Russia Economy in the Early 1990’s Part 2

By | February 8, 2022

As regards the economic action of the government aimed at dealing with the joint impact of inflation and contraction of production activity, it is above all the monetary sphere that has been affected, since the problem of transforming the balance sheet is a priority on the fiscal side. state and the containment of the consequent deficit: since the operating margins of companies are no longer the main entry item in the budget, it was necessary to organize from scratch of a tax system that makes income and business taxes the new pivot of state revenues; the undertaking is in itself so difficult as to postpone any possibility of effective maneuvering of fiscal policy in a stabilizing function in the long term. There are two main directions followed by monetary policy: the first, of a structural and long-term nature, consists in the re-foundation of the monetary and credit system itself, with new rules, institutions and instruments: starting with the establishment of an independent central bank or however able to use the typical instruments of control of the money supply available to the central banks of market economy countries (interest rate on bank refinancing, compulsory reserves, etc.) and the formation of a banking system made up of real financial intermediaries and not mere executors of government decisions, as previously; the second direction, shorter term, and aimed at stabilizing the economy, consisted in maintaining moderate growth of monetary aggregates at current prices, such as to guarantee the economy adequate liquidity at the new price level, but which at the same time at the same time it constituted a contraction in real terms of the money supply itself, so as to cause a reduction in the demand for goods and services and therefore the control of rising inflation.

The transformation of the credit system is closely linked to decisions relating to monetary stabilization. Both fields of intervention include the establishment of quantitative limits on the issuance of money and the expansion of government credits by both the central bank and the credit companies, the generalized and uniform introduction of compulsory reserves for all banks, and the limitation of administrative interventions aimed at conditioning the structure and levels of bank interest rates. However, the new framework for the instrumentation of monetary policy is struggling to take off, and so far the Russian central bank has carried out the control of the money supply through the management of administrative tools, that is, by setting quantitative limits on issuing money by putting banknotes issued in previous years out of circulation, and by imposing restrictions on the extension of bank credit, rather than by resorting to changes in the interest rate or the compulsory reserve regime. The measures adopted were highly restrictive. In the period of the greatest reduction in the money supply (January-June 1992), the total credit of the Russian central bank to the government and the economy more than halved in real terms, and the credit of the banking system it is reduced to just over a third of what was found at the end of the previous year, as well as coin stock (M2). Even if, starting from the second half of the year, the squeeze is relaxed due to the need to finance the expansion of the state budget deficit, the reduction in the quantity of money in circulation remains an established fact: throughout the year 1992, the monetary base, M2 and bank credit have decreased by 48.6%, 70.7% and 61.7% respectively, and the M2 / GDP ratio has more than halved.

Such a drastic monetary and credit policy, however, while it caused the dramatic fall in consumption, had a very limited impact on prices and did not serve to reactivate the production system: the excess demand did not return with the contraction in demand. itself, as production continued its vertical fall, with many companies short of liquidity and forced to stop their activities, or to accumulate debts towards commercial partners, suppliers and personnel; on the other hand, the partial liberalization of prices, which have grown enormously for intermediate products (e.g. from 1990 to 1992, electricity tariffs for industry have increased by more than 100 times), has brought the balance sheets of some companies back into balance, but it has created serious problems for many others.

Thus, the motivations for a restrictive monetary policy weakened, at the basis of which was the not unfounded belief that inflation was determined by an excess of demand on the real market, but which it believed – with an abstractness to which they perhaps the Western economic advisers and the rigidity of the IMF’s criteria contributed – that the sterilization of household monetary assets would be enough to restore macroeconomic equilibrium. In the absence of effective structural policies aimed at improving supply conditions and encouraging the recovery of investments, economic stagnation and galloping inflation continue to coexist; and the difficulties faced by large sections of the population appear increasingly difficult to accept – without tangible results.

According to itypeauto, the main problem, however, is that of restarting the growth of the production system. The internal reforms do not seem sufficient to carry out the renewal of the plants, without a decisive contribution from foreign operators in financing and importing technology. For the resumption of investments, the estimate of the immediate need is at least 50 billion dollars, and it is not clear how such substantial financial means can be found nationally. Spaces for greater international cooperation exist, also because the current Russian foreign debt, although it has grown rapidly, does not appear to be extraordinarily high: even though the Russia dollars), debt / GDP ratios are normal (less than 15%), the ratio between debt service and indebtedness (which remains around 20%), as well as the ratio between debt service and exports, equal to 27%, also no higher than what is considered the warning level. Foreign capital, private and public, however, flow in much more slowly than expected.

Russia Economy in the Early 1990's 2