Transcript Slide 1

Back in the USSR
• The Soviet, centrally planned, system began in the USSR in
the 1920's.
• In the early decades the system of planning allowed the
emphasise to be on capital goods production and created
quite high levels of economic growth.
• However by the 1980’s the Soviet Socialist economic
system with its inherent features, like state monopoly of the
means of production, severe regulation of all aspects of
economic activity, and its equality of income distribution
failed to provide efficiency and improved living
standards.
• Russia started its transition to a market economy in the
late 1980’s due to economic factors, regardless of any
politicians’ ideas or wishes.
• The goal of the radical reforms was to create a new
economy based on competition of enterprises, incentives
for employees and freedom from the control of
bureaucratic state administrative authorities.
Transition to a Market
• The low level of efficiency of Russia’s economy greatly
affected the nation’s living conditions. By the end of 1991 the
consumer goods market could not function.
• For example, to buy a television set, a washing machine, a car
or a carpet the people had to wait their turn for several months
or even years. In supermarkets often only empty shelves
could be seen, the shops sold goods in exchange for special
tokens that proved to be very often useless. People from
provincial towns had to go to the capital (Moscow) to buy
foodstuffs, like sausage or butter, etc.
• Under those severe conditions economic reforms began. The
first step taken was the liberalisation of prices for consumer
goods and services and a centralized system of resource
distributions was abolished.
Transition to a Market
• The prices of goods and services were to be determined
by market forces, not set by the State.
• Mass privatisation of State and municipal enterprises
was started.
• By 1994, 70 percent of Russia's large and mediumsized enterprises were privatised along with about
90 percent of small enterprises.
• The reforms were designed to encourage personal
initiative and individual ownership of businesses.
• Commodity and stock exchanges were introduced.
What were the effects of the
reforms?
• The reforms were largely introduced as ‘shock therapy’.
They were designed to move the economy quickly
towards a market system. While it was recognised that
the ‘shock therapy’ was going to cause some initial pain,
it was supposed to bring relatively quick positive results.
• In 1992, the first year of economic reform, retail prices in
Russia increased by 2,520 percent. A major cause of
the increase was the decontrol of most prices in
January 1992, a step that prompted an average price
increase of 245 percent in that month alone.
Inflation in Russia
CPI
3000
Inflation
has declined
to 4.3%
in 2012.
2500
2000
% 1500
1000
500
0
1991199219931994199519961997199819992000200120022003200420052006200720082009201020112012
Economic Growth in Russia
GDP
10
8
6
4
2
0
1991
%
-2
-4
-6
-8
-10
-12
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010
2011
2012
The GFC increased unemployment
Unemployment Rate
14
12
Unemployment
fell to 5.2% in
2012.
10
8
%
6
4
2
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010
2011
2012
Increasing underemployment
• Underemployment is a major
issue in Russia. Many people
run their own businesses
because they can not get jobs
but do not earn above a
subsistence income.
• Underemployment rose from
2.8% in 1993 to 16.7% in 1994
but has since declined to 5%
adding to the 5.2%
unemployment rate in 2012.
• Less than a quarter of the
unemployed receive benefits.
Unemployment is much higher
in regional areas
Real Wage Growth
Real wages
30
20
10
0
1991
%
-10
-20
-30
-40
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010
2011
Percentage Change in Households’
Real Income, Wages, and Pensions
Increased income inequality
• The move to a market system has increased
income inequality and especially in the mid-90’s
the level of poverty.
• The gini co-efficient rose from 0.26 in 1991 to
0.41 by 1994 and was 0.42 in 2010.
• The proportion of income, which belongs to the
20 % of the richest people in Russia, was 32.7%
in 1990 rising to 46.6% in 2006.
• The proportion of income, which belongs to the
20% of the poorest people in Russia, was
9.8% in 1990 declining to only 6.1% in 2006.
Quality of Life
• The quality of life declined in Russia in the 1990’s with
recession, rising unemployment, hyperinflation and
declining real incomes.
• The percentage of the population living in poverty rose
to 34% in 1992-3.
• The average life expectancy fell from 69 years in 1990
to 64 in 1994. For men it was even worse falling from
64 in 1990 to only 57 in 1994.
• Suicide rates also increased along with crime rates
and the level of mental illness.
Quality of Life
Quality of Life
• In 2011 the life expectancy of a male improved to
63.4 years and 75.4 years for a woman.
• Increased unemployment and lower incomes all
increased the suicide rate.
• Russia now has the second highest suicide rate in
the world after Lithuania.
• Russia has also been affected by HIV/AIDS.
• Russia has the fastest growing HIV rate in the world,
with new cases doubling every 12 months.
Exchange Rate
• The high inflation led to a loss
of purchasing power and a
decline in the value of the
rouble.
• In 1991 there was 0.17
roubles to a US$ by 2002 it
took 32 roubles to get 1 US$.
• A loss of value of 188 times
its purchasing power.
• It improved to be 24.5 roubles
to a US$ in 2008
• But declined again in 2012 to
31 due to lower oil prices
and economic uncertainty.
The Putin Reforms
• President Putin has been responsible for the greatest
improvements for the Russian economy and the people of
Russia.
• His main reforms have been:
 A Labour Code was adopted that more securely protects the
right of employees.
 The government has adopted a Tax Code that has created a
more favorable business climate.
 The Government has paid particular attention to changing the
tax system to reduce tax avoidance and evasion.
The Putin Reforms
Social programs to increase and
speed up the payment of pensions,
allowances, and salaries to
employees engaged in the public
sector.
 In the mid-nineties delays were often
6-12 months.
For this extensive modernisation of
the economy, the government intends
to create and guarantee a favourable
investment and business climate, to
have predictable and stable
macroeconomic policy and to realise
structural reorganisation of the
economy.
What have been the effects?
By 2007 Russia had achieved:
 Economic Growth at 7.7%.
 Unemployment has fallen to 6.2%
 Inflation has declined to 11%.
 Real wages have risen 15% a year (2000-7).
 Real Pensions have increased 15% a year (20007).
 Real Income per capita has increased 10% a year
(2000-7).
 The budget was a surplus.
 The current account was a surplus of almost $74
billion US in 2007 but is expected to move
towards a balance by 2010.
The Success Story
 There has been a major increase in foreign direct
investment into Russia since the reforms began. Many of
these ventures are joint ventures, between Russian and
foreign firms.
 Foreign investment has risen considerable since 2006 with
69% going into exploration and mining of fossil fuels (mostly
oil).
However, trade is very
dependent on oil prices
As is the Russian budget
What reforms have ocurred?
 The success of President Putin’s policies can be shown
by economic growth and living standards rising.
 The Government has introduced Capital Adequacy
requirements for banks to increase the security of the
banking system to encourage savings and investment.
 According to regular public opinion polls the President’s
policies to deal with crime, corruption, and poverty were well
supported.
 Crime and corruption still remain major issues.
 There are still many challenges facing Russia. Much of its
recent economic success has been due to rising world oil
prices (its major export). This has provided tax revenue to
the government and also spurred spending and growth.
 Declining oil prices may slow the economy down and create
budget shortfalls.
 Inflation and relatively high unemployment still remain
problems.
Dmitry Medvedev?
 Due to constitutionally mandated term limits, Putin was
ineligible to run for a third consecutive Presidential term.
 In March 2008 Russia elected a new president – Dmitry
Medvedev
 Putin was then nominated by the latter to be Russia's
Prime Minister
 Policies are likely to keep following the same pattern –
 The government has created state owned monopolies in
the key economic sectors, eg, oil, gas.
 They have secured the country's natural resources and
key economic sectors from private interests, whether
foreign or local.
 The Government aims to attract private foreign
investment into both minority investments into state
controlled monopolies and into direct foreign owned
enterprises.
The Impact of the GFC
The Global Financial Crisis had a major impact on
the Russian Economy.
 Falling oil prices have drastically reduced national
income and government revenue.
 Unemployment rose to 9.9%
 Economic growth fell by 10.1%
 The rouble lost 20% of its value in 2009.
 Russia went from a budget surplus of 3.6% of GDP
to a deficit of 6% of GDP.
The Impact of the GFC on
Poverty in Russia
Policy responses to the GFC
• Government anti-crisis measures including a
stimulus package which sent the budget into deficit
of 6.5% of GDP.
• It was used to bolster wages, pensions, and other
benefits.
• This helped reduce the poverty rate in 2009 to an
estimated 14%
• Bringing the number of people living below the
subsistence minimum (equivalent to about $169 per
month) to below 20 million.
• The World Bank estimates that the poverty level will
return to the pre-crisis level of 12.5% in 2010.
Where to now?
• The Russian economy is recovering and will
continue to do so if oil prices average over
$70 US a barrel.
• The lower rouble will help Russian
competitiveness.
• Strong fiscal stimulus from the government
should cushion the worst effects of the
recession.
• However many of the underlying problems of a
narrow export base and inefficient industries
remain.
The rebound has started
What are the challenges?
• Structural reforms have stalled in recent years,
although there are increasing calls to modernize
the economy and reduce its dependence on oil.
• The crisis has further increased the dominance
of the State in Russia’s economy,
• Reducing inefficient and weak enterprises’
dependence on state support, accompanied by
significant restructuring, will be a central, yet
difficult, challenge in the years ahead.
What are the challenges?
• The World Bank (2011) considers that Russia’s
short-term economic and fiscal situation
remains favourable because of high oil prices.
• But the balance of macroeconomic risks has
shifted toward an uncertain growth path as
inflation pressures subside and external risks
associated with sovereign debt issues in Europe
and the USA create economic uncertainty.
• In 2012 Putin returned as President. He is trying
to gain more control over the oil industry which is
Russia’s main export earner. But this may also
dampen investment.
A Western view of Russian
economic reform