The Russian Financial Collapse
As we all know, before the 1990’s, the Soviet Union was governed under a Communist regime that implemented a planned economy system. Right-wing theorists had always believed that this type of system inevitably led to despotism although the Soviet system had long stood as a contradiction to this train of thought. With the demolition of the Soviet Union , economists believed that this was the final proof that a free-market system is ultimately more efficient then efforts to build an economy through collective action and government intervention. This created an intriguing scenario for free-market economists throughout the world. Suddenly, a country with 150 million people would be implementing an entirely new economic system that would provide opportunities for economists to test there theories out in a real world situation.
Economists believed that by simply implementing this system that Russia ’s economy would rebound immediately. They recommended that the state eliminate all central planning and price controls, privatize state enterprises, and to open the country up to free trade and investment. The free-market system is based on liberalization, privatization, and stabilization and these idealistic economists believed that the implementation of these policies would lead to a ‘free market utopia’ in Russia .
Cynics were quick to point out some flaws in the idealistic thinking of the economists, many of whom were American. First off, the critics noted that historical reference would show that it takes many decades of institution-building for functioning capitalism to rise. Seeing that nearly every other country was decades ahead in the evolution of their own domestic neoliberal system, they felt that these countries would provide superior competition to Russia and that only through state assistance could the Russian system thrive into one that compete globally. They also felt that by reducing government spending and implementing tight monetary polices that a depression would be imminent and that the enterprises of the new Russia would not have the financial capabilities to survive. The IMF, ignored these warnings and went ahead with their neoliberal experiment in Russia .
The critics proved to be right, the Russian neoliberal experiment produced a period of economic shambles that has not been seen anywhere else in over 100 years. In the 7 years between the beginning of 1991, and the end of 1997, Russia ’s gross domestic product was split in half and investments in new plants and equipment had declined by three-fourths. The one area where Russia did benefit was that they became a major exporter of raw materials and metals. However, the IMF’s tight monetary policy made money so scarce that the Russian’s were actually forced to do most of there trades using a barter system.
This financial crisis resulted in the citizens of Russia becoming impoverished at record rates. The buying power of average real wages was split in half, and even those wages were not usually paid on time. About one third of workers were paid on time, one third were paid late, and one third were not paid at all. Much of the population was only able to sustain themselves by growing there own vegetables. On a personal level, many citizens were not able to survive. There was sharp increases in alcoholism, suicide, murder and illness.
While Russia was struggling in epic proportions, there was still a boom in financial markets that led to huge profits for the wealthiest of Russia . These well-connected individuals were able to make fortunes, many of these incomes fueled by Russia ’s biggest export, gas and oil. Not only did these “oligarchs” control the oil and gas, banks and real estate, but they also dominated the government and law enforcement as well as the media. Violence became commonplace as rivals used connections within the military to enforce there decrees.
As outsiders noticed the huge profits being realized by the oligarchs, foreign capital began to come in at a rapid pace ($44 billion in 1997.) Fueled by oil and bank stocks, Russia ’s stock market was among the world leaders in 1997. Also, Russian government bonds were gobbled up and paid absurd real interest rates leading up to the collapse of the economy.
Economists began to realize that the extreme imbalance between Russia ’s financial markets and its collapsing economy did not bode well for the financial future of the country. Ironically, it was an outside scenario that would ignite the fuse that led to Russia ’s financial collapse. In the summer of 1997, a financial crisis hit Asia , specifically Indionesia , Thailand Malaysia and South Korea . The IMF quickly swooped in with plans to restore these struggling economies in emerging markets. By spring of 1998, economists world-wide began to realize that the situation appeared to be bleak well into the future for the Asian economy, which in turn made investors skeptical of all emerging markets. This led to many investors pulling there money out of Russia .
Coinciding with the Asian collapse, a surplus of oil occurred on the world market, which of course led to reductions in the amount consumers would pay for it. Oil had been Russian’s main export. The first six months of 1998 showed that revenues from oil were half of what they were the year before. Without this revenue to pay its foreign debt, investors knew that Russia was in trouble and this only sped up the removal of foreign capital from the Russian market.
As the critics of the implementation of the neoliberal system had pointed out years ago, the Russian system appeared to be doomed from day one. While the neoliberalism had produced an economy that was doomed to fail domestically, Russia ’s financial boom was being driven by two instruments, oil and interest payments on the public debt. Oil, which is a primary product, has notoriously unstable prices, which put Russia in a situation where major or even slight changes in the worldwide oil price could drop the floor out of the financial boom. While many blame the Asian financial collapse, and the resulting oil price drops on Russia ’s downfall, eventually another event would have occurred with just as drastic results to the oil price.
The other factor in the collapse was directly tied to the failure of the neoliberal system. Russia was maintaing a budget deficit of 5 percent of the GDP and was financing it by selling short-term bonds. The new tight-fisted monetary policy which led to reductions in public spending were expected to help reduce the deficit, however the income from public taxes declined even faster. Coupled with the fact that the Russian’s who were actually making huge amounts of money were to powerful to be taxed and Russia had a situation where they were forced to rely on borrowed funds. This created a scenario where Russia was highly vulnerable to a raise in the interest rates. When this occurred, Russia ’s economy was doomed.
While this case appears to be a specific example of how the neoliberal system failed, many other experts argue that in fact, Russia ’s system was not very liberal at all. These theorists point to the rampant corruption and greed amongst the powerful elite and claim that there self-interests were placed ahead of the overall well-being of the Russian economy.
Before the reform, when the state-controlled the prices in Russia, the best way to make money was to purchases mass quantities of commodities like oil or metals and then sell them abroad at world prices. However, these arbitrage scenarios could only be capitalized on by a select few of Russia ’s elite who were well connected enough to get the necessary licenses and privileges to capitalize, basically embezzling money from the general public. Eventually, after billions of dollars had been funneled into the hands of the powerful elite, the reformers succeeded in deregulating the prices of the commodities.
The other way that corruption of the top officials undermined the liberal system was through getting abnormally cheap credits from the Russian Central Bank. Basically, the chairman Ruslan Khasbulatov, exhorted his influence to arrange for bank loans to the elite which in essence amounted to gifts. In 1992, the net credit issue of the Bank was 32 percent of the Gross Domestic Product. The bankers argued that it was a “Keynesian” boost to industrial production, but in reality production was plummeting throughout the country from the results of the hyperinflation.
These two ventures, couple with high levels on scandal in food-import subsidies accounted for 79 percent of GDP in 1992. Experts argue that if the true liberal system had been implemented by then, with commodity prices and interest rates being deregulated that a lot of Russia ’s problems would have been prevented. Instead, the oligarchs continued to capitalize on the price fixing and the slow and partial reforms.
The irony behind the whole situation is that while Privatization is blamed for Russia ’s problems, the biggest critics have been the elite Russian’s who had profited from the system. The problem is not that the businesses have become private, but that the government is still so corrupt and there are so many vague laws that the private ventures never really stood a chance. The powerful are clearly more concerned with there own bank accounts then with the social welfare of the people and as long as these people are in power it will be hard to change this anomaly.
There are signs that steps are being taken in that direction. Many of the top directors from the Soviet Union era have been replaced. Russia now had 2.7 million legally registered enterprises. Slowly, but surely the people in power from the corrupt practices of yesteryear are falling from grace and a new wave of businessman who capitalized on entrepeneurship are beginning to arrive.
You can get Economics papers help from professional academic writers.