Back in the USSR

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Back in the USSR

• The Soviet, centrally planned, system began in
  the USSR in the 1920's.
• 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.
• ,

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Transition to a Market

• The low level of efficiency of Russias economy
  greatly affected the nations 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.

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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.

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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.

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Inflation in Russia
While Inflation has declined it is still around
11.8 in 2008.
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Economic Growth in Russia
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Recession increased unemployment
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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 2 adding to
  the 6.2 unemployment rate in 2008.
• Less than a quarter of the unemployed receive
  benefits.

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Real Wage Growth
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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 0.40 in 2005.
• The proportion of income, which belongs to the 20
  of the richest people in Russia, was 32.7 in
  1990 rising to 46.6 in 2005.
• The proportion of income, which belongs to the
  20 of the poorest people in Russia, was 9.8 in
  1990 declining to only 6.1 in 2005.

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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.
• 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.
• Suicide rates also increased along with crime
  rates and the level of mental illness.

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Quality of Life
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Exchange Rate

• The high inflation led to a loss of purchasing
  power and a decline in the value of the rouble.
• In 1991 there was 0.17 roubles to a US by 2002
  it took 32 roubles to get 1 US.
• A loss of value of 188 times its purchasing
  power.
• It has since improved to be 24.5 roubles to a
  US in 2008.

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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.

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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.

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What have been the effects?

• Economic Growth at 7.7.
• Unemployment has fallen to 6.2
• Inflation has declined to 11.
• Real wages have risen 15 a year (2000-7).
• Real Pensions have increased 15 a year (2000-7).
• Real Income per capita has increased 10 a year
  (2000-7).
• The budget is a surplus.
• The current account was a surplus of almost 74
  billion US in 2007 but is expected to move
  towards a balance by 2010.

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Where to now?

• There has been a major increase in foreign direct
  investment into Russia since the reforms began.
  Many of these ventures are joint ventures,
  between Russian and foreign firms.
• Foreign investment has risen considerable since
  2006 with 69 going into exploration and mining
  of fossil fuels (mostly oil).

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Where to now?

• The Russian Government is risking the gains they
  have made by reducing their budget surpluses in
  2008-10. Allowing for the gains they have made
  from high oil prices in recent years these
  could easily turn into deficits.

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Where to now?

• The success of President Putins policies can be
  shown by economic growth and living standards
  rising.
• The Government has just 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
  Presidents policies to deal with crime,
  corruption, and poverty are supported by the
  people.
• Crime and corruption still remain major issues.
• There are still many challenges facing Russia.
  Much of its recent economic success 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 may slow the economy down
  and create budget shortfalls.
• Inflation and relatively high unemployment still
  remain problems.

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Dmitry Medvedev?

• Due to constitutionally mandated term limits,
  Putin was ineligible to run for a third
  consecutive Presidential term.
• In March 2008 Russia elected a new president
  Dmitry Medvedev
• Putin was then nominated by the latter to be
  Russia's Prime Minister
• Policies are likely to keep following the same
  pattern
• The government has created state owned monopolies
  in the key economic sectors, eg, oil, gas.
• They have secured the country's natural resources
  and key economic sectors from private interests,
  whether foreign or local.
• The Government aims to attract private foreign
  investment into both minority investments into
  state controlled monopolies and into direct
  foreign owned enterprises.