Crisis in Russia

1
Crisis in Russia

• Igor Lukashin
• PhD Student
• Department of Economics
• Arizona State University
• www.public.asu.edu/lukashii/

2
Crisis in Russia What went wrong?

• Bad tactical, strategic choices?
• Hit hard by international markets?
• Lack of real domestic production - the worst
  harvest in 30 years?
• Social tensions peaked over unpaid wages,
  worsening standards of living?

Empty Shelves. Angry Women
3
The Currency Plunge Ruble Woes

• On September 8, 1998 1 US Dollar 24.4900RR
• Median price was 21.0000 / 24.4900 (bid/ask).
• Minimum price was 19.8000 / 20.5000
• Maximum price was 22.0000 / 30.0000
• 75 of the prices were above 20.0001 / 22.6750
  and below 21.0000 / 29.9000
• Computed from a sample of 34 prices on Tuesday,
  September 8, 1998
• On August 8, 1998 1 US Dollar 6.2880 RR

4
A Bit of History The Brave Beginnings

• 1985 - Gorbachev came to power, initiated
  Perestroika, Glasnost
• 1985-91 Half-measures drew fire from both old
  guard hard-liners and nascent pro-market groups
• 1991 - abortive coup detat by hard-liners,
  followed by dissolution of USSR and formation of
  CIS

12/97 Gorby Sells Ads to pay bills. Est. USD 1M.
5
The Russian Reform Early Years

• The Gaidar (PM)-Yeltsin Reform 01/1992
• Price Liberalization of 01/92
• Tight monetary policy
• Privatization Program
• Single Exchange Rate
• Liberalization of domestic and foreign trade
• Minimum wage pension regulation

6
The Initial Progress

• Limited success because of political and social
  resistance
• Rampant corruption racketeering
• Lack of legal framework necessary for reforms
  (private property, land ownership laws
• Large-scale voucher privatization started
• Lax monetary policy, growing budget deficit
• 10/93 Yeltsin storms Parliament building
• 11/93 Chernomyrdin is the new PM
• 4/94 Budget deficit 10 of GDP
• 11/10/94 Ruble depreciates 27 against dollar

7
The Struggle to Stay in Power June 1996
Elections. Yeltsin vs Zuganov

• Communist resurgence losers outnumber winners
• Yeltsins popularity in single digits 4 months
  before election
• Massive ad campaign targeting younger population
  Vote or Lose as the main slogan
• Voting procedures enabled Yeltsin to squeeze into
  second round runoff election, giving more time to
  ad campaign
• Second round August 96. Yeltsin wins, but not by
  a landslide

8
The Timeline of the Crisis in Hand

• 11/97 Market Falls
• 3/23/98 Chernomyrdin sacked
• 4/29 Kirienkos cabinet
• 5/12 Coal miners strike
• 6/19 Russia requests another stabilization loan
• 7/12 Russia receives 12B loan package
• 7/19 5-fold land tax hike
• 8/17 Long-awaited devaluation
• 23 Kirienko sacked Ruble falls
• 28 Ruble trading suspended
• 31 Duma rejects Chernomyrdin

Another Revolution?
9
Humor The Last Line of Defense. Www.anekdot.ru

• "One banker phones another and says, hi, how are
  things? -All right. -Sorry, wrong number"
• The ruble's plunge on the Moscow Interbank
  Currency Exchange (MICEX) was another target
  "Result of the latest MICEX trading -- the ruble
  has been abolished."
• "The government and the central bank have
  invented and tested a time machine. In just one
  week the whole country has found itself back in
  1991."
• "Can an elephant overstrain itself? Yes, if it
  tries to lift the Russian economy."

10
Choices Faced and Actions Taken

• Decide on the Prime Minister
• Duma rejected Chernomyrdin
• Luzhkov, Primakov, Stroev decline to be
  considered
• Chernomyrdin - acting premier
• Order tax raids
• Require exporters to sell 50 of revenues for
  rubles
• Cut in oil excise taxes

11
Full Speed Ahead Another Titanic?

• Back to more government control?
• Who will win the Y2K elections?
• Civil war fantasy or possible reality?
• Nuclear warhead safety?
• Impact on foreign investment?