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At the same time, the status of the Russianfinancial market as of the spring of 1999 makes it impossible to expect thatany at all significant projects can be implemented in this sphere even in themedium term.

1 For more detail pertaining to the period between October 1997 andSeptember 1998 see: The Russian Economy Januarythrough September 1998. Trends and Prospects(Issue 19), Institute forthe Economy in Transition, Moscow, 1998.

2 We examined in much detail the political, economic, social, andconstitutional factors of the fiscal deficit in a survey by the Institute forthe Economy in Transition entitled The RussianEconomy January through September 1998. Trends and Prospects (Issue 19)..

3 In principle, a feasible level of tax collection is determinedby factors depending on the country’s economic development, such aseconomic structure, the population’s educational standards allowing developed tax legislation andappropriate accounting standards to be applied; the level of taxadministration; the general level of the population’s law abidance and emerging taxpayment traditions in society, and the level of social and ethnographichomogeneity of society.

Authoritarian regimes can afford to put farlarger resources in the government’s hands than is possible under democratic rule. That was actuallythe case in communist countries.

4 Russia’s own debt as at 1 January 1998, was 7.6 per cent of GDP, that is,25.2 per cent of the total. In the first eight months of 1998, federalliabilities as a proportion of overall foreign debt, including the debts of theformer USSR, reached 36.7 per cent.

5 In 1993,non-residents’Russian assets increased at a rate only insignificantly higher than that ofRussia’s foreignassets, the latter being smaller than the former in 1994. In 1995,residents’ foreignportfolio investments rose faster than non-residents’ investments in Russia as well.This trend reversed in 1996, however: whereas foreign portfolio investments inRussia were equal to 0.03 per cent of GDP all through 1995, as compared to 0.42per cent of GDP for Russian foreign investments, the former grew to 2.21 percent of GDP in 1996, and the latter slid to 0.04 per cent of GDP. The year 1997could be rated as a period of the heaviest influx of foreign portfolioinvestments into Russia: as it closed, the difference between the growth of thenon-residents’Russian assets and that of residents’ foreign assets topped $46billion, or 10.02 per cent of GDP, with the influx of foreign investments intoRussia registering at 10.06 per cent of GDP. In all, foreign portfolio assetsin Russia built up to $56.4 billion (4.4 per cent of GDP) over the three years,leaving the Russian portfolio assets abroad far behind with $1.9 billion (0.15per cent of GDP).

6 At the time of the default, the Russian banks (minus Sberbank)had about 40 billion rubles in GKO-OFZ bonds among their assets. The lossesincurred by Russian banks, which hedged the foreign investors’ exchange risks, as a result ofthe ruble’s meltdownrange between $15 billion and $22 billion, according to variousestimates.

7 The RTS-1 Index reached its all-time high level of 571.66 on 6October 1997.

8 See: OpenLetter from Economists of the RAS Economics Division to the President, theFederal Assembly and the Government of the Russian Federation,Ekonomika i Zhizn, No. 37,1998; and Yegor Gaidar et al., Anti-Crisis Action Program, Vremia, 1 October 1998.

9 Typical in this respect were the suggestions made by GennadySeleznyov regarding measures ostensibly needed to be put into effect ineconomic policy within a matter of days, literally. These ideas, actuallyplanks of a program, were put forward almost immediately afterPrimakov’sappointment. Seleznyov, the Duma Chairman, threw his full weight behind theappointee: It is important to suspend the operations of the currency exchangeand have the Central Bank issue a directive fixing the ruble exchange rate tothe dollar at a ratio of seven to one.... Talks are to be held with financialinterests in the West with a request to suspend the use of plastic forexcredit cards to prevent the flight of foreign exchange out of thecountry.... A temporary ban is to be imposed on currency exchange offices tosell forex to the population. All they are to do is buy dollars.... The foreignexchange in the hands of commercial banks is to be used exclusively to purchasefoodstuffs, daily necessities, and medicines. (Quoted in Kommersant, 11 September 1998, p. 2).Add to this proposals from the new government’s brass to denationalize theloss-making enterprises of the military-industrial complex, which hardly wentwell with the simple logic of government action in the heat of the financialcrisis. (Significantly, these ideas of the cabinet’s doctrine impliednationalization of loss-making sluggards rather than prosperous export-orienteddynamos.)

10 The economic policy of populism, when it is applied in practice,comprises four stages recurring, with due regard to local modifications, fromcountry to country. These stages are:

At the first stage, the government concernedtries to speed up industrial growth by pumping funds from export-orientedindustries into national pride industries (commonly engineering) andsimultaneously expanding money supply. The economy responds to these measuresby picking up, and public well-being begins to improve. The impression is thatthe government is scoring major points, about to turn the country into yetanother economic miracle. The government is rapidly gaining inpopularity.

At the second stage, the economy begins toshow signs of getting out of balance. It turns out that the growing productionand improving standards of living are attended by a worsening of somemacroeconomic factors – growth of the trade and balance of payments deficits, contractionof forex reserves, and swelling of foreign debt. These adverse sidelights are,for a while, only apparent to professional economists (or only some of them,given the country’sprotracted detachment from real market economics). The budget is sputtering,but no attention is given to these trifles as long as manufacturing continuesto chug along.

Way into the third stage, commodity shortagesare building up in the public sector and free prices are inflating. Attempts torein in the prices make commodity shortages even worse, and the inevitabledevaluation of the national currency explodes into violent inflation. Taxcollection slips and the budget collapses. Whatever the government is doing,living standards begin to drop and production falls off.

At the fourth stage, the government falls,and the new authorities (not infrequently military or emergency powers) adoptradical measures to calm the socioeconomic turmoil.

(See: R. Dornbusch, S. Edwards (Eds.),The Macroeconomics of Populism in LatinAmerica, University of Chicago Press, Chicago andLondon,1991, pp. 7-13.)

11 See Ruling by the Federal Supreme Court GKPI No. 98-448 of 2October 1998.

12 See Resolution of the Government of the Russian Federation No.1203 of 25 October 1998.

13 Resolution of the Federal Government No. 1226 of 21 October1998.

14 The decision was truly unique. Actually, it was the firstexample in recent economic history of a decision to resurrect legislative acts buried two orthree years before. It was not merely an economic move, but a political wink aswell. Rather than saying he was introducing government guarantees, Primakovwent for an unprecedented reinstatement of repealed acts in an unabashedlydemonstrative move. As with the Duma’s resolution to restore themonument to Dzerzhinsky in downtown Moscow, the government publicly displayedits filial attachment to the ideology and practices promoting the revival ofSoviet and neo-Soviet ways.

15 After an inflation leap in late August-early September 1999, thenew price equilibrium was not adequate to the volume of money in circulation.However, due to a rigid price level, which in this case implies economicagents' (producers and go-betweens’) reluctance to significantly reduce the already increased prices,no adequate deflation took place (see Fig. 7). As a result, the currency issuethat followed (loans to the government and commercial banks) was largely usedto support the price proportions established after the inflation leap (the realmoney stock rose). An important factor behind the lower inflationaryexpectations and increased real money supply was the exchange rate stabilityand the gradual rise of the RF Central Bank's gold and forex reserves thatgradually occurred during that period.

16 Gross currency issue is calculated as the sum of the change inbase money and the volume of the issue sterilized by the Central Bank's sale offoreign exchange.

17 Center for the Study of Economic Trends (CSET). Industrial Production Intensity Indices (January 1990-October1998), Moscow, November 1998; CSET. Business Activity of Russia's Basic Industrial Enterprises inNovember 1998, Moscow, 1998; Industrial Production Rates of Dynamics. Preliminary Results for1998. Estimate of the Situation for 1999 (based on reports for January-November1998), Moscow, December 1998.

18 Take, for instance, the following declaration made by Primakovbefore the Federation Council: "We had written off Purneftegaz. Now wehave it back. The next in line are other enterprises which had been taken outof the budget, maybe lawfully but against all logic and common sense."(Interfax, Febr.17).

19 Net external financing envisaged by the budget (approximately $2billion) is practically equal to the amount of the tied loans. If no suchloans are disbursed, this will not affect the volume of currency issue and theresults of our calculations, because we assume a corresponding reduction inexpenditure.

20 The experience of countries where inflation is high shows thatthe national currency exchange rate usually declines faster than prices rise.Between 1992 and the first half of 1998, Russia witnessed a reverse situationdetermined by a significant initial inflation of the dollar rate in the early1990s, and by the fact that the RF Government and Central Bank’s stabilization policy envisagedthe use of the ruble nominal rate as the "nominal peg". At present, thesefactors are absent. In 1999, the rate of the ruble devaluation will probablymatch the price growth rate, which would secure the stability of the effectiverate.

21 According to the balance of payments forecast made by an RFFinance Ministry expert team headed by Arkady Dvorkovich, in 1999 the RussianFederation will have a $31 billion surplus on its current account; foreign debtrestructuring to the amount of $13 billion will take place; foreign tied loansworth up to $2 billion will be obtained. These sources will be used to financethe deficit of Russia’s capital and financial account ($45 billion) and to increase itsofficial gold and forex reserves ($2 billion). Hence our assumptions do not goagainst the above estimate of the balance of payments situation.

22 To model inflation, we used the autoregression monetary model ofprice index performance estimated for a period of high inflation, 1992 throughearly 1995 (see The Russian Economy in Januarythrough September 1998. Trends and Prospects, Issue 19).

23 Here we assume that the debt of the former USSR will berstructured while Russia will only pay off and service government loans andits debt to international financial institutions if new loans are granted in1999. Otherwise a default will be announced with respect to thesedebts.

24 The volume of currency issue is determined by the minimum amountnecessary for financing federal budget expenditure, quasi-budget expenditure onrecapitalization of the banking system and stockbuilding of the RF CentralBank’s gold and forexreserves with account taken of nonmonetary sources of finance as stipulated inthe budget.

25 According to the monetary policy guidelines for 1999 set by theRF Central Bank, the growth of the money stock M2 for the year should be in the range of18 per cent to 26 per cent.

26 Needless to say, after the issue of money necessitated by theseexpenditures has caused a corresponding price rise, real government expenditurewill go down further (see below).

27 The forecast for 2000 is made similarly to the forecast for 1999.Under both scenarios and for the case currently under consideration, the 2000federal budget parameters were determined by indexing the correspondingparameters of the 1999 federal budget under the consumer price index for 1999.A leap of expenditure in January 2000 under both scenarios can be explained bythe fact that the volume of expenditure each month was estimated as one-twelfthof nominal expenditure envisaged for the current year.

28 In 1997, the enlarged government budget revenues, includingnon-taxes, amounted to 36.4 per cent of GDP and the fiscal deficit and thevolume of its financing, to 6.7 per cent of GDP.

29 See A. Shadrin, "New Municipal Bonds for City Infrastructure",Rynok tsennykh bumag, No.1,1999, pp. 63-67.

30 The Development of the RussianFinancial Market and New Instruments for Attracting Investment, Institute for the Economy in Transition, Moscow, 1998, pp.262-263 (in Russian).

31 See: A. Shadrin, "Asset Security and the Development of anAsset-Based Securities Market", Finansist, Nos. 9-10, 1998, pp. 12-15.

32 See: A. Shadrin, "The Market of Mortgage Securities. A RussianPerspective of US Experience", Rynok tsennykhbumag, No.7, 1998, pp. 62-64, No. 8, pp.73-76.

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