• Capital flight and unmanaged trade surplusOverheated money demand

53

M&AM&A in Russiain Russia

• World M&A （ Thomson Financial ）： $ 4.48 trill. ($3.61trill. In 2006). USA 41%, Europe 40%, and Japan 3%.

• M&A in Russia (2007) ReDeal:1260, $120.7bln. M&A ： 486, $124.6bln. Ernst & Young ： $71 bln., of which 11.4 bln

(In-out), 13.7 bln.(Out-in) in 2006. 2008:In-out23.6bln., Out-in26.2bln.

54

55

sectors Value ($

million)

Share of transaction (%)

Metallurgy and mining

13739 58.13

energy 2685 11.36

Construction and real estate

1837 7.77

Technology centre

1677 7.10

telecommunication

790 3.34

entertainment 660 2.81

transportation 540 2.30

machinery 470 1.97

finance 370 1.54

others 870 3.67

total 23633 100.00

Sectors Value ($

million)

Share of transaction (%)

energy 6017 23.00

food 3836 14.66

finance 3819 14.60

Metallurgy and mining

3503 13.39

chemical 3190 12.19

retail 2051 7.84

machinery 1431 5.47

pharmaceutical 930 3.57

Transportation 760 2.92

others 620 2.36

total 26162 100.00

In-outIn-out and Out-in of M&Aand Out-in of M&A

IPO financingIPO financing• An increase of

syndicated loans: short term funds

• An increase of IPO/SPO 29.4 billion (23 cases)

in 2007⇒An increase of external

debts• Suddenly dropped in

2008

External debts of Russia Jan.2006

July2006

Jan.2007

July2007

Oct.2007

Jan.2008

July2008

Oct.2008

Jan.2009

April2009

Total 257.2 288.8 313.2 399.2 437.8 471.0 535.7 548.2 483.5 450.8

State sector 150.7(58.6)

153.8(53.3)

137.1(43.8)

175.5(44.0)

188.4(43.0)

190.8(40.5)

198.0(37.0)

191.2(34.9)

161.8(33.5)

147.2(32.7)

State organisation

82.1 78.9 48.6 49.0 52.5 46.4 38.9 42.8 32.7 30.1

Banks 19.4 27.4 32.0 54.2 59.2 65.5 78.2 71.2 61.7 54.4

Other sectors 49.3 47.6 47.1 72.3 76.7 78.9 81.0 77.2 67.4 62.7

Private sector 106.4(41.4)

135.0(46.7)

176.1(56.2)

223.7(56.0)

249.5(57.0)

280.2(59.5)

337.7(63.0)

357.0(65.1)

321.6(66.5)

303.6(67.3)

Banks 30.8 39.3 59.8 76.1 87.7 96.9 113.1 125.2 102.9 90.6

Other sectors 75.6 95.6 116.3 122.5 136.0 156.4 191.8 199.0 186.0 179.7

01020304050

2007 2008 2009

Share of state secor in external debts(beginning of the year, % in total debts)

total

in rubles

in hardcurrency

59

Ultimate debtors and Ultimate debtors and government behaviourgovernment behaviour

• Who is private sector? Firms which the government manages or holds more than 50% of shares like Gazprom (1/3), Firms which the government holds less than 50% (block shares) or strongly influences. Chebolization: “privatisation of profits and nationalization of deficits”

• State-owned banks do not claim margin calls. Specific relation between government and enterprises

• Protectionist measures

Anti-crisis measures

1) November 2008: stabilization of the financial situation-accessibility of financial resources, relaxation of business burdens, improvements of social results and others. The support to bog business

2) June 2009: social responsibility and the linkage between the anti-crisis measures and long-term projects (modernisation programme)

Anti-crisis expenditure ($ billion)

State gurantee

Capital injection

Assts purchase

others total

Russia 0(0) 185(84) 11(5) 25(11) 222(13.9)

UK 393(39) 79(8) 0(0) 549(54) 1020(37)

USA 1769(50) 714(20) 663(19) 394(11) 3539(25)

Germany 539(60) 177(20) 0(0) 176(20) 893(23)

Japan 303(53) 0(0) 0(0) 273(47) 576(12)

China 0(0) 0(0) 0(0) 570(100) 570(13)

Anti-crisis measures

• Capital injection by the government

• Protectionist measures: Subsidies

• Guarantee of debts

• NationalizationAnti-crisis modernisation programme

(Shuvalov commission, V.Mau) strategic perspective of modernisation, list of untouchable enterprises

Contents of June 2009 programme

(1) social security, including employment, pension system, housing, etc.

(2) the development of production and technological potential by increasing efficiency

(3) the activation of domestic demand for Russian products using state investment and state order

(4) the stimulation of innovation and structural reorganisation(5) the creation of an advantageous condition for economic

growth by reforming market institutions and promoting SMEs(6) the formation of reliable financial markets(7) macroeconomic stabilization and reliance on domestic and

foreign investors

Government increased its holdings in the crisis: nationalisation

• State control over economic activity is pervasive (OECD)

• The number of majority stakes of the federal government increased

• Establishment of state corporations

• The state sector increased its share of assets in the banking sector: VEB using the oil money (the Fund of National Welfare)

68

Anti-crisis economic policyAnti-crisis economic policy

• Access to financial resources (direct finance by -led banks and others ）

• Relaxation of business burden (tax, customs, administrative measures and others)

• Improvement of social negative results and support to labour markets (enlargement of unemployment benefit, focus on education, housing and public health)

• Stimulation of domestic demands (government order and others)• Support to SMEs Concentration to big business in the support measures Support to city enterprises and agglomeration Priority sectors: automobile, agricultural machine, defense, housing,

construction PPP Strong protectionist measures

Main indicators of VEB (end of year, billion rubles)

2007 2008

Assets 540.5 1597.2

Credit portfolio 352.1 1061.6

Net income on interest

4.1 20

Operational expenditure

4.6 14.3

profits 6.4 6.4

70

Russian foreign reserve ($ billion )

0

100

200

300

400

500

600

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008.8 20

09

M&As by symbolised pricesprice buyer asset sector Debts Costs for

recoveryDate of transaction

100 rubles Alrosa 90% KIT-Finance

bank 100-120 billion rubles

90 billion rubles

Jan. 2009

5000 rubles NRK Rossiiskii kapital

bank n.d. 8.2 billion rubles

Oct.2008

5000 rubles VEB 90% Cvyz’-bank

bank 60 billion rubles

59 billion rubles

Oct.2008

5000 rubles VEB 99% Globeksa

bank n.d. 80 billion rubles

Oct.2008

1 million rubles

Gazpromenergobank

75% Soyuz bank n.d. n.d. Dec.2008

1 Euro S.Pugachev 65.1% Soir media n.d. 10 million E Jan. 2009

60 rubles VEB 51% Systemy-Gals

development

$ 700 million 5 billion rubles

March 2009

$1 Moscow city

75% Sky Express

airlift 2.5 billion rubles

n.d. 2008

No cash Sverbank 100% Moi gorod

retail $ 22 million n.d. Q1 2009

No cash Sverbank 17% capital city

Mixed-used

$400 million n.d. Q1 2009

System-formation enterprises

• From strategic industry and enterprises to system organizing- technological centre, large job provision, exporter, large investor, inter-departmental sector (MIC, metallurgy, company town and others)

• 325 billion Ruble• 294 system organizing enterprises• State guarantee for credit: 70% of defense enterprises• rescue of leading enterprises

Effects of the policy

• GU-VSE and MATS are skeptical: 60% have a weak effect.

• The policy includes negative aspects: the worsening of competition, corruption, asymmetric information between businesses and the government

• Another nationalisation in social aspect: reduced working hours and others

Weak response in employment

• Informal sector expands• Incomplete employment has increased• Wage arrears revived. – illegality• Non-monetary transaction revived.-barter and

mutual settlement (barter does not increase by Russian economic barometer)

• Work hours decreased and temporary holidays increased (Russian work share)

Robust foundation of the Russian society

Unemployment and unpaid work

Wage Arrears (millon R)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

2008 2009

4.Causes and the significance of the crisis in Russia

Specificities of the crisis and the meaning of the crisis

Global factors The structural crisis of the ‘New Economy (service sector, asset based economy

based information technology)’ Financial deregulation Overheated investments and the housing bubble Lack of liquidity and the credit crunch among financial organizations Mistakes made by the US government and Federal Reserve Board (FRB) Market failure through securitization and the increases in the securitization risk The uncertainty associated with derivatives Credit expansion through deregulation and uncontrolled financial technology Global inflow of excess money into forward markets (deterioration of the real

sector by price jumps and the outflow of funds) The linkage between uneasy psychology and panic The real sector crisis stemming from a demand decline caused by drastic decreases

in stock prices and the adverse wealth effect A decline in investment, consumption and employment An upturn in the interest rate from credit risk (monetary constraints)

Causes of the crisis by V. Mau

(1) the root factor of the inadequate financial policy of the US

(2) fundamental and systematic factors such as the very aggressive growth-oriented policies of developed countries and the development of financial technology

(3) factors specific to Russia. From the perspective of global capitalism, the flow of global finance has changed

Economic growth has become a key factor in the crisis.

21st century crisis

21st century financial crisis:

1) private short term fund (Hedge Fund),

2) a decrease of IMF function

3) fragile financial system and drastic de-regulation

4) firm’s dependence on indirect financing and foreign capital

Closely involved in the global economy and cheap global money

Crisis as the periodicity of business fluctuations

• Russia synchronized with the business cycle of the global capitalism.

Russia has competed the transition period.

• Stagflation in Russia: high inflation and recession

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Crisis in RussiaCrisis in Russia

Inflation: price increasing

crisis

Drop down of production

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Linkage of developed country Linkage of developed country and emerging market economyand emerging market economy

Specific factorsGlobal factors:priceproductionInterest rate Developed countries

Financial pressure

Emerging market economyFinancial pressure

fragility

Linkage offinance

Source: IMF, 2009, p.143

Specificity of crisis in RussiaSpecificity of crisis in Russia

Stagflation (Depression or stagnation and inflation) for Russia and CIS

Deflation and Depression for developed countries

Crisis under the dual profits (budget and balance of payments)

Crisis as transition indicators

A comparison of economic background in 1998 and 2008

• Different political situation: regency (weak president) vs authoritarian (strong president)

• Different economic policy: stabilization and state intervention by GKO vs high economic growth and 4I

• Different economic situation Macroeconomic indicator : growth, inflation and

finance Micro economic performance: loss-making enterprises

and barter transaction Labour and social indicator: employment and income Contrast of two periods

Comparison of crisis in 1998 and Comparison of crisis in 1998 and 20082008

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Source of crisis

Acors of crisis

Volume of external debts ($ billion)

External reserve ($ billion)

1998 crisis

GKO, government

GKO holders (banks)

20 10

2008 crisis

Loans, global crisis and banks and enterprises

Debtors (banks, enterprises)

500 800

Comparison of crisis Comparison of crisis in 1998 and 2008in 1998 and 2008

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Financial deficits Final debtors

1998 crisis

Large deficits government

2008 crisis

Stable surplus, austerity economic policy, sterilization policy

Enterprises and banks (private but semi-government, government)

Comparison of three crises1992 1998 2008/2009

Political crisis Yes Yes No

Decline of demand Yes accompanied with collapse of USSR and CMEA

No Yes linked with cyclical recession in the global economy and overheat in the non-trade sector

Decline of oil price No Yes Yes

Currency crisis Yes Yes affected by managed devaluation of ruble and rejection of exchange rate change by monetary authority

Yes affected by appreciation of ruble and rejection of exchange rate change by monetary authority

Instable state budget Yes Yes No A decline of revenue does not bring about instabilisation due to Stabilisation Fund

Debts crisis No Russian cannot attract foreign money

Yes The main debtors were state Yes The main debtors were corporate sector

Capital flight No Yes Short-term state borrowing led outflow of capital for clearing GKO

Yes Foreign investment led outflow of capital for declining markets

A comparison of crisis in 1998 and 2008

• International financing and foreign debts caused the crisis. GKO vs M&A weak domestic financial markets difference: international balance: from state to private, shot

term funds• Relaxation of restriction on capital transfer extended

dependence on foreign capital. Parallel economy functioned in Russia. Capital flight

• The fragility of the domestic financial market made financing more delicate.

• Mistake of Central bank: reluctance of devaluation ex Argentine

Different characteristics of crisis in 1998 and 2008

• Petroleum price (determined not by supply ability but by speculative funds, abnormal price change in 2008)

1) increase of Russia’s dependence on exporting resources: from 32% in 1998 to 62% in 2007, narrower economy

2) state budget dependence on the petroleum price: foreign reserves

• International financial flow

M&A funds and IPOs

Russian specific factorsRussian specific factors

(1) Political situation

(2) High dependence on export of raw materials: Due to the crisis the prices and the demand for the main Russian export goods sharply declined.—1) capital flight, 2) government’s dependence, 3) dependence on foreign money, 4) out of control of oil price

(3) The fragility of the market: financial market and monopolisation, M&As

(4) Russian peculiarities

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  1995 1997 1999 2001 2003 2005 2007 2009*

Insiders, total 54 52 50 50 50 48 51 55

Managers 11 15 15 19 25 31 35 41

Workers 43 37 34 28 22 16 13 10

Outsiders, total 37 42 42 42 45 45 40 38

Non-financial outsiders 27 31 33 34 36 38 31 24

Outside individuals 11 15 20 22 21 20 13 8

Other enterprises 16 16 13 12 15 18 18 16

Financial outsiders 9 9 7 8 8 5 8 13

State 9 7 7 7 4 7 9 7

Ownership in companies in Russia

Russian peculiarities: response of Russian peculiarities: response of economic actorseconomic actors

• Specific adaptation: revival of “transition phenomena”

Labour market and employment: low elasticity in employment (informal sector, incomplete employment), high elasticity in wage

Transaction: barter ad non-monetarized transaction

• Enterprises kept their speculative activity

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Russia’s specificities in crisis

• Unbalance of transaction: heavy import dependence and natural resources (direct impact)

• Violation of liquidity: chap foreign money and high leverage ratio

• Inflation with weak competitiveness: The government cannot devaluate Ruble.

• Self-satisfaction of national financial system with speculation

• Speculative management with Russian corporate governance

• Abnormal Russia survives.

Transition and crisis From the perspective of market transition, paradoxically speaking, it can be

stated that the Russian transition concluded as a result of a close linkage with the global market as well as the regressive institutional changes and regeneration of embedded institutions. However, the end of market transition does not mean that one needs to build an Anglo-Saxon-type liberal market economy. As far as the state continues intervening and businesses do not lose their paternalistic behaviour, the Russian-type coordinated market will continue to be fragile. The weak competitiveness along with profits from abundant resources becomes a catalyst for crises, and the sustainability of the market institutions is undermined by conditions such as aging equipment and shortage of labour force and skills.

At the beginning of 2008, the outdated (no longer serviceable) machines occupied 51.1% in enterprises.

(1) Government failure: deep-rooted corruption

• Corruption of bureaucrats: The economic policy doe not have consistency.

• Corruption of police and public servants: enforcement of the law is weak. 　

• There are many cases of takeover including raids. Ownership and M&A have a risk.

• Administrative costs are pervasive.

2001 2005

Corruption involved

50.4% 54.9%

Corruption risk 25.7% 35.0%

Bribe average (Ruble)

2162 2452

Total business corruption value ($, billion)

33 316

Russian corruption （ INDEM fund)

(2) The population problem is unsettled.

• From 148.3 million in 1991 to 141.9 million in 2009 (-4.3%)

• A decline of population brings about shortage of labour forces. Labour forces decreased from 75 million in 1992 to 74.2 million in 2006.

• The social policy is difficult to keep in the future.

• The age structure distorted.• A decline accompanies

depopulation and overpopulation.

2006 2007

Population million

142.24 142

Natural change

- 687 thousand

- 478 thousand

Social change

+ 132 thousand

+ 240 thousand

(3) Skill and human resource are indispensable for survival.

• The most difficult constraints for the firm is human resources.

• The skill formation system in the Soviet period collapsed. The advantageous condition of Russia “potential good labour force” disappeared.

• The new skill formation system has not created yet. The talented skill market and temp agencies are not well organized.

• The size of non-regular workers is 15%.

Constraints of enterprises (%)

0

20

40

60

80

1995 1998 2001 2003 2005 2007

%

domesticdemandimport

unpaid

lack of finance

lack ofemployeeslack ofequipment

Young people change their job.

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Less than one year

41 43 43 41 40

1-2 years 30 29 27 28 28

2-5 years 21 19 19 21 21

5-10 years 13 15 12 12 16

10-20 years 13 12 13 10 12

More than 20 years

9 12 11 10 10

ConclusionConclusion• The global crisis penetrates the Russian

economy and it has a chance to adapt the global standard. E.g. revision of law on bankruptcy

• Before the global crisis, the Russian economy has changed its economic structure under the economic growth. Russian was synchronized with the global capitalist business cycle, and the Russian economy cannot survive without the global markets.

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• Strong hand of the government characterizes the Russian market.

• The crisis recalled the Russia’s innate institutions and such institutions played a role of soft-landing (adjustment behaviour) of the crisis.

• Russia continues to face a market that is both fragile and robust.

Thank youThank you

•Fin

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