Causes and specific features of financial crisis in Russia at the end of 20th century. Economic and institutional background of crisis
The process of economic transformation in Russia has been marked by a prolonged transitional depression and macroeconomic instability: seven years of continuing decline resulted in a cumulative drop of GDP by more than 40% between 1989 and 1996; in that period there were also several outbursts of near- hyperinflation. The first radical effort to tackle inflation was the IMF-supported stabilization program of 1995. It focused on tight monetary control and nominal exchange rate targets; subsequently, direct central bank financing of the budget was discontinued and the exchange rate was placed under control. In the years that followed, Russia made marked progress towards price and exchange rate stability and this prompted positive expectations in the West and a widespread perception that the country was pursuing the right course of reforms. It is important to point out that the 1995 stabilization effort was not supported by deep structural and institutional reforms. Russia inherited from the past an over-industrialized economy, dominated by highly inefficient heavy industry (including the military-industrial complex). The liberalization of prices and the discontinuation of subsidies resulted de facto in the destruction of a large share of the existing capital stock. Restructuring these industries is a serious policy task: simply closing down the large number of inefficient enterprises would not be socially and politically tolerable, but unfortunately that was the way of Russian development during 1990s. In these circumstances the Russian authorities started speedy, give-away mass privatization program which was carried out during 1992-1994. However, this resulted in most cases in the concentration of effective property rights in the hands of insiders (company managers) who had neither the willing nor the capital to perform the necessary deep restructuring of the enterprises. The newly emerging system of private ownership was not conducive to effective corporate governance and was in fact another obstacle to the process of enterprise restructuring. Moreover, the loopholes in law system seem to have incited a continued stripping of the assets of the privatized enterprises rather than their market-oriented restructuring. Thus, the progress in institutional and legislative reforms in Russia in the 1990s has been modest and the emerging market infrastructure in the country is extremely poor. This is especially so in the areas of commercial and corporate law. The execution of agreements most often relies on the goodwill of the parties, while contract enforcement is often impossible by legal means. Very little was done to reform the functioning of Russian public administration whose lack of transparency is well known. It gave birth to widespread rent seeking which resulted in the de facto concentration of wealth in a relatively small group of oligarchs. This distorted socio-political environment, and the presence of a mistakes in public administration has created a vicious circle which is a major obstacle to reforms and to social justice. One frequent characteristic of the Russian nouveaux-riches is that the wealth of numerous members of the new class was not acquired as a result of entrepreneurial success; it was simply "easy money", obtained in some cases from illegal or semi-legal activity. Huge amounts of capital left Russia and were spent on luxury goods or just placed in safe havens instead of being put to productive use within the country. The unprecedentedly rapid stratification of society and the lack of social justice eroded initial public support for the reforms and strengthened the opposition to the reform process. It was in this economic and institutional environment that the Russian government launched the 1995 stabilization program. The climate for productive investment in Russia...
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