Реферат: Russian Crisis Essay Research Paper The improper

The Russian government had to offer high yields on its treasury bills and bonds in order to attract the necessary capital. As a result, the borrowing added a new and heavy debt service burden to the Russian budget. Debt service expenditures have accounted for more than 30% of total Russian expenditures. In 1997 and the beginning of 1998, Russian treasury bill rates were averaging more than 25% per annum. Adjusting for inflation would make the real interest rate around 10%. During the late part of May and beginning of June 1998, the Russian government had to boost interest rates on bonds and bills even higher. Notably, most Russian domestic debt was short-term with an average maturity of around 11 months. That meant the debt had to be constantly rolled over, making the Russian government highly vulnerable to short-term fluctuations of capital markets. About 1/3 of the debt is held by foreign investors. The government also has not been able to rein in subsidies to agriculture, the residents of the far northern regions, and the oil and gas industries. It also has not adequately dealt with social payments to the aged, disabled, and others who require a financial safety net. The increasing burden of debt service made it difficult, if not impossible to address other budgetary priorities. Payments to workers, soldiers, pensioners, and contractors were deferred, building up arrears. Now Russia has not been able to pay banks and other investors who hold the government debt, which has created the current crisis.

In sum, the Russian government survived financially, until recently, by accruing ever growing debt and government nonpayment of fiscal obligations to workers, soldiers, and others. These practices masked the weaknesses in the government’s ability to rein in subsidies and raise revenues. It managed to continue as long as investors were willing to renew short-term debt. But the Asian financial problems and other factors created uncertainty in emerging capital markets on the part of investors, and slumping oil prices made hard currency revenues scarcer, bringing the crisis to a head.

Russian “infection”, spreading the neighboring countries

As for Russia’s impact on the rest of eastern Europe, the fallout has been quickest to hit banks, notably in the Baltic states, and stock markets, with Hungary’s liquid bourse taking the worst pounding. But financial market contagion was not the real evil to the region; the genuine menace lied in the economic impact of ruble and Russian recession.

Take the little Caucasian republic of Armenia, for example. Although Armenia has made good progress in recent years in strengthening trade links with Iran, Russia remains Armenia’s dominant economic partner. That’s true of actual trade, and the supply of credits, and joint projects.

In addition, there are hundreds of thousands of Armenians now living in Russia working unofficially. They send back millions of rubles in wages to their families at home. It’s obvious then that Armenia had direct impact of catastrophe in Russia.

Looking further east, to Central Asia, we find similar ties between Kazakhstan and Russia. The Kazakh government has made efforts to re-align trade southwards and westwards, to Pakistan and Turkey. But Russia still supplies the bulk of the consumer and industrial market in Kazakhstan, and likewise takes Kazakh exports.

The results and suggestions

There are many underlying aspects to Russia’s crisis. The “Asian crisis” spooked fund managers into withdrawing from most “emerging markets.” World oil prices have fallen dramatically, seriously impacting Russia’s exports and balance of trade, Russian tax collections continued to disappoint and, in the few years since economic reform commenced, no significant, viable world class industries have yet emerged in Russia. The Russian Government couldn’t ease the Asian economic crisis or raise international oil prices, and development of competitive world-class businesses within Russia, if it is to happen, will take time.

What lessons should Russia’s leaders learn:

? If the socialist economy no longer functions, the government should try to disinflate as rapidly as possible. A delayed disinflation will be much more painful.

? If the government is confronted with delayed disinflation, it should cut budget deficits radically.

? The illusion of being able to finance the deficit out of a short-term portfolio should be abandoned.

? It should be understood that hardening the budget constraint is important not only for raising budget revenues but also for allowing market mechanisms to work and thus for increasing the efficiency of the economy.

So what is it that Russia can do to assure that it continues to progress towards its rightful place as a world economic power?

At the very least Russia’s political leaders must:

? Understand that the policy of seeking ever more cash from the West is not a policy that will develop Russia politically or economically.

? In short the Duma must accept responsibility for its crucial role in Russia’s future. Short-term political ambitions and partisan hopes that the failure of “Yeltsin’s reforms” will lead to greater political advantage for the opposition in the Duma must yield to the reality that international lenders will not keep lending to Russia forever.

? And most importantly, take immediate, positive steps to encourage long-term foreign direct investment (“FDI”) in Russia.

Why to focus on FDI?

Unlike portfolio investment in equities and debt, FDI directly creates jobs and cannot be withdrawn by a computer keystroke. The comparatively miniscule amount of FDI in Russia should be a source of acute embarrassment to the Duma and a stimulus to prompt, decisive action. Foreign investors do not expect guarantees of profit or protection from market forces. They do require some hope of tax stability and reasonable support, rather than interference, from the Government. To date Russia has attracted a meager amount of FDI even without offering such conditions.

Appendix

Exchange rate of Russian ruble comparatively to US dollar (the denomination in the 1998 is not considered)

Percentage of changing of Exchange rate of Russian ruble

comparatively to US dollar

S. Commander, C. Mumssen, Understanding Barter in Russia. (EBRD Working paper 37, 1998).

Professor A Kennaway The Russian Political Economy 1999. Royal Military Academy Sandhurst

Jeffrey A. Burt, Board of Directors of the Russian-American Chamber of Commerce?. 14 June 1999

Michel Camdessus ;Managing Director of the International Monetary Fund European-American Business Council New York, September 15, 1998