Transcript Slide 1

Back in the USSR
• The Soviet, centrally planned, system began in the USSR in
the 1920s.
• 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 1980s 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 1980s 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
1991
250
69
1992
2500
68
-40
4.8
1993
840
65
0
5.9
1994
215
64
-8
7.3
1995
131
65
-28
8.4
CPI
1996
22
66
13
9.4
1997
11
67
5
11.1
1998
84
1999
37
2000
20
2001
19
2002
15
-10
12
-22
12.9
21
19.5
20
9
16
8.1
2003
12
65
11
8.6
2004
12
11
8.2
3000
2500
2000
CPI
1500
1000
3000
2500
0
2000
1500
CPI
1000
3000
500
2500
0
2000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1500
1000
500
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
500
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
CPI
Life exp.
Real wages
Unemployment
2005
11
2006
10
Inflation
has risen
from 6.5%
in 2013 to
8.3% in 2014.
ment
Economic Growth in Russia
5.9
8.4
11.1
12.9
9
8.6
GDP
10
10
88
66
44
22
00
2001
2003
2005
20072007
20092009
20112011
2013 2013
2014
1991 1993
19931995
19951997
19971999
1999
2001
2003
2005
-2 1991
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
-12
The GFC increased unemployment
Unemployment
rose to 5.1% in
2014.
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 5.1%
unemployment rate in 2014.
• Less than a quarter of the
unemployed receive benefits.
Unemployment is much higher
in regional areas
Real Wage Growth
1993
1
5.9
1995
-28
8.4
1997
5
11.1
1999
-22
12.9
2001
20
9
2003
11
8.6
2005
6
2007
15
2009
-4
2011
9
2013
4.5
30
20
10
0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014
%
-10
-20
-30
-40
2014
-1.2
Increased income inequality
• The move to a market system has increased
income inequality and especially in the mid-90s
the level of poverty.
• The gini co-efficient rose from 0.26 in 1991 to
0.41 by 1994 and was 0.42 in 2014.
• The proportion of income, which belongs to the
20 % of the richest people in Russia, was 32.7%
in 1990 rising to 47.0% in 2010.
• The proportion of income, which belongs to the
20% of the poorest people in Russia, was
9.8% in 1990 declining to only 6.5% in 2010.
Poverty and Inequality in Russia
Quality of Life
• The quality of life declined in Russia in the 1990s with
recession, rising unemployment, hyperinflation and
declining real incomes.
• The percentage of the population living in poverty rose
to 34% in 1992-3.
• It stood at 13.1% in 2014.
• 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.
• In 2014 male life expectancy reached 69 years.
• Suicide rates also increased along with crime rates
and the level of mental illness.
Quality of Life
• 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 2014 to 49
due to lower oil prices and
economic sanctions and
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 were 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 in 2014.
However, trade is very
dependent on oil prices
Russia’s share of world oil
output (%)
As is the Russian budget
As is the Current Account
What reforms have occurred?
 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.
The Impact of the GFC
The Global Financial Crisis had a major impact on
the Russian Economy.
 Falling oil prices 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.
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 since 2009.
• 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
returned to the pre-crisis level by 2012.
Where to now?
• In 2014-15 the
Russian economy is
facing a number of
challenges.
• Oil prices declined
considerably in 2014
leading to lower
national income and
budget revenue.
What are the challenges?
• Russia’s economy is stagnating.
• Seasonally adjusted growth for the first two
quarters of 2014 was near zero.
• 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 increased uncertainty brought about by the
Russia-Ukraine tensions and related sanctions by
the Western Nations impacted investor and
consumer decisions.
• Consumption was negatively impacted by the
geopolitical tensions through the sharp depreciation
of the Rouble and related inflation pressures.
• The cost of buying in US dollars rose 50% in 2014, as
the rouble declined from 33 to a US dollar to almost
50 to a US dollar.
Russian Ruble
What are the answers?
• Apart from the political issues. The World Bank
considers that:
• Structural reforms would need to focus on
improving economic institutions to ensure that
public finances are stable and economic volatility
well-managed
• There are improvements in education and
infrastructure to make workers more productive
• There should be strong competition regimes to
encourage private enterprise and
entrepreneurship.
The Way Ahead
• Stabilisation, transparent rules, better
quality of public investment, and
competition should be the reform priorities
for the next decade.
A Western view of Russian
economic reform