Russia’s Economy

The Soviet Economy state ownership of almost all economic resources; collectivized agriculture; “command planning”: central planning for all production units; centralized price setting and distribution; preference for manufacturing industry over consumer goods; “from each according to his ability, to each according to his needs”

The Soviet Economy, Cont’d basic goods and services were available and affordable; employment; improvement in living standards; rapid industrialization; economic decline by 1970s; exploration of oil and natural gas; lack of structural reform stagnation

The Gorbachev Years Mikhail Gorbachev ( ) perestroika (restructuring of the economy) workers’ cooperatives and individual labor activities; creation of a small private sector; reduction in planning and allowing managers more autonomy; no real structural reform and marketization of the economy: big industrial plants remained in state hands and continued to be subsidized by the state; controlled prices, despite price reform; full employment continued; lack of bankruptcy laws; lack of incentives for private companies to compete with state enterprises; growing budget deficit.

From Planning to Market Complete overhaul of the economy, without an existing blueprint; Necessary reforms included: 1. ownership changes and de-monopolization; 2. privatization; 3.bankruptcy and labor market reforms; 4. price reform; 5. monetary stabilization; 6. budget deficits; 7. attract foreign trade and investments; 8. banking reform; 9. legislative reform. “Shock Therapy” vs. gradual reform “Shock Therapy” led to great hardship for the majority of the population due cuts in state subsidies for housing, health care, transport, energy, education, etc.; rise in unemployment; inconsistent remuneration. reducing the role of the state in the economy.

Reforms Price reform: freeing of prices designed to bring about market-driven prices (led to rapid inflation); monetary policy: “Ruble Corridor”; attempts to ensure stable currency, control inflation and increase confidence in the Russian economy; privatization: voucher privatization, auction privatization, “loans for shares” privatization; legal regulatory framework: bankruptcy laws, land ownership, foreign investment, taxation code;

Impact on the Russian Economy Sectoral shift from industry to services; reflects transition from centrally-planned, industry-led economy to a market-based, consumer-oriented one; decline of agriculture; overall decline in GDP; corruption; move toward integration in the global economy.

The Crash of 1998 August 17, 1998: Devaluation of the ruble; curtailment of domestic and foreign debt payments Causes: 1. currency crisis; 2. debt; 3. capital flight; 4. stagnant economy Consequences: focus on macroeconomic reform 1. gov’t policy focused on macroeconomic stability; 2. increase in output and competitiveness of domestic products.

The Economic Boom of Causes of the economic boom: 1. high global prices for oil, natural gas, and metals (e.g., in 1998, oil sold at $10/barrel, whereas in 2008 it sold at $160/barrel);2. increase in production by Russian firms; 3. mixed success of economic policies. Effects: 1) importance of the energy sector (accounted for 2/3 of all export income and 30% of GNI); 2) macroeconomic stability; 1. GDP growth; 2. increased investment; 3. balanced budget; 4. current account surplus; 5. reduction in poverty and unemployment; 6. creation of a stabilization fund. Economic reforms: 1. legislative reform in labor, oversight, custom codes, and land ownership; 2. tax reform; 3. lack of deep-rooted structural reform of the economy.

Crisis and Reform since 2008 Impact of global financial crisis of 2008: decline in GDP (fall in oil prices, decline in consumption and investments); cushioning effect of stabilization fund (Reserve Fund and National Welfare Fund); In 2015 economy is projected to decline by 3.8% and 0.6 % in 2016; inflation is 15-16% The Government’s View: a) Dependence on oil, gas, and lack of efficiency; b) Decline in investments; c) insufficient share of small and medium-sized business d) High costs of production; e) Poor governance.

State of the Russian Economy Completed transition from centrally-planned to market economy; over-reliance on oil, natural gas, and other natural resources; problems associated with “resource curse” 1. makes economy vulnerable to fluctuating energy prices; 2. delays social and economic reforms; 3. “rent-seeking” practices lead to maintaining the status quo; 4. energy production may decline as a result of lack of substantial reforms (corruption, lack of control, etc.) faces the task of modernization and diversification (sectoral and geographic)