RUSSIAN ECONOMY AFTER

THE 1998 CURRENCY

CRISIS

RUSSIA REDUX? - New Left Review, No. 44, - March-April 2007.

Output is growing, inflation is under control

GDP growth rates and inflation (right axis, log scale) in Russia, %, 1990-2007

-15

-10

-5

0

5

10

1990

1992

1994

1996

1998

2000

2002

2004

2006

1

10

100

1000

10000GDP growth rates

Inflation (CPI, Dec. to Dec.)

Unemployment is falling

Unemployment rate, ILO definition, % of labor force, annual averages

7

8

9

10

11

12

13

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FOREX increased in 2007 to over $400 billion, but RER keeps growing

Fig. 5. Real effective exchange rate, Dec. 1995=100%(left scale), and year end gross foreign exchange reserves, including gold, bln. $ (right log scale)

0

20

40

60

80

100

120

140

160

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071

10

100

1000

REER

FOREX

Fig. 2. GDP change in FSU economies, 1989 = 100%

25

35

45

55

65

75

85

95

105

115

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Central Europe

Uzbekistan

Belarus

Kazakhstan

Estonia

Turkmenistan

Azerbaijan

Latvia

Lithuania

Tajikistan

Russia

Kyrgyzstan

Armenia

Ukraine

Georgia

Moldova

The dynamics of HDI in Belarus is better than in Russia, not to speak about China or Cuba

Human Development Index for China, Belarus, Russia and Ukraine

0,63

0,65

0,67

0,69

0,71

0,73

0,75

0,77

0,79

0,81

0,83

1990 1992 1994 1996 1998 2000 2002 2004

CubaRussia BelarusUkraineChina

Russia was leading in economic liberalization, while Belarus was lagging

Private sector share in GDP, %

0

10

20

30

40

50

60

70

80

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Russian FederationUkraineBelarus

But Belarus and Uzbekistan are doing better (even though they are net importers of fuel), not to mention net

exporters like Azerbaijan, Kazakhstan, Turkmenistan GDP in 2006 as a % of 1989

TurkmenistanPoland

Estonia

Slovakia

BelarusHungary

Czech RepublicArmenia

KazakhstanAzerbaijan

RomaniaLatvia

LithuaniaCroatia

BulgariaRussia

KyrgyzstanTajikistan

UkraineGeorgia

Moldova

Uzbekistan

SloveniaAlbania

40 60 80 100 120 140 160 180

Russian growth is lagging behind that of oil exporters and some oil importers Average annual GDP growth rates in CIS countries in 2000-07, EBRD

estimates

02468

10121416

Kyr

gyz

stan

Uzb

ekis

tan

Mo

ldo

va

Ru

ssia

Geo

rgia

Ukr

ain

e

Bel

aru

s

Taj

ikis

tan

Kaz

akh

stan

Arm

enia

Tu

rkm

enis

tan

Aze

rbai

jan

In the 1990s mortality rate rose to the highest level in the postwar period

Fig. 2 Mortality rate (per 1000) and average life expectancy, years

6

8

10

12

14

16

1950

1953

1956

1959

1962

19651968

1971

1974

1977

1980

1983

1986

19891992

1995

1998

2001

2004

2007 (1st half)

Mor

atlit

y ra

te, p

er 1

000

inha

bita

nts

63

6465

66

67

6869

70

Ave

rage

life

exp

ecta

ncy,

yea

rs

Mortality (left scale)

Life expectancy (right scale)

In the 1990s the murder rate tripled or quadrupled

Fig. 1. Murder rates and suicide rate per 100,000 inhabitants

5

10

15

20

25

30

35

40

45

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

(Ist

hal

f)

Murder rate (crime statistics)Murder rate (death statistics)Suicide rate

August 1998 currency crisis

Number of billionaires per 1 trillion dollars PPP GDP in 2007, by country

ArgentinaChina MainlandIndonesiaGreece PortugalCzech RepublicRomaniaThailandSouth AfricaBelgiumJapanColombia PhilippinesNetherlandsItalyFranceMexicoSouth KoreaPolandIndiaAustriaDenmarkTaiwanEgyptVenezuelaBrazil

United KingdomChileSpainSerbiaAustralia

NorwayUkraineCanadaGermany

OmanSwedenIrelandSwitzerland

New ZealandSingaporeUSA

MalaysiaRussiaSaudi Arabia

TurkeyKazakhstanUnited Arab Emirates

IsraelKuwait

Hong KongCyprus

LebanonIceland

0 50 100 150 200 250

Number of billionaires in 2007 and PPP GDP in 2005 (billion $) by country

R2 = 0,6811

-50

0

50

100

150

200

250

300

350

400

450

0 2 000 4 000 6 000 8 000 10 000 12 000

US

ChinaJapan

IndiaGermanyRussia

UK

Relevant papers : http://www.carleton.ca/~vpopov

•  Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. - Comparative Economic Studies, Vol. 49, Issue 1, March 2007, pp. 1-31.

•  Democracy, Quality of Institutions and Economic Growth (co-authored with V. Polterovich). – In: Political Institutions And Development. Failed Expectations and Renewed Hopes. Edited by Natalia Dinello and Vladimir Popov. Edward Elgar Publishing, 2007.

•  Reform Strategies and Economic Performance of Russia’s Regions. – World Development, Vol. 29, No 5, 2001, pp. 865-86.

•  Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession). – Comparative Economic Studies, Vol. 42, Spring, 2000, No. 1, pp. 1-57.

Fig. 5. Government expenditure, % of GDP

0

10

20

30

40

50

60

1985 1989 1995 1978 1985 1994 1989 1996

Debt service

Defence

Subsidies

Investment

"Ordinarygovernment"

P O L A N DC H I N A

U S S R / R U S S I A

S o u r c e : ( P o p o v , 2 0 0 0 ) .

Collapse of the public spending Fig. 6. Consolidated government revenues and expenditure, % of GDP

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenues

Expenditure

Deficit Surplus

Russia missed the opportunity to use the windfall profits from oil and gas exports to repair the damage done to the

public spending in the 1990s Fig. 3. Government budget revenues and expenditure, % of GDP

10

15

20

25

30

35

40

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Consolidated budget

Federal budget

Revenues

Expenditure

Expenditure

Revenues

Corruption Perception Indices

2

2,5

3

3,5

4

4,5

5

5,5

1980-85 1995 2002 2003 2004 2005

ChinaRussiaIndia

Control over corruption indices in Russia and China (points, ranges from -2.5 to +2.5)

-1,10

-0,90

-0,70

-0,50

-0,30

-0,102005200420032002200019981996

ChinaRussia

Government effectiveness indices in Russia and China (points, ranges from -2.5 to +2.5)

-0,80

-0,60

-0,40

-0,20

0,00

0,20

2005200420032002200019981996

ChinaRussia

Rule of law indices in Russia and China (points, ranges from -2.5 to +2.5)

-1,00

-0,90

-0,80

-0,70

-0,60

-0,50

-0,40

-0,30

-0,202005200420032002200019981996

ChinaRussia

Macroeconomic policy after the crisis Annual growth rates of real wages, real incomes and productivity, %

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006

Real wagesReal incomes Productivity

Why real incomes and wages grow faster than productivity? Figure  1.  Growth  Rates  of  GDP  and  GDI

-‐10

-‐5

0

5

10

15

20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

GDP

GDI,  Pm

GDI,  Pda

%

S ourc e:  Kuboniwa,  2007.

Macroeconomic policy after the crisis Growth of real investment and total (private and

government) consumption, 1991=100%

0

20

40

60

80

100

120

140

1991 1993 1995 1997 1999 2001 2003 2005

Consumption

Investment

Macroeconomic policy after the crisis

Structure of Russian GDP, %

0%10%20%30%40%50%60%70%80%90%

100%

1991

1993

1995

1997

1999

2001

2003

2005

Net export

Investment

Governmentconsumption

Privateconsumption

In 1995-98 exchange rate was pegged to the dollar, inflation fell, but RER increased greatly, and FOREX decreased

Fig. 5. Real effective exchange rate, Dec. 1995=100%(left scale), and year end gross foreign exchange reserves, including gold, bln. $ (right log scale)

0

20

40

60

80

100

120

140

160

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071

10

100

1000

REER

FOREX

Goods export and imports to Russia, billion $, annual data

0

50

100

150

200

250

300

350

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Export

Import

Fig. 4. Goods export from and import to Russia, billion $, monthly data

0

5

10

15

20

25

30

1994 1

7 1995 1

7 1996 1

7 1997 1

7 1998 1

7 1999 1

7 2000 1

7 2001 1

7 2002 1

7 2003 1

7 2004 1

7 2005 1

7 2006 1

7 2007 1

ExpImp

August 1998 currency crisis

Fig. 5. Real exports and imports of goods and services, national accounts statistics, 1995=100%

60

80

100

120

140

160

180

200

220

240

260

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

EXPIMP

Balance of payments items, Russia 1992-2007, billion $

-200000

-150000

-100000

-50000

0

50000

100000

150000

200000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 (e

st.)

Capital account, including"errors and omissions"

Change in Reserves

Current Account

Private capital flows (mln.$, left scale) and oil prices (cents a barrel - right scale) in 1994-2004, million $

-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

1994 I

IV III II 1997 I

IV III II 2000 I

IV III II 2003 I

IV III

0

500

1000

1500

2000

2500

3000

3500

4000

4500 PCF

Oil price

CORR between private capital

flows (including errors and

omissions) and oil prices = 0.16

Oil prices grow, but GDP growth does not accelerate

Fig. 6. Oil prices (2006 $ a barrel, right scale) and GDP growth rates in Russia (%, left scale), 1990-2007

-15

-10

-5

0

5

10

15

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 (estimate)

0

10

20

30

40

50

60

70Oil price

GDP growth rates

Oil prices in 2006 $ per barrel(1869-2006)

Russia's external debt, billion $

0

40

80

120

160

200

240

280

320

1.01

.199

8

1.01

. 19

99

1.01

.200

0

1.01

.200

1

1.01

.200

2

1.01

.200

3

1.01

.200

4

1.01

.200

5

01.0

1.20

06

01.0

1.20

07

Non-financialenterprises

Banks

CB(includinggovernmentdebt to IMF)Government