Russia

BGIE Russia 3/24/11 1. Compare the crises of 1998 and 2008. How were they similar' How were they different' Similar * Crises Correlate to Sharp Drop in Oil Price- Quick fall of the economy was due to high dependence on commodity/oil export prices. Steep decline in oil prices (Exhibit 7) hurt Russia which increasingly derives most of its exports (Exhibit A-1) and tax revenues (Exhibit 5a, 2008) from natural resources. Different 1998: * Internally Caused by Weak Government- Government’s inability to successfully enforce revenue policies was due to lack of administrative capacity to collect, trading tax concessions for political acquiescence, tax evasions by individuals, and “loans for shares” giving rise to powerful oligarchs who lobbied against tax reform. Lack of revenue caused government to issue high yielding (~150%) bonds, leading to a viscous cycle ending in ultimate default. * Lack of Political Will and Resources to Develop Response Plan- Response to crisis was announcing default on domestic debt, devaluation of ruble and stalling of foreign debt repayment. Weak state and government leader did not have resources (federal revenue or reserves) to implement a policy (Exhibit 3) 2008: * Externally Caused by Global Financial Crisis- Began with the liquidity crunch in U.S. and worldwide recession. * Private Sector’s Large Accumulation of Foreign Debt- Represents 28% of GDP compared to only 4% in 1998 (Exhibit3). This opens to the new threat of takeover by foreign lenders. * Comprehensive Response Plan by Government- Pro-active intervention which involved injecting liquidity to major sectors, raising interest rates to fight inflation, and managing gradual depreciation of ruble. * Stabilization Fund- In 2008, government able to draw $215B from fund to which budget surpluses due to soaring oil prices were channeled. This was used to finance the anticrisis plan of direct subsidies, export tariff reductions, refinancing foreign debt, etc. 2. Is Russia in 2010 still vulnerable to political and economic instability' Vulnerable * Government Inhibitions to Entrepreneurship and International Trade/Investment- Economic growth is limited due to the high state involvement (Exhibit 9, as compared to developed countries) thus further preventing diversification into other industries and reliance on natural resources. * Poor Productivity- Labor productivity and total factor productivity growth are at an unimpressive -5.8% and -4.4% respectively (Exhibit 3). Poor positioning to partake in any diversification activity. * Dependence on Raw Materials- Continued reliance on natural resources subjects economy to price volatility. * Corruption and Paternalistic Attitude of Big Government- Mentality is widespread and causes lack of initiative, innovation, and thus diversification. (Appendix B) Not Vulnerable (Ref: Appendix B) * Acknowledgment of Weaknesses Lead to Desire for Progress- Realization of over-dependence on commodities and importance of an open/transparent/cross-party consensus driven government leads to an urgency for change. This will cause continued progress to overcome current weaknesses.