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Russia: The End of a Time of Troubles
Presented by:Mevin MathewMohit Madaan
FLOW OF PRESENTATIONBackground• Fall of USSR• Rise of Boris YeltsinEconomic reforms• Between 1917-1991• Between 1991-1999Political Impact of economic reformsEconomical Policies• Liberalization and stabilization• Privatization (between 1992-1994 and 1995-1999)Economic trouble(1991-1999)• Ruble, barter, Demonetization• Region, Federal Authority, Taxes• The legal system• Crisis of August 1998• Demographic CrisisPutin to Power
Background• Fall of USSR• Rise of Boris YeltsinEconomic reforms• Between 1917-1991• Between 1991-1999Political Impact of economic reformsEconomical Policies• Liberalization and stabilization• Privatization (between 1992-1994 and 1995-1999)Economic trouble(1991-1999)• Ruble, barter, Demonetization• Region, Federal Authority, Taxes• The legal system• Crisis of August 1998• Demographic CrisisPutin to Power
FALL OF USSRUNDERLINING CAUSES
• Years of Soviet military buildup at the expense of domestic development
• Economic growth stalled/stagnant economy
• Failed attempts at reform• War in Afghanistan • General feeling of discontent,
especially in the Baltic republics and Eastern Europe (i.e. Chernobyl)
August Coup• August 1991 – “hard-line”
Communists tries to take over the government
• Last effort to save USSR• Country went into an uproar;
massive protests• Soldiers themselves rebelled –
“can’t fire on our countrymen”• Coup collapsed after 3 days• After the coup, Estonia and Latvia
declared their independence.• Other republics soon followed
Collapse of the Soviet Union• A new entity was formed
“Commonwealth of Independent Republics"
• Russia and 15 independent former USSR countries
• Complete political independence, linked to other Commonwealth countries by economic, and military ties
• The Soviet Union, with its centralized political and economic system, had ceased to exist in December, 1991
RISE OF BORIS YELTSIN• Gorbachev was unable to
reestablish real control• Yeltsin negotiated the transition
of power made inevitable by the will of the people.
• December 1, 1991 all non-Russian republics declared independence (population wanted democracy)
• Boris Yeltsin was the first democratically elected president of Russia
RUSSIA’S ECONOMIC REFORM
• Soviet system focused on industrial and military development• Institutions of state made decisions about what and how much
to produce• State coordinated inputs and outputs and set prices• State allocated credit and resources and hence budget
constraints were soft• Managers of the firms were concerned primarily with meeting
production targets
Between 1917-1991
The Soviet years
1920s-1950s
• Soviet system achieved a rapid economic growth based on massive mobilization of resources
• Created a formidable industrial and military power• Rapidly expanded employment and invested in physical capitalization
1960s
• Growth rates declined due to diminishing returns• Technological innovation stagnated• Mandated increased production in heavy industrial sectors such as steel
than to create incentives for high technology and consumer products
1980s
• Economic growth disappeared• Restructuring of the economy required
RUSSIA’S ECONOMIC REFORM
• In June 1991, Boris Yeltsin had been elected as president• In October 1991, he announced that his administration
would radically reform the economy from socialism to capitalism
• He entrusted the reform process not to politicians, but, in his words to “professionals”
• This turned out to be ideologically committed group and came to be known as “young reformers” all under the age of 40
Between 1991-1999
• Yeltsin authorized to mandate components of his economic reform program by decree, change the structure of government, and appoint all cabinet ministers without parliamentary approval.
• Yeltsin adopted “shock therapy” to deal with the suffering Russian economy
Yeltsin declared “It will be worse for everybody for about half a year”
• Reformers planned to free most prices (three quarters of which were still state-controlled)
• Liberalize Imports• Overhaul the tax system• Eliminate the budget deficit• Tighten monetary policy• Privatize the majority of state-owned firms
Political impact of economic reforms
• Economic reforms were quite controversial
• Russian voters also did not support these reforms
• This was evident in the 1993 elections for seats in the state Duma
33%
40%
27%
SEATS WON IS STATE DUMA ELECTIONS
Parties of Economic Reform (Russia's choice and Yabloko)Centrist Parties, ambivalent about reformsParties against Capitalist Reforms
ECONOMICAL POLICIES OF BORIS YELTSIN
Policies
Price and Trade Liberalization
Macroeconomic stabilization Privatization
LIBERALIZATION AND STABILIZATIONReformers sought
tight monetary policy to rein in
inflation
Reformers achieved some initial success
Opposition to this policy
Tight monetary and fiscal policies were progressively
relaxed due to powerful political and economic
forces
1992-Viktor Gerashchenko was made Chairman of the Central Bank of
Russia (CBR
Gerashchenko (chairman of CBR)
was in hands of the parliament
Disagreed with the reformers’
approach to monetary policy
Offered liberal credits to Russia’s
struggling industrial
enterprises
Thus government was unable to impose
monetary discipline and a hard budget
constraint on Russian firms
Indian Liberalization (1991)Reforms
• Abolition License- Permit Raj• Reduced tariffs and interest
rates• Automatic approval of FDI in
many sector
Impact
• A huge private sector emerged.• Income Tax Department and
Customs Department became efficient in checking tax evasion
India reported its highest GDP growth rate of 9.6% in 2006 after reforms
US$ 132 million US$ 5.3 billion
Foreign Investment Growth:
PRIVATIZATION
Anatoly Chubais: “They steal and steal and steal. They are stealing absolutely everything, and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property ”
1992-1994: Vouchers and Auction• Every Russian was given a “voucher”, which could be exchanged for
stock in privatized firms, invested in voucher fund, or sold for cash• The direct exchange of stock was supposed to take place at “voucher
auction”• The reformers achieved their goal of rapidly privatizing large number
of firms• Between Jan 1992 and June 1994, the government privatized 16,500
firms, shares of which were held by over 41 million Russians, either directly or through voucher investment funds
Very quick process: Citizens were not
able to understand
• The directors of Russia’s large industrial enterprises opposed as the move “threatened their control” over much of the economic structure Russia had inherited from Soviet industrialization.
• To compromise with the industrial directors opposition, government offered preferential access to their firm’s shares through 3 separate programs
• Most popular among these was the “option 2”, with which managers received 51% of the voting shares in their firms at a nominal price
• Some managers acquired even greater control over their firms through a variety of complex but illegal schemes
Privatization, 1995-1999: Pledge AuctionsNatural gas, oil, and
mineral deposits were excluded from the process of mass
privatization
Boris Yeltsin and the reformers faced
huge fiscal crisis in 1995
Vladimir Potanin proposed that the banks would give a
large loan to the government for one
year
As collateral, banks would hold and manage
the state’s block of shares in 29 large state owned oil and mineral
assets
If government is unable to repay back the loan,
ownership would be transferred to bank holding the shares
GKI( State Property Committee) authorized
Oneksimbank and other banks to
organize the pledge auctions
Most of the banks agreed among
themselves in advance which bank would bid
for each block of shares
Outside bidders were disqualified on the
technical grounds and foreign bidders were
excluded from 7 auctions
Government raised $800
million in loans from the auction
Case of NORILSK NICKELFactory at Norlisk
Oneksimbank won auction for $170.1 million and starting price was $170 million
Rossiiski Kredit (interested in the bid)- was informed on the day of auction that it was having procedural irregularities
Rossiiski Kredit Chairman later on revealed that they were ready to pay $355 million
PROFITS LOST= $ 184.9 MILLIONS
AUCTION PRICE= $ 170 MILLIONS
Privatization in India (1991)
Disinvestment Commission was set up during 1991 -92 for identifying PSUs equity disinvestment and for suggesting modalities of disinvestment
Enunciation of the National Telecom Policy in 1994-95 which opened up basic telecom services to competition.
Foreign equity participation up to 49% was permitted in case of a joint venture between an Indian and a foreign firm
A key reform in infrastructure development was the creation of a major new source of funding for national, state and rural road construction, called the Central Road Fund (CRF) under the Central Road Fund Act of 2000.
The Rise of the “Oligarchs” (1995-1997)
• During 1990s, Russians began to refer to a handful of powerful businessmen as “the oligarchs” indicating their political influence
• Reasons that forced the government to bend towards oligarchsInability of the state to meet its fiscal obligations, the government needed funds the oligarchs provided
Upcoming presidential elections, 1996
Russia has the most billionaires per trillion dollars of national output. India comes second
The predominant source of plutocratic wealth in India is from three factors — land, natural resources and government licenses.
Most of India’s billionaires have benefited from sweet deals in real estate, mining, telecom, oil and such like.
Billionaire businessman Mukesh Ambani is quoted as bragging that the ruling Congress Party is "Apni Dukan“ (our shop), implying that he owns the ruling party.
Telecom minister Andimuthu Raja left an estimated $40 billion on the table by accepting bribes in exchange for lower bids from Indian and foreign bidders on 2G cellular spectrum auction
India's Highway Minister Kamal Nath is alleged to skim 15% on all the projects his ministry overseas.
Presidential Elections, 1996
• Presidential elections was a “crucial event” for both Boris Yeltsin and oligarchs
• Major problems confronting them were:
• In January 1996, just few months before elections Zyuganov led the polls by substantial margins, followed by Yeltsin at 5th place
Yeltsin’s Zyuganov’s
Economic Dissatisfactio
n
Public support
Unpopularity
Threats posed by Possible Zyuganov’s Presidency
Zyuganov would end Russia’s experiment with markets and democracy and would promote communism again
Would not honor the pledge auctions arrangements
Oligarchs would to lose not only millions of rubles but political power as well
Therefore it was necessary for them to derail the ambitions of Zyuganov
THE DAVOS PACT
• At Davos, Switzerland in Feb 1996, Russia’s most powerful businessmen agreed to cooperate to support Yeltsin’s reelection bid
• They offered all their resources-1. Media2. Funding3. Regional contacts• Although Russian law limits presidential candidates to spend
only $3 million, Yeltsin’s campaign team admitted to spend $ 100 million ( in reality it was $ 500 million- 1 billion)
The Ruble• The currency that Russia inherited in 1991 was the “Soviet Ruble”, the currency used by all 15
former Soviet states
• Only Russia’s central bank could actually print new rubles and provided it to other new states
• But central banks of other states could issue Ruble credit
• Russia’s central bank did not have any complete control over the country’s money supply
• In July 1993, Russia’s central bank issued the new currency- Russian Ruble
Problems of the Barter System
January 1992( 10%)
January 1999( 50-70 %)
• Without cash revenues, firms were unable to pay salaries
• The federal government could not effectively tax industries that relied on barter
• Government was unable to evaluate accurately the value of a firm’s assets and transactions
• So many firms relied so much on barter that few firms had cash to pay taxes at all
• Provincial governments began to tax in kind and eventually the federal government forced to do so.
Demonetization
• New monetary surrogates emerged, mainly as local currencies• Examples:
Tatarstan’s government issued their own money substitutes
Local commercial banks and firms, issued promissory notes called vekselia or twechels (from German word from bill of exchange)
FEDERAL UNITS IN RUSSIA• There are 89 Federal Units, or “subjects”
organized into six legal categories
21- Republics, each of which bears name
of a non-Russian ethnic group
49- oblasts 6- Krais, populated by ethnic Russians
Moscow and St. Peterbergs as “federal cities”
10- autonomous okrugs
1- autonomous oblast
Regional authority v/s
Federal Authority• Yeltsin provided too much sovereignty to regional leaders- a few adopted their own “REGIONAL” constitution- some violated federal laws
• As a result bilateral treaties were signed by Yeltsin with regional leaders but Still not able control them
• Goods were not allowed to move freely across regional borders
• Local govt was able to collect tax but the Federal govt not able to collect their share from the local govt
Taxes
Problem due to Russia’s inefficient federal system• Goods could not move freely across
regional borders• Federal system was unable to acquire
its share of tax receipts from regional and local authorities
Problems due to complex and confiscatory tax laws• Government taxed gross revenues
rather than profits• Firms were subject to 17 different
taxes that added 110% of revenues• Limited deductibility of items• Required frequent reporting
Efforts to Crack Down Tax EvasionGovernment created a “ Tax Police”, complete with guns and significant executive authority
Tax collectors were treated harshly by citizens, in 1996, 26 were murdered, 74 injured, and 6 kidnapped
Ultimately , government had difficulty in meeting its budgetary obligations
Russian Orthodox Church intervened
Morbid legal system leads to violent Entrepreneurship
Legal system
Was Not having
effective court system
Judiciary Was Not
independent
Federal govt was not
able to pay judges
Maintained by regional heads,
manipulated laws
Privatization of Security• There was a high rise in several niches
such as private security, contract enforcement, and transaction insurance
• Russians had a perception that Arbitrazh courts were slow to rule and unable to enforce decisions
• Because of high entrepreneurial risks associated with the failure of business partners to observe contracts or pay debts
3 basic types of private protection • Units of police and security forces
that sold their services privately and illegally
• Illegal organized criminal groups, so called Russian mafias
• Private protection agencies
Growth of Russia’s Private Security Industry1992 1993 1994 1995 1996 1997 1998
Private Protection Companies 0 1,237 1,586 3,247 4,434 4,705 5,650
Private Security Services 0 2,356 2,931 4,591 5,247 4,973 4,720
Private Detective Agencies 0 947 2,088 149 182 809 434
Total 0 4,540 6,605 7,987 9,863 10,487 10,804
Costs of their services varied• 20-30% of profits for business transactions• Up to 50% for collecting bad debts
THE AUGUST 1998 CRISIS PM a
1.• Government defaulted on its domestic debt
2.• Devaluation of Ruble
3.• Suspension of repaying of foreign private
debt
Defaulted on its domestic and foreign debt
Government
Domestic Banks
Foreign Investors
Devaluation of Ruble
Devaluation
Promotes export
Reduces Imports
THE AUGUST 1998 CRISISPossible Reasons for August Crisis
• Government stated falling oil prices
• Asian financial crisis• Overvalued ruble• Excessive borrowings• Debt was too costly and too short
term
Consequences of crisis
• Sharp drop in real income, living standards and employments
• Temporary paralysis of payments and settlement system
• Ruined the balance sheet of the large private banks whose holdings were primarily government bonds
• Government defaulted on $ 40 billion in ruble-dominated bonds, heavy losses for private investors
PRESIDENT PUTIN IN 2000 Diagnosis about the problem
Russia at the turn of the Millennium• State should have
power
Open letter to the Russian voters• Emphasized need of
Law and Order
Putin in Power
Re-organized the fedral system- additional layer of political authority between centre and regions- 7 federal super-regions
Abolished treaties that created special tax privilages for several regions
Controlled the oligarchs
In short 1. Made state more powerful
2.Stability in law and order
Oligarchs during Putin's presidency
Roman Abramovich Mikhail Khodorkovsky
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