Economy of Russia Essay

Russia as a country has transformed significantly since the collapse of the Soviet Union. The economy has changed from a globally-isolated, centrally-planned economy to a more globally-integrated market based economy. The economy of Russia has gone through fluctuations since then to emerge as the eight largest by its purchasing power parity (PPP) in 2009 estimates (CIA, 2010). The Russian economy is largely dependent on the export of raw materials and natural resources, specifically oil and gas. Other resources include precious minerals, fishing, and agriculture. Since the collapse of the Soviet Union, Russia has undergone two major economic crises. They are the 1998 Russian Financial Crisis and the 2008 Russian Financial Crisis which was a part of the 2008 Global Economic Crisis. This article will examine the performance of the Russian economy after the two crises. In addition, the article will evaluate the current performance of the economy of Russia. The 1998 Russian Economic Crisis After the collapse of the Soviet Union, Russia undertook major economic reforms to transform its economy closed centrally planned socialist economy into a capitalistic market economy. According to the CIA Factbook, the most notable economic reforms in the 1990s were the privatization of enterprises that belonged to the state and the removal of Soviet price controls. The CIA notes further that the rapid privatization of the state enterprises (except in defense and energy related sectors) essentially handed over the enterprises to a few politically connected individuals popularly referred to as ‘the Russian oligarchs’ making equity ownership concentrated to a few. It was during this time that Pinto, Gurvich, and Ulatov noted that the country was plagued with corruption, financial manipulations, and capital looting (capital flight). In 1997, the Asian Financial Crisis began and this led to the fall in commodity prices. As the crisis spread economies heavily dependent on exports were highly affected. Russia’s economy being heavily dependent on world prices was hit hard. Pinto et al point out that the exchange rate of the ruble against the foreign currency was artificially fixed and the subsequent fiscal deficit accelerated the crisis. During the Asian Financial Crisis, the demand for oil and minerals declined and this affected the foreign currency reserves for the country. Poor management of the situation such as Russia’s Central Bank maintenance of the Ruble within a narrow range in the middle of the crisis by using the available foreign reserves made the situation worse. The poor measures resulted in the investors pulling off and inflation rising to over 80 per cent. The bail out offered by the International Monetary Fund and the World Bank did not help the situation. Several banks closed and the government debt increased considerably. The 2008 Russian Economic Crisis The Russian economic crisis of 2008 was an extension of the global economic crisis 2008-2009. A report prepared by the World Bank pointed out that although the Russian economy was better prepared to withstand the financial crisis, its dependence on export of limited commodities made it succumb to the crisis. According to the report, the crisis caused a decrease in capital flows as investors withdrew across the world markets, the credit crunch affected the banking system in Russia, the decrease in demand for oil eroded the fiscal and foreign reserves of the country, and the stock market suffered from the uncertainty of demand for oil (4). The International Monetary Fund noted that anti-crisis measures such as the states guarantee on loans to support the banking sector, the cutting of the interest rate by the Russian Central Bank, and the states support for the housing and car manufacturing helped in managing the crisis. Recession of the Russian economy slowed down and the economy has shown positive signs for recovery although slower than before the crisis. After going through the 1998 economic crisis, Russia undertook some policy and structural reforms with aim of cushioning the Russian economy against such a crisis as well as promoting economic growth and development. The structural reforms were necessary to create regulatory and institutional conditions for business and reduce the administrative risks. Some of the measures that were taken to counter the crisis, according to the World Bank (18- ) include devaluation of the ruble, cash infusion in to the market, tax reforms, privatization, and review of international trade policy. When the ruble was devalued, there was a sudden increase in the price of imported commodities but the move benefited the local industries and they were able to pay off their debts. The local enterprises also benefited from the cash infusion by the state, which in turn led to an increase in the demand for Russian commodities and services. The tax reforms were aimed at creating an enabling environment to stimulate the resumption of economic growth by reducing the tax burden. The reforms were aimed at corporate profit tax, VAT, and the removal of tax privileges that were not justified. The privatization process identified corporations that were to be privatized in 1999 and others in 2000. The international trade policy required reviewing to take into account the devalued ruble and the fluctuating price and demand for oil and raw materials. The Russian government also introduced the stabilization fund to hedge against the fluctuating international oil prices. The recovery from the crisis was however accelerated by the rise in international demand and price of oil. The Russian economy had fallen due to decrease in demand for oil and when the demand rose, the economy started to recover. 2008 Economic Crisis The government of Russia undertook intervention measures to manage the recent economic crisis and ensure that the country was on the way back to economic growth that had been achieved prior to the crisis. Some of the measures taken by the government were injecting funds and supporting the market. The government also offered bail outs for local corporations that relied heavily on foreign investment and hence highly susceptible to the changes in the global market. In addition, the government undertook further tax measures that saw the profit tax reduced to enable the corporations to remain operational. The government lifted import tariffs on industrial equipments to enable the rejuvenation of the affected companies. In a similar scenario to the 1998 crisis, the comeback of the Russian economy occurred after the increase in the international demand for oil. Current Russian Economic Status and Future Prospects According to the IMF, the economy of Russia has recovered from decline but is yet to recover to the levels that it had achieved prior to the crisis. The IMF projects that the Russian economy will 3. 6 per cent in 2010 up from a low of negative 7. 5 per cent. Russian economy is highly susceptible to economic crises due to its overdependence on the commodity markets. This has been evident from the two economic crises that have hit the country since the fall of the Soviet Union. Therefore, for the Russian economy to grow and cushion itself against the fluctuating international prices for commodities there is an urgent need to diversify the composition of the economy. The government of Russia has already taken measures such as investing in the information sector and has risen to become the world third largest software exporter as well as outsourcing. In addition, the government has encouraged the development of agriculture and manufacturing industry through technological and organizational modernization. The agriculture has improved with Russia becoming a net grain exporter rather than a net grain importer as was the case a few years ago. The economic reforms that have been undertaken by the Russian government have the ability to promote the development of a stable economy in the future. Russia is set to gain from the structural reforms that have been instituted and with the vast richness in natural resources and economic diversification, the Russian economy is set to grow and stabilize. References Pinto, B, Gurvich, E and Ulatov, S. â€Å"Lessons from the Russian Crisis of 1998 and Recovery† The World Bank. 2004 â€Å"Russia† CIA World Factbook. 28 April, 2010. 11 May, 2010. â€Å"Russian Federation† The International Monetary Fund. N. d 11 May 2010. < http://www. imf. org/external/country/rus/rr/> â€Å"Russian Federation† The World Bank. 2010. 11 May 2010. < http://web. worldbank. org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/RUSSIANFEDERATIONEXTN/0, menuPK: 305605~pagePK: 141159~piPK: 141110~theSitePK: 305600, 00. html>