Russian Economy in the Late 1990s
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
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