Russian Economy Before And After Vladimir Putin - Essay Example

? Russian economy before and after Vladimir Putin Contents Introduction 3 The Economy of Russia 4 The Economy before Vladimir Putin 5 The Economy after Vladimir Putin 8 Political Factors 12 Conclusion 13 Reference 15 Introduction The country of Russia officially named as the Russian federation is situated in northern Eurasia. The republic of the country consists of 83 federal subjects. The country characterizes that of semi-presidential republic. The federation of the country is structured fundamentally. The country has implemented multifaceted foreign policy as is also recognized as the successor state of the former USSR. Till 2009, the country maintained diplomatic relations with around 190 countries as well as with around 140 embassies. Since the fall of the Soviet Union, Russia has emerged as one of the powerhouse in the scenario of global trade. The country adopted a democratic form of government and the regime of free market. The country got its inclusion in BRIC constitution along with India, Brazil and China. The BRIC group leads the developing world in terms of growth and economic transformation. To talk about the market access, most of the goods can be freely imported to the country. The country focused intensely on joining the World Trade Organization after the presidential election of 1999. The accession of the country to the WTO is now complete. Significant amount of progress was made in the last year which paved the way for the accession. The country will benefit from the accession in the long run on several fronts, one of the most important being the discriminatory measures held by the 30 countries against the exports of steel of Russia. It is also anticipated that the accession to the WTO drives in more foreign investments. The country follows the system of harmonized Customs. The Russian history faced difficult times in the first 20 years of the last century. The civil war ruined the country, the people starved because of the economic embargo of the governments. The government was not able to gather pace on the imports as well as exports which was the need of the time. To deal with the situation, the Russian government decided to send a trade mission to UK. The Economy of Russia The economy of the country is ranked ninth in the world in terms of nominal value while the economy is ranked sixth in terms of purchasing power parity. The economy has transformed to a market based economy from a centrally planned one after the collapse of the Soviet Union. The reforms of the 1990 privatized many sectors while the sectors like energy and defence being the exceptions. Macroeconomic stabilization as well as restructuring of the economy can be regarded as the indicators for transition from centrally planned to an economy that is based on the market. Macroeconomic stabilization entails implementation of monetary and fiscal policies. The aim of implementation is promotion of economic growth that will pave the path for stable prices and exchange rates. Restructuring of the economy require establishment of entities like commercial or institutional. These entities will allow the operation of the economy in an efficient fashion. One of the footsteps to achieve this goal is to open up the domestic market to foreign trade. The economy thus gets linked with the rest of the world. The bid of the country to join WTO faced a hurdle on the issues of low rate of domestic energy consumption and the closeness of the market for the foreign competitors. The member countries of WTO expressed the view that the country should charge equal prices for oil and gas even domestically. The accession process was boosted as Russia worked out the disagreements on prices of energy as well as agricultural subsidies with European Union. In the year 2003, WTO estimated that the country is positioned 17th in the rank of largest exporters of the world. The minister of trade announced that the country has the potential to gain thousands of dollars once it has access to the regime and the world markets. As the pressure to resort to protectionism is increasing, it is becoming extremely challenging to preserve the current levels of openness. The priority of the Trade Policy Union is to keep the markets open and overcome the barriers in trade. It ensures that trade continues on the sustainable path with the aim to reduce poverty. The imposition of the trade barriers involves some sort of cost on trade. The cost imposed on trade tends to raise the price of the traded goods. A trade war may be the resultant if two or more nations involve themselves into some sort of barriers to trade. Economists are of the opinion that barriers to trade are detrimental and can contribute in decreasing the overall economic efficiency. The trade as well as economic relations with London according to the Russian site BSR witnessed stable progress in the current year. The growth in the Russian economy is predicted by the leading investment banks despite the cooling of the existing bilateral relations. It was thought in Russia that mass privatization will bring employment opportunities and would lay the foundation stone for economic restructuring. The Russian economy will witness a growth flourish. But the real picture is different. The restructuring of the private firms have not gathered pace, the assets of production showed a significant rate of wear, the activities towards innovation dimmed as well as the competitiveness of the goods produced domestically fell. The structure of ownership has emerged as a problem. The characteristics of the Russian firms include the high level of concentration, the dominant owners take direct control over the firms and there are insiders among the dominant shareholders. The Economy before Vladimir Putin The transformation of the economy into a market oriented economy is one of the significant turn before the accession of Vladimir Putin. Since the fall of the Soviet Union the country followed the policies necessary in order to create a market economy. Under the recommendation of the international Monetary Fund and the World Bank the country tended to follow the shock therapy. The policy was not at all successful as it was would be and resulted in economic collapse. Millions were thrown under the vicious circle of poverty. Corruption as well as crime began to spread its network. The removal of the price controls of the Soviet Union coupled with the financial crisis of 1998 resulted in hyperinflation. The country took up the responsibility of settling the external debts of the USSR. Between the periods of 1991 to 1998, the GDP of the country contracted to around 40%. The country had to suffer from the contraction despite it enjoyed large base of natural resources, and strong industrial base. The figure may be misleading as the Soviet Union had to spend a large amount on military and on the production of goods. There was lack of demand for those goods. The wasteful expenditures contributed to create false impression of larger than the actual contraction. Foreign investments as well as privatization of the state enterprises were flooded in the initial periods of the post Soviet Union. But some of the fundamental areas like commercial banking and implementation of the comprehensive laws were ignored. In the initial months of 1992 the government of the country lifted the controls on price and clamped down the creation of credit. The middle parts of the same year witnessed increase of money supply at sharp rates. By the end of the year the money supply increased by around eighteen times. The exchange rate of the Russian currency deteriorated and was the cause of high inflation. The retail prices went up by 2520%. The average increase in price for January, 1992 was 245%. The rate of inflation improved to 224% in1994. The instability of the economy caused variation in the inflation rates. The government achieved to reduce the rate to 4% in August, 1994 but the rate climbed up to 16.45 in December of the same year. The government delimited the imposed restrictions on the credits and tightened the flow of money. For the initial periods of 1996, the rate of inflation was steady at 16.5%. The failure to pay wages by the state enterprises contributed in depressing the demand conditions. A relatively stringent budget was passed on 1995 by following tight monetary policy. The fluctuation of the exchange rates of the Russian currency indicated to instability of the economy. From the inception of the rubel till the middle of 1995, the exchange rate between the current and the U.S. dollar declined from 144 to 5000 rubel for 1 U.S. dollar. Prior to 1992 the rubel was overvalued artificially. The instability of the economy became more prominent when there were changes in the nominal rate rapidly. The announcement of the Central Bank to keep the value of the rubel within a band ranging from 4300 to 4900 for 1 U.S. dollar reflected the implementation of stringent monetary as well as fiscal policies. The government involved itself in building up reserves with which it can defend the currency. In the middle of 1995 the rubel in fact appreciated in inflation adjusted terms. The announcement that the currency was fully convertible on current account basis acted as the indicator for stabilization of the currency. The announcement helped the citizens to covert the currency to other currencies according to their wishes which facilitated the transactions for trade. The enterprises belonged to the state and the ownership was supposed to be shared by all the citizens. The real situation was different. The enterprises were under the hands of few who exploited the situation and became rich. The issued stocks of the state owned enterprises were grabbed by the criminal bosses. The manipulations of finance enriched a group of people and capital flew out of the country in the form of cash or in the form of assets. The analysts have identified decrease in the GDP of the country by 50% from 1990 to 1995. The major sectors like that of agriculture and energy suffered from the transition. The consumption and the output levels declined as retrenchment of workers took place in those sectors in order to operate the sectors efficiently. The activities of the service sector were inaccurately measured and a new private sector emerged in 1996. The country enjoyed some progress by the end of the year 1997. The level of inflation was under control and the currency was at a stable level. The programs related to privatization transferred thousands of enterprises to private ownership. Some of the important laws directed towards market orientation were also passed. An arbitration court was created in order to solve the economic disputes. The year 1998 witnessed a financial crisis of the country. Three elements associated with the financial crisis were identified. The financial crisis hit the banks and the firms of the country, a steady decline in the price of the export commodities of the country and recession characterised by low demand domestically (Mankoff, 2010).The government faced difficulties in raising the revenues and in implementation of the fiscal reforms. In fact the government was dependant on the short term borrowing with the aim to finance the deficits in budget. The financial crisis led to sharp decline in the earnings of the country from the exports of oil. The resultant was exodus of foreign investors. The government had to allow the rubel to depreciate and discontinued the payment of 40 billion dollars in rubel bonds. The Economy after Vladimir Putin The economy of Russia led by Vladimir Putin witnessed double growth in the nominal GDP. The economy climbed to 11th from its previous rank of 22nd in terms of nominal GDP. The average real gains of the economy were at around 7% per year. In the year 2007, the GDP of the country exceeded the GDP of 1990s. It signifies that the country has been able to recover from the effects of recession. The economy can be characterised as the 38th richest economy of the world on purchasing as well as in nominal basis. The economy witnessed 75% growth in the tenure of Putin while the growth in investments was at 125% (RIA Novosti, 2008). The period enjoyed growth in production and the sectors of construction as well. The real income took the steady upward rising curve and the average salary increased by more than 8 times. In the six year period of 2000 to 2006, the volume of consumer credit increased by 45 times (Russia Profile, 2008). The percentage of people living below the poverty line was only 14 in 2008 while the percentage was at 30 in 2000. The government failed to limit the growth of prices and therefore still remained a problem. In the tenure of Putin the inflation was kept under the ceiling for only twice. The inflation began to climb up the ladder and the inflation rate of 2007 exceeded that of 2006. The upward trend was sustaining in the initial period of the following year as well. The economy enjoyed growth opportunities but still it is driven by commodity. A large percentage of the federal budget comes from the payments of oil. Raw materials with fertilizers constitute the primary exports of the country. The economy has experienced fall in exports in the period when Putin was in power. The exports accounted for 20% of the GDP in the year 2000 while the rate fell to just 8.7% in 2007. The economy is characterised by income inequality and the most important point to note is that the inequality is showing no signs of convergence. The income of the poor grew 14 to 17 times less than the growth in income of the rich in the last decade. The persons living on pensions and the unskilled workers are far from experiencing the fruits of development and such a situation is more evident from the income differentiation ratio. The dynamics of industrial production after the crisis showed diverse effects. In the year 2000, industrial production recorded a 12% growth as compared to that of 2009. The growth of the industrial production in 2004 was 4%. The manufacturing sector as well witnessed rapid growth. However the growth rate shuttered in case of heavy machine industry and metallurgy. The increase in the cost of production can be held responsible for this decrease in growth. The economy had to experience sudden shock in the construction sector in the second half of 2004. In the same year the Russian government failed to keep the level of inflation at the targeted level. One again, a significant influx of currency to the country created inflationary pressure and the authorities lacked the capability to handle such pressure. The strict fiscal policy provided some help to the Central Bank. Since 2000, rubel has followed the stable path compared with the foreign currencies. A favourable situation of the market and huge surplus in trade has led to further increase in the currency reserves of the Central Bank. The country is involved in trying to pay out the foreign debts ahead of the schedules. The country signed an agreement with the Paris Club to pay out the 15 billion dollars much ahead than the repayment period. In the last few years the country has recorded significant influx of foreign capital. But it must be noted that such influx is not sufficient for the economy. Only a minor part of the capital influx is formed by foreign direct investments. The bulk of foreign investments in the country are recognized as other investments. In spite the country has achieved good macroeconomic results under the leadership of Putin but the standard of living of the people have been barely affected. The average monthly income of the country was at 210 U.S. dollars in 2004. It was also estimated that 19% of the total population live below the poverty line. It should also be noted that due to lack of means it was not possible to implement the pay rises for the employees as suggested by the federal budget. More than half of the total GDP of the country was accounted by the services sector in 2004. But according to the World Bank, the common use of transfer prices overvalues the services generated while it underrates the value of goods generated. If the transfer price factor is omitted from the calculation the contribution of the service sector in the generation of GDP will be more than 50%. The sectors relating to health services, education as well as municipal services together contributes to only 10% of the total generated GDP. The prime movers of the economy of the country are oil and gas sector. The World Bank estimated that oil and gas together constitute about 20% of the GDP of the economy. The sector absorbs a major part of the investments made in the country. The receipts from the sector make almost 40% of the federal budgetary revenues. The sectors are operating on the growth curve and stimulate the activity of other branches of the economy. The investments directed in the energy sector have brought upsurge of orders for the other sectors as well. On the other hand the inflow of the petro dollars paved the way for increase in salaries for the employed as well as increase in the public expenditures. The tax policy of the country is misleading. The policy is acting towards increasing the fiscal burden of the country. Therefore the link between the prices of oil with the producers of oil has been weakened. The metallurgy sector is undergoing a real boom. The demand in the markets of Asia are growing and creating an excellent opportunity for the international steel and iron market. The building industry and the development in rail services contributed in generating domestic demand. The sector in Russia also has an advantage as the costs of production are relatively low and the resources are easily available and cheap. The sector faces a challenge as well. Although the sector are still profitable but the technologies used are becoming obsolete in comparison to the Western countries. It became clear after the second term of Putin that the country has adopted a well defined policy in order to manage the revenues from oil. Still the economy is very much dependant on the imports of food. The share of the food that is imported into the country exceeds 40%. However there has been growth in agriculture in the recent years but the growth fails to satisfy the demand for food. At the moment the country is the largest importer of poultry products. One of the failures of Putin’s government is that they have failed to influence people to invest in the stock market. The not so good stock market tools prevalent in the country can be accounted as the reason for this outcome. One of the important points to note here is that the situation is changing slowly. People are now engaged in investing in different financial instruments much to the likings of the middle class (Paszyc and Wisniewska, 2005, pp. 2-14). Political Factors There are two perspectives on which the media of China is concerned on Putin’s return. One of them is the Western emphasis of violation of Putin of democratic principles while the other being the relationship between China and the return of the man. The first perspective is a passive one. The Western media rebukes on the anti-democratic rule by the man. The second perspective is much more active. Every single move from the part of Russia is of interest for China. If the Russian politics remains stable then that would benefit China. Putin will also find a chance in order to continue his relations with China. China anticipates Russia to gain enough strength to balance United States with Europe. The anti-Putin protestors severely think that corruption have crawled in into the economy. The people who voted for Putin were of the opinion that a man of Putin’s stature has the capability to check corruption. If measures are not implemented urgently, anti-corruption is likely to become the biggest problem the economy has to deal with. According to Corruption Perceptions Index Russia ranks 154 out of the 178 countries. The ranks were arranged from the least corrupt to the highest corrupt country. A certain organization involved in developing the index analysed that in the year 2006, almost 240 billion dollars were spent on bribes. The amount accounted to 20% of the GDP of the country for 2005. The existing corruption acts as the restraining factor in the opening up of the economy (Gang, 2012). . According to former President Dmitry Medvedev some 35 billion dollars of governmental funds flowed in state contracts in the year 2010 itself. The report stated that the friends and relatives of Putin took the opportunity with both hands and accumulated their fortunes with the help of state companies. Since Putin became the president he tried to restore a sense of order within the country with the view to establish economic stability. Putin’s actions against the obscure punk rock band have been frightening. If Putin would have allowed the band just to sing their songs and protest against the actions of the economy, they would not have been remembered. Instead the actions of Putin legitimised the words. Such actions united the world and raised protests against Putin. If there is loss of freedom, the Russians will find themselves in geopolitical crisis. Such crisis would elevate the tensions persisting with the West to the levels of cold war. At the start of this year, the prevailing taxes on beer rose by 20%. The action was adopted as part of the government’s program to curb beer. The finance plans to further raise the tax on beer by 25% and 20% in 2013 and in 2014 respectively. Conclusion It can be concluded that the reforms carried out under the leadership of Putin failed to change the structure of the economy of Russia. It will however not be wise to ignore the achievements of Putin in transforming the economy but the transformation has been slow and not diverse. A success in a certain sector has compensated the failure for some other sector and so the whole economy failed to reap the benefits. The implemented changes lacked the potential to reduce the importance of the natural resources and make it less dependent on hydrocarbon prices. A majority of the investments were directed towards the oil and gas sectors and so the other sectors suffered from lack of sufficient investments. The economy of the country remains extremely sensitive to the price fluctuations of hydrocarbons. The measures taken from the part of the government may not be sufficient to tackle the situation where the prices of oil drop considerably and remain at the lower level for a long time. A progressive deterioration of the infrastructure and limited outlays on its modernisation may signal increasingly serious breakdowns of entire systems crucial for Russian economy. The business in Russia is becoming dependant on the benevolence of the bureaucrats and the relation of the businessmen with the concerned authorities. The limit of the economy will be restricted if the economy is treated as a political instrument. The election of new president for the country can act as the signal in restoration of stability inside the economy. The entrepreneurs are concerned on the fact that re-entry of Putin inside the office will increase the risk of their investments and the corporate assets will be under serious threats. In 2011, the middle class society along with the forces of the opposition challenged the corrupt processes of election in the country. Such protests aroused questions on the victory of the current president. Many were uncertain about the ability of Putin to deal with the existing problems in the country. Putin acted to the situation with promises to increase the expenditure on public services. There are two diverse challenges that Putin will have to face in the coming two years. Putin will have to deal with the division occurring within the environment of business and the political establishments. The president is also aware with the discontent of the masses arising within the industrial centres. The political journalists arte of the opinion that even if Putin somehow manages to tackle the current situation and restores stability within the economy, he may still find it difficult to retain his power in the elections of 2014. Reference Mankoff, J. 2010. “The Russian Economic Crisis”. [online]. Available at: http://www.cfr.org/financial-crises/russian-economic-crisis/p21803. [Accessed: 11th September, 2012]. RIA Novosti, 2008. “Russia’s economy under Vladimir Putin: achievements and failures”. [online]. Available at: http://en.rian.ru/analysis/20080301/100381963.html. [Accessed: 11th September, 2012]. Russia Profile, 2008. “global Russia calendar”. [online]. Available at: http://www.russiaprofile.org/business/a1187177738.html. . [Accessed: 11th September, 2012]. Paszyc E. and Wisniewska, I. 2005. “The Russian Economy under Putin”. [Pdf]. Available at: http://www.isn.ethz.ch/isn/Digital-Library/Publications/Detail/?ots591=0c54e3b3-1e9c-be1e-2c24-a6a8c7060233&lng=en&id=105372. [Accessed: 11th September, 2012]. Gang, D. 2012. “Corruption remains biggest problem on Putin’s plate”. [online]. Available at: http://www.globaltimes.cn/NEWS/tabid/99/ID/699069/Corruption-remains-biggest-problem-on-Putins-plate.aspx. [Accessed: 11th September, 2012]. Olivant, G. 2012. “Freedom of Speech in Russia Crushed Under the Boot of Strongman Putin: Pussy Riot Jailed”. [online]. Available at: http://aconservativesmusings.com/2012/08/17/freedom-of-speech-in-russia-crushed-under-the-boot-of-strongman-putin/. [Accessed: 11th September, 2012]. Read More