Russia: The End of a Time of Troubles?

Russias Economic Reform 1991: Yeltsin sought a year from Nov 1991 to Dec 1992, during which he wanted to bring in radical reforms through young professionals However these young professionals were highly inexperienced there were three categories of Economic reforms: 1. Price and Trade Liberalization 2. Macroeconomic Stabilization 3. Privatization It was known as Shock Therapy Liberalization and Stabilization: The government freed most prices in January 1992. However the reformers sought tight monetary policy. Central Russian Bank went into trouble because of its liberal trade policy This increased the inflation. Finally, the government was able to stabilize at the beginning of 1995 Privatization, 1992-94: Vouchers and Auctions: Privatization: Public assets to the public. Every citizen was given a voucher which could be exchanged for private stock, invested in voucher fund or sold for cash Direct exchange of shock was supposed to happen in a voucher auction 1992-94: 16500 firms were privatized. But a large number of citizens could not participate in this. The government offered current worker and managers of industries preferential access to their firms shares. Option 2 Workers and Managers received 51% of voting shares at a nominal price. Thus, Insiders gained a lot of control ,and restructuring did not happen as projected Privatization, 1995-99: Pledge Auctions: Natural gas, Oil and Mineral deposits were not privatized. The GKI was to deal with those sectors. In 1995, when there was a fiscal crisis, the banks proposed that they would give a loan if they were given control over 29% of State assets, most of which were Oil & Natural Gas industries. Private Banks were allowed to participate but there auction bids were cancelled. Public Banks decided amongst themselves which meant that the auctions were fixed. Ex. Norilsk Nickel - $170.1 million bid on $170 million base price and no competitors. Auction got meaningless. Those who bid it got $ 100 million a month. The Rise of Oligarchs, 1995-97: Yeltsin was losing on his communist rival in the 1996 elections The Rich businessmen of Russia didnt like this outcome. They wanted Yeltsin to win and helped in his presidential campaign: gave access to media, regional contacts and funding Yeltsin won on the sole basis of influence

Vijay Krishnan A DM14257

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Russia: The End of a Time of Troubles?

Russias Economic Troubles, 1991-99 The Ruble, Barter and Demonetization: Russian firms didnt use Rubles in their business. Instead, they were based on barter, as free prices were not allowed. Barter system created problems: Even if the company were performing reasonably good, there were no cash flows involved hence no tax revenue to the government Local stated issued own currency to substitute ruble Local banks issued promissory notes These issues brought in more economic instability. The Regions, Federal Authority and Taxes: A complex federal system: 89 federal units, 21 republic units populated by non- ethnic Russians 2 federal cities, 49 oblasts, 6 krais. Yeltsin asked the states to take as much sovereignty possible in 1991. This resulted in the respective regions claiming independence. Yeltsin had to sign nearly 50 treaties to restore the balance of power Tax laws were enormously complex. Ex. A firm was subject to 17 different taxes which amounted to 110% of the revenue. This lead to under reporting by the firms Tax police was created. Hugely unpopular. In 1996, many casualties reported. Fiscal woes were persistent Contracts, Violent Entrepreneurship, and the Law: To place the economy, Bankruptcy Law, Securities Law and Civil Code were enacted. But there was no effective court system, no independent judiciary Arbitazh courts took care of business disputes. These courts were not maintained well by the government, so they started to work with businesses. Private security businesses were setup. These agencies employed workers with firearms. They were linked with the Russian Mafia. August 1998 Crisis: August 17: PM announcing that government was forced to default on its domestic debt, devalue the ruble and impose a moratorium on repaying foreign debt. Problem due to ineffective tax collection, Bonds were issued at premium rates. Consequences were enormous: drop in real income, standard of living, employment. 1997 Asian financial Crisis cited as a reason Demographic Crisis: Life expectancy had fallen. Birth rates plummeted. Population shrank Public health Infrastructure was collapsing

Putins Plans: Administrative added a layer to federal structure by forming 7 federal super regions. Actions against Oligarchs tax investigations Putin was aggressive in Chechen War. Vijay Krishnan A DM14257

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