Back in the USSR• The Soviet, centrally planned, system began in the USSR in

the 1920s. • In the early decades the system of planning allowed the

emphasise to be on capital goods production and created quite high levels of economic growth.

• However by the 1980s the Soviet Socialist economic system with its inherent features, like state monopoly of the means of production, severe regulation of all aspects of economic activity, and its equality of income distribution failed to provide efficiency and improved living standards.

• Russia started its transition to a market economy in the late 1980s due to economic factors, regardless of any politicians’ ideas or wishes.

• The goal of the radical reforms was to create a new economy based on competition of enterprises, incentives for employees and freedom from the control of bureaucratic state administrative authorities.

• ,

Transition to a Market• The low level of efficiency of Russia’s economy greatly

affected the nation’s living conditions. By the end of 1991 the consumer goods market could not function.

• For example, to buy a television set, a washing machine, a car or a carpet the people had to wait their turn for several months or even years. In supermarkets often only empty shelves could be seen, the shops sold goods in exchange for special tokens that proved to be very often useless. People from provincial towns had to go to the capital (Moscow) to buy foodstuffs, like sausage or butter, etc.

• Under those severe conditions economic reforms began. The first step taken was the liberalisation of prices for consumer goods and services and a centralized system of resource distributions was abolished.

Transition to a Market

• The prices of goods and services were to be determined by market forces, not set by the State.

• Mass privatisation of State and municipal enterprises was started.

• By 1994, 70 percent of Russia's large and medium-sized enterprises were privatised along with about 90 percent of small enterprises.

• The reforms were designed to encourage personal initiative and individual ownership of businesses.

• Commodity and stock exchanges were introduced.

What were the effects of the reforms?

• The reforms were largely introduced as ‘shock therapy’. They were designed to move the economy quickly towards a market system. While it was recognised that the ‘shock therapy’ was going to cause some initial pain, it was supposed to bring relatively quick positive results.

• In 1992, the first year of economic reform, retail prices in Russia increased by 2,520 percent. A major cause of the increase was the decontrol of most prices in January 1992, a step that prompted an average price increase of 245 percent in that month alone.

Inflation in Russia

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006CPI 250 2500 840 215 131 22 11 84 37 20 19 15 12 12 11 10Life exp. 69 68 65 64 65 66 67 65Real wages -40 0 -8 -28 13 5 -10 -22 21 20 16 11 11Unemployment 4.8 5.9 7.3 8.4 9.4 11.1 12 12.9 19.5 9 8.1 8.6 8.2

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CPI

Inflation has risen from 8.3%in 2014 to 15.6% in 2015.

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Economic Growth in Russia

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014 2015%

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Unemployment rose in 2015

Unemployment rose to 5.3% in 2015 from 4.8% in 2014.

Increasing underemployment

• Underemployment is a major issue in Russia. Many people run their own businesses because they can not get jobs but do not earn above a subsistence income.

• Underemployment rose from 2.8% in 1993 to 16.7% in 1994 but has since declined to 5% adding to the 5.3% unemployment rate in 2015.

• Less than a quarter of the unemployed receive benefits.

Unemployment is much higher in regional areas

Real Wage Growth declines

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-30

-20

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014 2015%

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Increased income inequality

• The move to a market system has increased income inequality and especially in the mid-90s the level of poverty.

• The gini co-efficient rose from 0.26 in 1991 to 0.41 by 1994 and was 0.42 in 2014.

• The proportion of income, which belongs to the 20 % of the richest people in Russia, was 32.7% in 1990 rising to 47.0% in 2010.

• The proportion of income, which belongs to the 20% of the poorest people in Russia, was 9.8% in 1990 declining to only 6.5% in 2010.

Poverty and Inequality in Russia

Quality of Life• The quality of life declined in Russia in the 1990s with

recession, rising unemployment, hyperinflation and declining real incomes.

• The percentage of the population living in poverty rose to 34% in 1992-3.

• It stood at 13.1% in 2014.• The average life expectancy fell from 69 years in 1990

to 64 in 1994. For men it was even worse falling from 64 in 1990 to only 57 in 1994.

• In 2014 male life expectancy reached 69 years.• Suicide rates also increased along with crime rates

and the level of mental illness.

Quality of Life

• Increased unemployment and lower incomes all increased the suicide rate.

• Russia now has the second highest suicide rate in the world after Lithuania.

• Russia has also been affected by HIV/AIDS. • Russia has the fastest growing HIV rate in the

world, with new cases doubling every 12 months.

Exchange Rate

• The high inflation led to a loss of purchasing power and a decline in the value of the ruble.

• In 1991 there was 0.17 rubles to a US$ by 2002 it took 32 rubles to get 1 US$.

• A loss of value of 188 times its purchasing power.

• It improved to be 24.5 rubles to a US$ in 2008

• But declined since 2014 to 68 rubles due to lower oil prices and economic sanctions and uncertainty.

The Putin Reforms

• President Putin has been responsible for the greatest improvements for the Russian economy and the people of Russia.

• His main reforms have been: A Labour Code was adopted that more securely protects the

right of employees. The government has adopted a Tax Code that has created a

more favorable business climate. The Government has paid particular attention to changing the

tax system to reduce tax avoidance and evasion.

The Putin Reforms

Social programs to increase and speed up the payment of pensions, allowances, and salaries to employees engaged in the public sector.

In the mid-nineties delays were often 6-12 months.

For this extensive modernisation of the economy, the government intends to create and guarantee a favourable investment and business climate, to have predictable and stable macroeconomic policy and to realise structural reorganisation of the economy.

What were the effects?By 2007 Russia had achieved: Economic Growth at 7.7%. Unemployment had fallen to 6.2% Inflation has declined to 11%. Real wages had risen 15% a year (2000-7). Real Pensions had increased 15% a year (2000-

7). Real Income per capita had increased 10% a year

(2000-7). The budget was a surplus. The current account was a surplus of almost $74

billion US (9.7% of GDP) in 2007 but has declined since then as a percentage of GDP to only 3% in 2015.

However, trade is very dependent on oil prices

Russia’s share of world oil output (%)

As is the Russian budget

As is the Current Account

What reforms have occurred? The success of President Putin’s policies can be shown

by economic growth and living standards rising. The Government has introduced Capital Adequacy

requirements for banks to increase the security of the banking system to encourage savings and investment.

According to regular public opinion polls the President’s policies to deal with crime, corruption, and poverty have been well supported.

Crime and corruption still remain major issues. There are still many challenges facing Russia. Much of its

recent economic success until 2014 has been due to rising world oil prices (its major export). This has provided tax revenue to the government and also spurred spending and growth.

Declining oil prices in 2015 have slowed the economy down and created budget shortfalls.

Inflation and relatively high unemployment still remain problems.

The Impact of the GFC

The Global Financial Crisis had a major impact on the Russian Economy.

Falling oil prices drastically reduced national income and government revenue.

Unemployment rose to 9.9% Economic growth fell by 10.1% The ruble lost 20% of its value in 2009. Russia went from a budget surplus of 3.6% of GDP

to a deficit of 6% of GDP.

Policy responses to the GFC• Government anti-crisis measures including a

stimulus package which sent the budget into deficit of 6.5% of GDP.

• It was used to bolster wages, pensions, and other benefits.

• This helped reduce the poverty rate since 2009.• Bringing the number of people living below the

subsistence minimum (equivalent to about $169 per month) to below 20 million.

• The World Bank estimates that the poverty level returned to the pre-crisis level by 2012.

Where to now?

• In 2014-15 the Russian economy is facing a number of challenges.

• Oil prices declined considerably in 2014-15 leading to lower national income, a falling ruble and budget revenue.

What are the challenges?• Russia’s economy is in recession. • Economic growth for the first half of 2015 was

minus 4.6%, compared to the previous year. • Structural reforms have stalled in recent years,

although there are increasing calls to modernize the economy and reduce its dependence on oil.

• The crisis has further increased the dominance of the State in Russia’s economy,

• Reducing inefficient and weak enterprises’ dependence on state support, accompanied by significant restructuring, will be a central, yet difficult, challenge in the years ahead.

IN 2015

2015

What are the challenges?

• The increased uncertainty brought about by the Russia-Ukraine tensions and related sanctions by the Western Nations impacted investor and consumer decisions.

• Consumption was negatively impacted by the geopolitical tensions through the sharp depreciation of the ruble and related inflation pressures.

• The cost of buying in US dollars rose 100% in 2014-2015, as the ruble declined from 33 to a US dollar to 68 to a US dollar.

Russian Ruble to the US$

Falling FDI

What are the answers?• Apart from the political issues. The World Bank

considers that:• Structural reforms would need to focus on

improving economic institutions to ensure that public finances are stable and economic volatility well-managed

• There are improvements in education and infrastructure to make workers more productive

• There should be strong competition regimes to encourage private enterprise and entrepreneurship.

The Way Ahead• Stabilisation, transparent rules, better

quality of public investment, and competition should be the reform priorities for the next decade.

A Western view of Russian economic reform