In November, the RF Ministry of financeincreased the monthly quota for the non-residents from US$ 1.5 bn toUS$ 2.0 bn. The substantial demand from foreign investors favored the furtherdecrease of profitability of the State bonds to the 40% annual to the lastthird of October.
An important event from the viewpoint of theState Budget deficit financing and formation of the milestones for the domesticmoney market was the placement, on 15 November 1996, of the last tranche of theEurobonds, for the sum US$ 1 bn. The maturity of these securities is 5 years,the coupon rate is 9.25% annual. The conditions of placement for Russia turnedout more profitable than expected26.
At the end of November, the GKOs-OFZs marketshowed, together with the growth of quotations a significant growth of turnover(see Fig. 1.11, Table 1.5). In December 1996, the State securities marketshowed the further stable prices growth. E.g., in November 1996, the meanweighted profitability of the GKOs to maturity was about 45% to 50% annual; tothe last decade of December it reduced to the 38% annual. The total reductionof profitability in the State securities market permitted the Central Bank toreduce, from 5 December, the guaranteed level of hard currency profitabilityfor non-residents to 13%.
After the elections, the Central Bankreduced, abruptly enough, its behavior in the currency market. The volumes ofthe US Dollar interventions reduced, while the US$ exchange rate growth rateincreased, in August, to 3% (see Fig. 1.12).
The average monthly exchange rate growthrate made 1.45% in the second half-year. This change of the policy was due,mainly, to the significant reduction, during the electoral period, of the hardcurrency reserves: they reduced, in the first half-year, by US$ 3.6 bn. Afterthe elections, the political necessity to maintain the low exchange rate growthrates became less imperative. Hence, the Central Bank softened the exchangerate policy, having reduced the US Dollar interventions and accepted theincrease of the exchange growth rates. The dynamic of the official US$ exchangerate in 1996 is shown at Fig. 1.13.
The wish to slow down the growth of the realRuble exchange rate could be the additional factor of acceleration of the US$exchange rate growth rate. Nevertheless, due to the lower inflation, the growthof the real Ruble exchange rate sharply slowed down already in the firsthalf-year, having made only 5.4% (27.9% for the same period of 1995). Due tothe introduction by the RF Central Bank, in July 1996, of the inclined currencyexchange corridor, the RF Central Bank came, in the second half-year, to thepolicy of the smooth nominal devaluation of the Ruble. In 1996, the growth ofthe nominal rate was 19.8%. As a result, to the end of 1996, the real exchangerate returned, practically, to the level of the end of 1995. As Fig. 1.14shows, there were three periods during the year. The first one (January to May)is characterized by the trend, continuing from 1995, to the growth of the realexchange rate. To the middle of May 1996, the Ruble rose, in comparison withDecember 1995, by 3.5%. Due to the introduction of the inclined currencyexchange corridor, the RF Central Bank came, in the second half-year, to thepolicy of the smooth real devaluation of the Ruble. Hence, from May toSeptember 1996, the real exchange rate reduced by 5.4%. In September, thistrend was replaced by the opposite one, and the third period began.
To the end of 1996, the real Ruble exchangerate practically returned to the level of December 1995. In this connection, itis important to emphasize that the growth of the real course resulted from theuse of the stabilization mechanism of the nominal anchor in 1995, when therelatively high prices growth rates continued by inertia. In 1996, this effectstopped acting due to suppression of the inflation.
In autumn 1996, the decrease of the netinternational reserves of the Central Bank continued (see Table 1.16). Thisprocess was determined by the continuing redollarization of the economy due tothe remaining political incertitude. Besides, the statistical data reflectedthe operations of the Central Bank relative to the redemption of the Ruble sumsof the redeemed GKOs. To the end of the year, the net international reservesgrew somehow: to the end of November they made US$ 2.51 bn (against the minimalvalue US$ 1.34 bn at the end of October).
The policy of the Central Bank, aimed atreduction of profitability in the financial and money markets gave a certainpredictability to the dynamic of the exchange rates, having, thus, reduced theattractiveness of the currency exchange market for the banks. The reduction, inSeptember to October, of the arbitrage spread between the official and marketrates confirms the stabilization of this sector of the market.
Hence, the stabilization of the politicalexpectations to the end of 1996 improved the trust of the economic agents inthe obligations of the monetary powers. In particular, the stability of the RFCentral Bank policy of the currency exchange rate remained effective, despitethe abrupt reduction of the hard currency reserves in September and October. Insuch situation, it is expedient to continue the policy, of the second half of1996, of the controlled exchange rate coordinated with the inflationrate.
The high possibility to forecast the dynamicof the exchange rate in the second half of 1996 improved the possibilities forarbitrage operations in the currency market. With the relative mobilityof the capital, the reduction of the risk favored, for the one hand, the growthof investments in the Ruble assets. For the other hand, in such conditions, thedynamic of the exchange rate needs to be coordinated with the value of thedifferential of the interest rates on the Ruble and US Dollar assets. Hence, tothe end of the year, the dynamic of the main parameters in the financialmarkets was determined, mainly, by the interests parity. In the other words,the increase of the US Dollar exchange rate was approximately equal to thedifferential of the interest rates on Rubles and hard currencies taking intoaccount a small premium for risk.
For 1997, the Central Bank intends to pursuethe policy of the inclined currency corridor. For the end of the year, itsupper limit is fixed at Rbl. 6,350/US$ 1 and the lower limit is fixed atRBL. 5,750/US$ 1. As before, the width of the corridor is Rbl. 600, while thepossible growth of the exchange rate does not exceed 14.2%. However, theCentral Bank will not fix the daily upper and lower limits, thus being capableto regulate the exchange rates changes during the year with moreflexibility.
In the event of favorable development, in1997, the dedollarization process will create the problems similar to thesesurged in the first half of 1995 and resulted in the breaches of the limits ofthe monetary mass growth. The support of the lower limit of the inclinedcorridor fixed by the Central Bank can lead to additional Rubles emission. Webelieve, that the protection of the lower limit is not absolutely necessaryfrom the point of view of support of trust in the anti-inflation policy.However, the most probably, the Central Bank will have to support the US Dollarbecause of the pressure from the manufacturers-exporters and IMF. This seemsexpedient from the viewpoint of the economic growth stimulation, aswell.
1.6. Phenomenon of DeferredGrowth
Today’s Russian conceptions of economicgrowth
The issues of the search for the adequateeconomic growth model have formed the central point of the economic policydiscussions in the post-elections Russia. Strictly speaking, they becamepriorities a bit earlier, already in the end of 1995. During the Duma electoralcampaign, the three main approaches to the solution of the growth problemsdelineated themselves quite clearly: the Governmental (based on themacroeconomic stabilization); the left (inflationist, supposing the productionstimulation on the basis of the artificial extension of the aggregate demand);and the nationalist (protectionism and support by the monopolist structuresexisting in the economy) ones. Moreover, in the today’s Russia, the two latter models areclosely interrelated, from both politically and in essence27.
The important feature of theGovernmental conception is the understanding of the link between the problem ofgrowth and the purposes of the deep structural reform of the Russian economy;the two other models suppose, first of all, the restoration of the pre-reformstructure of the national economy. This contradiction is essential: it meansnot only the preferences for branches of industry resulting from this or thatmodels of growth. The conception of restoration means the accent on theunemployment problem, its priority over the economic efficiency. The above isalways characteristic for the left and nationalist parties positions. Hereby,the issue of the economic growth (not of the macroeconomic stabilization)became the crystallizer for the formation of the positions of the main socialpolicy forces, and, hence, the significative political parties ofRussia.
Notwithstanding the fierce polemics of thepast years as for the role of the macroeconomic stabilization between theopposition and the Government, the mastering of the inflation became the mainreason for the intensified attention of politicians to the growth problems. Theconnection between the beginning of the economic upsurge and reduction of theinflation below 50% annual has been well studied in the economic literature ofthe last years28. This empirical fact formedthe basis of the economic policy of the Russian Government during all the yearsof the radical economic reform. At the same time, this strategy was the objectof severe criticism of the main opposition parties trying to prove theimpossibility to support a low inflation during a long enough period (this wasthe position of G. Yavlinski) or insisting on the radical measures of“restoration of the national economy” rejecting the anti-inflation monetarypolicy (CPRF’sposition).
Thus, the political struggle around thestrategy and tactics of the economic policy shifted to another plan. Theattention became centered at the issue whether the relatively low inflation isa necessary condition for the beginning of the growth. Or, more exactly,whether, under the conditions of the actually finished macroeconomicstabilization, it is possible to stimulate the economic activity by a certainsoftening of the monetary policy.
From the methodology viewpoint, thediscussion of the late 1991 - early 1992 resurged. The political decision onliberalization was accompanied by serious doubts whether the reaction of theRussian economy to such measure would be adequate, whether this measure hassome hidden mechanisms (flaws) due to which the liberalization would not resultin victory over the lack of goods and strengthening of the economicagents’ interest in theRuble. Similar questions surged in 1996, but, this time, because of thecorrelation between the inflation and the economic growth.
However, there exists a series ofpeculiarities. If the prices liberalization is not only necessary butsufficient condition for liquidation of the goods shortage, the onlysuppression of the inflation may be insufficient for the start of the economicgrowth. The economy may conserve the specific mechanisms blocking the growth;this has been shown by the experience of certain Latin American and Africancountries. Moreover, the issue of the growth start in Russia is, as of today,not only economic, but also political, similarly to the role of theanti-inflation policy when solving the stabilization problems, when theinflation level actually reflected the balance of forces between the maingroups of the social economic interests29.
Political prerequisites ofgrowth
The absence itself of the growth officiallyregistered during 1996 is not inconsistent with the macroeconomic regularitiesrevealed by economists based on the stabilization experience of othercountries, first of all, post-communist. Thus, a statistically revealed stableregularity for the latter is the beginning of the growth eighteen months to twoyears after the year in which inflation gets below 50% (i.e., the last year forRussia). Just this logic, the cautious monetary policy accounting for theexpected start of the growth, forms the basis for the post-elections activitiesof the Government. This was reflected in the draft Federal Budget for 1997,which will be discussed below.
However, when estimating the efficiency ofsuch logic, at least two issues of principle need to be taken into account.Firstly, whether the one or two-year time lag natural from the macroeconomicsviewpoint is acceptable politically, i.e., whether the social and politicalsituation in the country is stable enough to go through the extremely painfulsituation of depression without shocks. Secondly, how successfully are formingthe other (besides inflation) prerequisites required to restart the growth. Theanswers to these two questions determine the solution of the key problem oftoday: whether the beginning of the economic growth in Russia will bedeferred.
The problem of stability of the social andpolitical situation cannot be subject of a strict analysis. Though, the mostcrucial points here are obvious enough: the low level of the budget financingof the social sphere, armed forces, and other recipients of budget assets; thebudget non-payments and indebtedness for labor remuneration; the growingdifferentiation of incomes; etc. These factors may become decisive for theevolution of events the next year.
More definite can be the judgment on theeconomic growth factors; here both the macroeconomic and purely political onesare essential. First of all this is the issue of the political stability asprerequisite for the growth of the investment activities for both domestic andforeign investors. B. Yeltsin’s victory at elections and successful surgery created the basicprerequisites for the political stability in Russia. This has already seen itsconfirmation in the attribution to Russia of the high enough (for thebeginning) rating of investing reliability and in the successful placement ofthe first series of eurobonds in November 1996. Another positive factor is thatthe constitutional and legal mechanisms allowed to go through the period of theforced political passivity of the President without any seriousshocks.
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