Russian Economic Framework Country Analysis Framework Looking at the Russian Economy Focus of a country framework A country framework for these medium-term considerations should yield results useful for investment planning, policy choice, and financial reimbursement where appropriate. This is the focus of the framework outlined in this paper. This framework does not explicitly cover longer term and global level assessments, although one could use an essentially similar framework for those as well. This paper outlines a framework, not a methodology. It is compatible with many different specific methods. The reason for preserving this flexibility is that there are many methods, reflecting somewhat different traditions in modeling and country expertise, and each of these may have its own field of appropriate use. These methods are also evolving rapidly.
Yet it is useful to identify, in the midst of these varied circumstances and rapid evolution, which particular general features are essential, or at least highly desirable, and to state these explicitly. The Harvard Business Notes Framework is very comprehensive but not focused to specific line of industry. 1 Country studies 1.1 Background 1.2 Types of country studies System boundaries Global level Country level Sector level Time frames 1.3 Country framework 2 Comparative analysis 2.1 Comparisons 2.2 Baseline strategies 2.3 Alternative strategies 2.4 Increments Comparison Other baseline strategies Other alternative strategies Comparisons using different alternative strategies 2.5 Scenarios 2.6 Cases High growth scenario Reference growth scenario Low growth scenario 2.7 Using the framework Shifts in strategy Increments in cost Sensitivities Counterfactuals Uncertainties Incentives 2.8 Conclusions and observations Comparative analysis Relevant comparisons Consistent comparisons 3 Desirable additions to the framework 3.1 Net analysis 3.2 System analysis 3.3 Economic analysis 3.4 Integrated analysis 3.5 Comprehensive analysis 3.6 Standardized analysis 3.7 National analysis Today A World Bank report on the Russian Federation states that despite the promise and optimism with which the dissolution of the USSR was greeted, the economic transition has not always sustained that optimism. According to the report, Russia still lacks the enduring economic basis to sustain its growth, and the recent uncertainty in the Russian economy only underlines the fragility of this emerging economy. In the following paper, I will describe the state of the Russian economy, how it got there, prospects for the future and recommendations regarding impact on U.S.
investors. Reasons for Current Economy With the fall of the Berlin wall in 1989, and the end of the Cold War, the West was eager to support Russia and all of the former Eastern Block countries in the transition to Capitalism and democracy. In the article Money cant buy me love in The Economist, Washington based Russia-watcher David Satter, states that the West had a dream of a strong, friendly Russian government shouldering its shares of the worlds problems. The West supported democrats and reformers in the hope that their ideas would influence their country. In addition, Russia has been the recipient of large amounts of financial aid and loans from the World Bank, the IMF, and various Western governments. According to their respective web sites, since 1992 the World Bank has approved more than $11.29 billion in loans for projects to Russia, while the IMF has loaned more that $15 billion. Unfortunately, while integration with the world economy has resulted in success stories such as Hungary and Estonia, Russia has continued to struggle.
Many of the pro-western politicians turned out to be politically inept, and some outright corrupt. In addition, there is a growing mistrust of the Western ideals and ways. In August of last year, the Russian government defaulted on $40 billion worth of debt in ruble bonds, rocking the worlds economy. Before this crisis, the Russian economy appeared to be developing quite nicely. They had a growing middle class and the needs of the poor were being met by a small but thriving volunteer sector.
Many businesses, in light of competition from foreign firms was beginning to show promise, and was putting more focus on meeting the needs of shareholders, customers and employees. Also the government had a steady tax revenue stream. Since the crisis however, the economy has been shrinking, and the fledgling middle class has been devastated. Russia still maintains a healthy current account surplus of $18 billion, but dues to the lack of confidence in the economy, most of these dollars are being deposited into stable foreign currency accounts outside of Russia in safe havens such as Switzerland. In addition, little of this money shows up in tax revenue for the government.
Russia has a remarkably inefficient tax system, which has allowed widespread nonpayment of taxes. Tax revenues last year were running at about $1 billion per month (less than that of New York City), yet the government was spending $1.5 billion per month. This has brought about widespread political uncertainty in the country, and raised the possibility of a non-Western friendly government coming to power. Most Russians think their lives will get worse before it gets better. This crisis has been exasperated due to the recent drop in oil prices.
One of Russias main exports are oil, and the decline in price has greatly reduced Russias trading power on the international market. The Current Conditions According to The Economist article Money cant buy me love, since defaulting on the $40 billion dollars in bonds last August; the government has fallen even further behind on $1.5 billion due on its dollar debts left over from its days as the Soviet Union. Without international help, they will be unable to pay back the $4.8 billion due this year to the IMF and World Bank. Inflation is widely expected to rise to 100%, and may rise even higher if the government begins to print money to meet demands such as paying off wage arrears. The Economist article Russia, financial outcast, notes that many teachers, who earn $20 a month in Russia, have not been paid in over a year.
The fledgling Russian middle class has essentially been destroyed during this process. In addition, rampant social problems have accompanied this economic decline. Russia currently has nearly the highest murder rate in the world, male life expectancy has fallen to 58 years, and the population is declining at a rate of 800,000 per year. There now exists a high distrust of Western business practices and ideals, as well as a general distrust of foreigners in general. Many Russian politicians believe that the Western-backed practices such as budgetary stringency and privatization are to blame for Russias current problems.
Prime Minister Yevgeny Primakov is backing off on reforms and any policy that presents economic risk. The West similarly is dramatically scaling back investments in Russia, both in terms of scope and dollars. In the past, financial support for Russia from the West has been forthcoming. In light of the recent defaults, today Western investors and organizations are far less anxious to invest in Russia without deep fundamental changes in the way Russia is governed. There is no support in the Congress for further loans, and those politicians who remain interested in Russia now favor steering money away from the government and towards private ventures such as mortgages to help rebuild the Russian middle class. What investment remains with the West is being focussed more on energy and resources industries, rather than on trying to transform Russian business.
Future Outlook For the foreseeable future, Russia is expected to continue to flirt with financial disaster. Approximately $17 billion in debt falls due this year, but the real crunch is expected to come in July of 1999 when due to a fluke of timing, Russias payment to the IMF will shoot up from below $400 million per month to over $1.2 billion. It is widely anticipated that Russia will be unable to meet these commitments without support from the West. In the short term, Russia has asked for $7 billion to partly roll over repayments to the IMF that fall due throughout the year. Russia adopted the promised reforms. If the Russians do not adopt the required changes, the West may focus exclusively on humanitarian aid, such as exchanging currency for food or medicine.
There is a growing opinion among Russian politicians that Russias current problems are the result of the IMF and western advice on privatization and budgetary stringency. They reject the IMFs insistence on higher taxes and lower spending as being impractical, and feel little need to worry about paying back the loans that were part of their predecessors failed experiments in wild capitalism. With the presidential elections scheduled in the year 2000 and the very real possibility of a change in government as a result, the threat of further Russian defaults looms even larger. If these defaults occur, the result will be that Russia will be cut off from international capital markets, and enters a period of economic isolation. This will further postpone improvement of conditions in the country, and they will face years of poverty and stagnation. Observations and Recommendations In summary, the Russian economy is in crisis.
This crisis is due to many factors, including lack of maturity in the financial systems, widespread non-payment of taxes among both individuals and firms, and stability within the government and other infrastructure. Further, due to declining oil prices and pending repayments of loans to international organizations such as the IMF, the consensus is that conditions are expected to get worse before they get better. There is also an expectation that if the Russians default on further loans in the future, they will require even more foreign aid to even meet their most basic needs and to avoid total collapse of their economy. There are two alternative paths that the West can pursue here. One alternative is that they could simply turn their back on Russia and let them default on further loans. As noted in the article Cant buy me love in The Economist, This would place the worlds sixth-most-populous country, a nuclear superpower and a permanent member of the UN Security Council in the company of such countries as Afghanistan and the Congo poor war-ridden places, some barely existing as states.
Another alternative is that the West could continue to invest in Russia. They could expand their trading relationship with Russia by further opening its markets, and engaging with competent Russian regions and institutions. This has already worked in Novgorod, a region outside of St. Petersburg, where tax incentives and a business friendly governor have attracted several foreign firms to this area. This would be an alternative to the damage control focus that the West is currently engaged in. My personal beliefs are with the opinion that the West should not turn its back on Russia forever.
Russia represents a fantastic market opportunity for America. In time, as they develop a more workable financial system, a stable tax base and tax revenue stream, Western interest should return. The isolation alternative will only serve to further destabilize the largest nuclear power on earth, with implications that could be far more dire than further loan defaults in Russia. References Money cant buy me love. February 6, 1999. http://www.economist.com/editorial/freeforall/curr ent/sf1220.html. February 6, 1999.
Russia, financial outcast. February 6, 1999. http://www.economist.com/editorial/freeforall/curr ent/ld5311.html. February 6, 1999. Summary of Disbursements and Repayments: Russian Federation. IMF Web site. January 31, 1999. http://www.imf.org/external/np/tre/tad/expurch2.cf m.
February 10, 1999. Russian Federation: Position in the Fund. IMF Web site. January 31, 1999. http://www.imf.org/external/np/tre/tad/exfund2.cfm . February 10, 1999.
Countries: The Russian Federation. World Bank Web site. September 1998. http://www.worldbank.org/html/extdr/offrep/eca/ru2 .htm. February 10, 1999. Bibliography References Money cant buy me love.
February 6, 1999. http://www.economist.com/editorial/freeforall/curr ent/sf1220.html. February 6, 1999. Russia, financial outcast. February 6, 1999. http://www.economist.com/editorial/freeforall/curr ent/ld5311.html. February 6, 1999.
Summary of Disbursements and Repayments: Russian Federation. IMF Web site. January 31, 1999. http://www.imf.org/external/np/tre/tad/expurch2.cf m. February 10, 1999. Russian Federation: Position in the Fund. IMF Web site.
January 31, 1999. http://www.imf.org/external/np/tre/tad/exfund2.cfm . February 10, 1999. Countries: The Russian Federation. World Bank Web site. September 1998. http://www.worldbank.org/html/extdr/offrep/eca/ru2 .htm.
February 10, 1999. Economics.