Based on the fact itself of the pre-electionsincertitude and taking into account the absence of a real experience of theeconomy functioning under the conditions of politically significativeelections, one could suppose that, in 1996, in Russia, the conditions maximallycorresponding to the “electoral short-sightedness of the electorate” (includingthe economic agents we discuss) would form. For the one hand, the voters didnot have experience of participation in politically significative elections andit seemed they could not fully realize the responsibility for their results.For the other hand, practically all the runners participated in freePresidential elections for the first time, as well. Hence, the voters could notcompare the promises of the runners with the real policy of the previous years.The latter was true for the CPRF, as well, because it had had, in the visiblepast, no experience of the economy management in market conditions. For thefirst glance, the absence of the political experience must mean the“short-sighted behavior” being the most important prerequisite of the“political-business cycle by Nordhaus”. However, the real course of events doesnot give reasons to accept this thesis, and, hence, unequivocally use thismodel of the economic policy formation. Let us discuss this issue in moredetail.
The economic policy expected for thebeginning of 1996, was the inflationism resulting from both the pre-electionspolicy of Yeltsin and the possible post-elections policy of Ziuganov. Certainfactors allowed to expect a sharp growth of the populist accents in theactivities of B. Yeltsin. Moreover, these factors were understandable for thevoters in whole and the economic agents in particular.
First of all, the cadre President’s solutions of January-February1996 were significative, namely: the dismissal of A. Èubais who had symbolizedthe strict stabilization course; the actual weakening of the political positionof the Prime Minister having implemented this course; and the strengthening ofthe roles of O. Soskovets and N. Yegorov, advocates of the inflationism andprotectionism policy. This brought from the memory the process of 1994, whenthe Duma elections success of the left forces incited the President to rejectthe stabilization course implemented by Ye. Gaidar and B. Fedorov inautumn 1993. It seemed the situation could repeat. Moreover, it was B. Yeltsinhimself to be elected, i.e., the logic of the electoral inflationismcorresponded to the logic of decisions-making in the “inside-outpolitical-business cycle”.
This conclusion was supported by the resultsof the Duma elections. During them, the Governmental course to themacro-economic stabilization was opposed by the forces proposing the two thoughinterrelated but different alternative variants of the economic policy: theinflationist (left) and the protectionist (right) ones. At the elections, theobvious victory came to the followers of the first variant, including, for theobvious program reasons, the CPRF, the agrarians, and “Yabloko”. Many partisansof the inflationist course were also in other fractions, including thepro-Government NDR.
At last, the tonality of theB. Yeltsin’s electoralcampaign having begun in February clearly showed his inclination to theeconomic populism. The travels in regions, accompanied with the promises ofsignificant money payments, the obviously populist campaign for the payment ofthe labor remuneration debts (without delimiting between the debts of theFederal Budget, local budgets, and enterprises to their workers), the suddenproposal to allot Rbl. 16 trln. from the Federal Budget to Checnia - all theseand other decisions were to launch the inflation mechanism ifimplemented.
Differences in behavior of economic agentsin financial and goods markets
A standard reaction on the declaration of thepower on the possible money expansion should be the growth of the inflationexpectations and the relevant change of the pricing policies of corporations(amended contracts). Nevertheless, this did not happen in a direct way: theenterprises did not follow way usual for such event of the prices growthaccounted for in the contracts.
E.g., the polls (carried out during the lastyear) of the managers of enterprises as for their own activities and behaviorof their counter-agents showed a stable trend toward the decrease of theinflation expectations; moreover, the actual decrease has turned out deeperthan the expected one. The above conclusion does not exclude certainhesitations; nevertheless, the above lie within the limits of the possiblemeasure errors. In spite of that, in such event, the fact is characteristicthat the expected (in contrast with the actual) prices growth comes out not inthe pre-elections period, but in the 1996 autumn, thus reflecting the seasonalgrowth of the inflation index. Anyway, the electoral struggle in no practicalway influenced the inflation expectations. This shows the formation of veryrational behavior stereotypes of the economic agents whose activities areoriented rather toward the indexes of the Governmental macro-economic policythan toward the promises of various politicians. (see Fig. 1.1). The abovefigure shows the prices growth expectations index based on the monthly polls(carried out by IET since 1992) of the industrial enterprises following therelevant representative panel7.
The regression analysis reveals the presenceof a significative correlation between this index and the actual inflation(R2 = 0,65, F-statistics: 96.8, t-statistics for the variable: 9,84 è -4,01 forthe free term). The year 1996 showed a stable decrease of the inflationexpectations except the above autumn surge corresponding to the growth of theactual inflation.
The same is shown by the comparisons of theinflation estimates based on the regression model8, accounting for the actualprices growth trend. The first half of 1996 showed a stable discrepancy betweenthe forecast of inflation based on the dynamics of the monetary mass and theactual trend, while the latter shifted toward the lower values. As thedeviation of the actual inflation from the monetary forecast may beinterpreted, at certain conditions, as the dynamics of demand of economicagents for the real cash remnant,9, the above may also,lead tothe conclusion that the pre-elections acceleration of the inflation had notbeen expected (see Fig. 1.2).
The rational behavior of the economic agentshas shown itself, the most obviously, in the exchange market. Under thepolitical uncertainty, it was quite natural to expect an aggravation of theinvestment crisis; indeed, the latter characterized the first half of 1996.Nevertheless, at a conservative enough attitude to the investment activitiesthe activities of the economic agents show the obvious enough trend to the“anticipation”, the readiness to take part in the more risky transactionssupposing the capacity of an effective pursue of the political situation. Fromthis viewpoint, the activation of the stock market observed since march was anunexpected though a well explainable phenomenon. I.e., it began at the timewhen the trend to the growth of the B. Yeltsin’s rating in the public opinionpolls showed itself (see Fig. 13 and Table 1.1).
The dynamic of the stock market in thepre-elections period reveals the two significant moments. The first one is endof March when, following the publishing of the results of the public opinionpolls, the slow growth of the business activities began. The second one is theend of May showing the sharp activation coinciding with the turn of the publicopinion in favor of B. Yeltsin.
Of course, the economic role of this dynamicshould not be overestimated. The very narrow limits of the Russian stock market(in the absolute indication and as compared with the GKOs market) do not allowto speak of any serious scales of the absolute risks. Moreover, as one canjudge, the main agents in the corporate papers markets are the foreigninvestors whose share of investments in Russia is not large; hence the lowlevel of risk. However, even with the above side effects, the dynamic of thestock market is quite indicative, showing the adequacy and rationality of thebehavior of economic agents in the situation of the politicaluncertainty.
To generalize the above, the conclusion canbe made that, judging by the real process of events, the behavior of theeconomic agents reflected clearly enough their understanding of the inflationmechanism. The economic agents well estimated the macro-economic situation,taking into account that the monetary power had enough reserves to hold theinflation under control for a long enough time (at least till the end of theyear), the ratio of forces in the Government, and the limited possibilities ofits inflationist wing, made some rational steps to ensure themselves againstrisks resulting from the risks aimed to anticipate the longer term consequencesof the inflationist policy and (or) the political changes possible as resultsof the Presidential elections.
The political risks consisting in thepossibility of the communist restoration had the maximal influence on the Statebonds and foreign currencies markets situations. The dynamic of the inflationexpectations showed that the economic agents understood the variants of theactions of the Government and the limitations of its policy. The relativeindependence of the inflation from the political processes may be explained bythe differences in the mechanisms linking the risks estimations and the dynamicof the relevant parameters. The high level of the half-year risk in the firsthalf of 1996 incited the change of the financial portfolios structure in favorof the US$ assets. The inclination of the economic agents to reduce the sharesof the Ruble deposits and State bonds while increasing the share of the cashand non-cash hard currency resulted in the sharp growth of the interest ratesand higher pressure on the exchange rate. This is confirmed by the data on thehard currency purchase by the population in the dynamic of the exteriorreserves. Thus, the share of purchase of the cash hard currency in theexpenditures of the population grew from 12.8% as of December 1995 up to 16.9%as of June 1996. At the same time, the share of the population’s expenditures directed to thegrowth of the accumulations in form of deposits and securities dropped from7.3% as of December 1995 down to 3% as of June 1996. (see Table 1.6). Thedecrease of the net exterior international reserves from US$ 5.9 bn as ofDecember 1995 down to US$ 4.1 bn as of June 1996 and to US$ 2.5 bn as ofNovember 1996 is also significative.
At the same time, the high risk ofalteration of the monetary policy in the second half of 1996 (in the event thecandidate of the opposition wins the Presidential elections) did not influenceor influenced in a low extent the expectations of the future inflation, and,hence, the level of the real cash balances and prices in the electoral period.The level of demand for money in the first half-year continued growing despitethe approaching elections, though, maybe, faster than it could be in a normalpolitical system.
We believe that the difference of theintensity of the reaction on the political incertitude is due to the fact thatthe first effect of the alteration of the portfolios structure was due to theeconomic agents acting based on the choice of the optimal structure of savings,while the second process of the change of the demand for money was relative tothe change of the general demand for the consumer and investment goods. Whilethe precautionary measures in the field of change of the savings structure canbe realized relatively quickly and without significant transaction costs, thereduce of the demand for money at the anticipation of the inflation growthneeds more serious and expensive decisions. At the same time, the currency andmoney markets react on the changes or anticipated changes of the economicpolicy much quicker than the commodities markets (due to the commoditiesstocks, inertia of contracts, etc.). In the other words, the crisis of thecurrency and money markets may immediately follow the transition to theproinflationist policy. Yet, this does not mean a sharp and unexpectedbeginning of the inflation. The possible inflation of 1996 could have beenforeseeable for the economically active agents, and, hence, harmless for them.Hence, without the precautionary measures for the event of a sharp transitionto the proinflationist policy, the risk of loss for the savings of the economicagents placed in the financial and currency assets is much higher than the riskof the losses from the inflation tax on the real cash balances.
Pre-election situation of the Statesecurities market
The market of the State bonds turned out themost sensitive to the political incertitude situation. Here, the relatively lowinflation expectations, the comprehension of the impossibility of the sharpchanges of the macro-economic situation within the framework of thepre-elections half-year, and the fear of a radical alteration of the economicsituation after the elections showed themselves clearly.
As of the beginning of 1996, the aggregatevolume of the circulating GKOs and OFZs reached Rbl. 76.5 trln. (seeTable 1.5). The average profitability to redemption, calculated after theaggregated data, was 94% annual at the moment. The first half of January showedthe trend to the decrease of the GKOs and OFZs profitability. The quotationsgrowth is explained by the moderate, if compared with December, volumes of newissues in January and the before term redemption of certain issues of the GKOsand OFZs by the Ministry of finance. As itself, this fact means that theMinistry of finance wanted to revise the temporal structure of the GKOsportfolio in order to reduce the costs of the interior debt servicing. To thelast week of the month, the average profitability for the issues with thematurities 30 to 90 days was 4.3% per month, which was close to the inflationlevel of January. In some extent it was explainable by the decision to accept,in February 1996, foreign investors to the GKOs-OFZs market. As of thebeginning of February, the expected rate of profitability for all the issueswas 82.7% with 56.2% as of the end of the month.