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Research paper example essay prompt: Russian Crisis - 1566 words

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.. loyment problem, the decline in economic growth has set back attempts to reduce it. 3. High interest rates Another cause was the high interest rates which Russia was experiencing. For a critical period in 1998, Russian interest rates increased sharply as a sign of loss of investor confidence.

In May 1998, interest rates on GKOs, that is Russian treasury bills used to finance government budget deficits, roughly doubled from 27.8% the month before, to 54.8%. They continued to climb and peaked at 135.3% in August 1998. Other critical interest rates also climbed to very high levels. The Russian Central Banks's refinancing rate spiked at 150% during the week of May 27 to June 4, 1998. While rates have decreased they nevertheless remain high. High interest rates cripple Russia's ability to finance its government budget deficits and have stifled investment in the non-government sector as well.

Immediate causes 1. Fiscal policies In dissecting crisis and trying to explain the reasons it developed two sets of related causes emerge. The most immediate and direct causes are the government's financial imbalances and Russian fiscal policies that have made Russia very vulnerable to the vagaries of the global financial markets. Russia's immediate financial problems center on its fiscal situation. The Russian government has run persistently high budget deficits. While general government expenditures (that is, expenditures of the federal and regional governments, plus extra-budget expenditures) have declined, some areas of public spending have not been adequately controlled. The government has not been able to cover its expenditures with revenues.

From 1995 and until recently, the government had financed much of its budget deficit by borrowing in capital markets and issuing treasury bills, known by the Russian acronym GKOs, and bonds. On the upside, borrowing allowed the government to dramatically reduce inflation from a peak annual rate of 2,500% in 1992, to around 11% by the end of 1997. However, the low inflation rate may be superficial given that many state employees are not being paid and parts of the economy have increased bartering and have relied on other nonmonetary means of payment such as interenterprise debt. 2. Tax collection The growth in government financial imbalances and borrowing practices largely explain the suddenness of the current financial crisis in Russia.

But how Russia got to this point of vulnerability analysts explain by citing more fundamental problems with Russian economic policy and economic structure. One such problem has been the inability of the Russian government to collect revenues adequate to match expenditures. Many analysts and Russia's Western creditors have pointed to Russia's tax regime as being inefficient and a factor in the lack of sufficient tax revenues. The Russian system has consisted of some 200 different types of taxes at various levels of government (federal, regional and local) making administration of the regime unduly burdensome. The governments have frequently changed regulations on implementing the tax regime, making compliance even more burdensome. In addition, the governments have granted tax exemptions to favored sectors and enterprises reducing the potential revenue. Analysts have pointed out that the division of tax authority among the various levels of government has been unclear and conflicts have erupted making tax administration and compliance arduous. Importantly, the government has not had the resources, such as a sufficient number of tax inspectors, to administer tax collection.

3. High yields on treasury bills The Russian government had to offer high yields on its treasury bills and bonds in order to attract the necessary capital. As a result, the borrowing added a new and heavy debt service burden to the Russian budget. Debt service expenditures have accounted for more than 30% of total Russian expenditures. In 1997 and the beginning of 1998, Russian treasury bill rates were averaging more than 25% per annum. Adjusting for inflation would make the real interest rate around 10%.

During the late part of May and beginning of June 1998, the Russian government had to boost interest rates on bonds and bills even higher. Notably, most Russian domestic debt was short-term with an average maturity of around 11 months. That meant the debt had to be constantly rolled over, making the Russian government highly vulnerable to short-term fluctuations of capital markets. About 1/3 of the debt is held by foreign investors. The government also has not been able to rein in subsidies to agriculture, the residents of the far northern regions, and the oil and gas industries.

It also has not adequately dealt with social payments to the aged, disabled, and others who require a financial safety net. The increasing burden of debt service made it difficult, if not impossible to address other budgetary priorities. Payments to workers, soldiers, pensioners, and contractors were deferred, building up arrears. Now Russia has not been able to pay banks and other investors who hold the government debt, which has created the current crisis. In sum, the Russian government survived financially, until recently, by accruing ever growing debt and government nonpayment of fiscal obligations to workers, soldiers, and others. These practices masked the weaknesses in the government's ability to rein in subsidies and raise revenues. It managed to continue as long as investors were willing to renew short-term debt.

But the Asian financial problems and other factors created uncertainty in emerging capital markets on the part of investors, and slumping oil prices made hard currency revenues scarcer, bringing the crisis to a head. Russian "infection", spreading the neighboring countries As for Russia's impact on the rest of eastern Europe, the fallout has been quickest to hit banks, notably in the Baltic states, and stock markets, with Hungary's liquid bourse taking the worst pounding. But financial market contagion was not the real evil to the region; the genuine menace lied in the economic impact of ruble and Russian recession. Take the little Caucasian republic of Armenia, for example. Although Armenia has made good progress in recent years in strengthening trade links with Iran, Russia remains Armenia's dominant economic partner. That's true of actual trade, and the supply of credits, and joint projects.

In addition, there are hundreds of thousands of Armenians now living in Russia working unofficially. They send back millions of rubles in wages to their families at home. It's obvious then that Armenia had direct impact of catastrophe in Russia. Looking further east, to Central Asia, we find similar ties between Kazakhstan and Russia. The Kazakh government has made efforts to re-align trade southwards and westwards, to Pakistan and Turkey. But Russia still supplies the bulk of the consumer and industrial market in Kazakhstan, and likewise takes Kazakh exports.

The results and suggestions There are many underlying aspects to Russia's crisis. The "Asian crisis" spooked fund managers into withdrawing from most "emerging markets." World oil prices have fallen dramatically, seriously impacting Russia's exports and balance of trade, Russian tax collections continued to disappoint and, in the few years since economic reform commenced, no significant, viable world class industries have yet emerged in Russia. The Russian Government couldn't ease the Asian economic crisis or raise international oil prices, and development of competitive world-class businesses within Russia, if it is to happen, will take time. What lessons should Russia's leaders learn: If the socialist economy no longer functions, the government should try to disinflate as rapidly as possible. A delayed disinflation will be much more painful.

If the government is confronted with delayed disinflation, it should cut budget deficits radically. The illusion of being able to finance the deficit out of a short-term portfolio should be abandoned. It should be understood that hardening the budget constraint is important not only for raising budget revenues but also for allowing market mechanisms to work and thus for increasing the efficiency of the economy. So what is it that Russia can do to assure that it continues to progress towards its rightful place as a world economic power? At the very least Russia's political leaders must: Understand that the policy of seeking ever more cash from the West is not a policy that will develop Russia politically or economically. In short the Duma must accept responsibility for its crucial role in Russia's future.

Short-term political ambitions and partisan hopes that the failure of "Yeltsin's reforms" will lead to greater political advantage for the opposition in the Duma must yield to the reality that international lenders will not keep lending to Russia forever. And most importantly, take immediate, positive steps to encourage long-term foreign direct investment ("FDI") in Russia. Why to focus on FDI? Unlike portfolio investment in equities and debt, FDI directly creates jobs and cannot be withdrawn by a computer keystroke. The comparatively miniscule amount of FDI in Russia should be a source of acute embarrassment to the Duma and a stimulus to prompt, decisive action. Foreign investors do not expect guarantees of profit or protection from market forces.

They do require some hope of tax stability and reasonable support, rather than interference, from the Government. To date Russia has attracted a meager amount of FDI even without offering such conditions. Appendix Exchange rate of Russian ruble comparatively to US dollar (the denomination in the 1998 is not considered) Percentage of changing of Exchange rate of Russian ruble comparatively to US dollar Works Cited S. Commander, C. Mumssen, Understanding Barter in Russia. (EBRD Working paper 37, 1998).

Professor A Kennaway The Russian Political Economy 1999. Royal Military Academy Sandhurst Jeffrey A. Burt, Board of Directors of the Russian-American Chamber of Commerce. 14 June 1999 Michel Camdessus ;Managing Director of the International Monetary Fund European-American Business Council New York, September 15, 1998 http://www.wright.edu/~tdung/imf wb nyt.htm Political Issues.

Related: asian crisis, crisis, economic crisis, financial crisis, russian, russian government

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