Differentiating itself from the other post communist countries, many have argued that Russia lacked the political basis for reforms that therefore explains the failure of many stabilisation attempts with the 1998 financial crises as its apogee. Nevertheless, the government undertook its first heavy pro-market plan in January 1992, with Deputy Prime Minister Yegor Gaidar as a leader. This programme was monetary based, as opposed to exchange rate based. It mainly consisted of the following main points: Price liberalisation, reduction in the credit growth, reduction in the budget deficit, trade liberalisation. Starting on January 1992, it was in the first place seeking for IMF approval, which came only in April of the same year.

The first step taken was that of price liberalisation, in January 2nd. Prices were freed, though basic food items, rents and medicines were still controlled for the sake of the consumers and energy prices for producers. An immediate consequence of this policy was the initial jump in inflation, as seen in table 1. At the end of January, it had reached +350%, and just over 2500% at the end of the year.

Table 1 - Inflation in Russia

Source: Lavigne, Marie. The Economics of Transition. McMillan Press ltd, second edition, 1999.

While in most countries price liberalisation brought about the immediate end of shortages and queues, as well as a rather quick equilibrium adjustment of relative prices, Russia did still held these phenomena back. In fact, ceilings on mark-ups (imposed by state trade) and the remaining complex and inefficient regulations on trade did not allow relative prices to adjust properly ^[1]. Thus, shortages disappeared only gradually.

At the same time, price liberalisation faced a certain political resistance. This was emphasized as the V.A.T. was introduced at a rate of 28% ^[2]. Coordination problems arose as well, as there was regional inflation and price disparities as local authorities were imposing their own controls over prices, despite higher official’s orders.

A factor contributing to the high rates of inflation was the large amount of saving stocks resulting from forced savings during the soviet period ^[3]. This generated a monetary overhang, becoming an inflationary one as prices were liberalised. These factors seem to account for initial inflation. However, in a longer run, the inability to bring it down to reasonable rates was emphasised by the catching up of wages. The main problem however, was the growing amount of credit growth, generating inflation. As shown in table 2, most of these credits were going to enterprises and a fairly large amount to other CIS Republics.

 Table 2 - Flows of credits from the Russian Central Bank, 1992 (as a % of GDP)

Source: Anders Aslund (ed.). Economics Transformation in Russia. Pinter Publishers, London, 1994. 

The growth of credits to other CIS countries seemed to be a major problem for Russia. The Central Bank of Russia (CBR) did in some cases finance over 50% of former Soviet Union countries national GDP ^[4]. Relations between Russia and the rest of the CIS Republics stayed close, especially in terms of trade and it enhanced the growth of credits.

As a currency union, the rouble zone, still bound them, this resulted in hyperinflation in the CIS. While Armenia and Ukraine experienced rates over 10,000%, Russia limited the effect through a very strict monetary policy (Aslund, 2000). The central bank increased the commercial bank’s required reserve ratios, keeping a certain control over money supply, which was reflected in the drop of inflation after having adjusted to the initial monetary/inflationary overhang.

Another point of the stabilisation programme was the reduction of budget deficit through lower spending and higher revenues. Military spending and subsidies were drastically reduced. Raising money for the budget was enhanced as the government launched a privatisation programme at the end of 1992. The privatisation of small and medium enterprises was conducted rapidly, whereas large-scale privatisation was slower.

Nevertheless, firms pressured for subsidies and soft-budget constrains. This incentive can be explained by a vicious circle involving inflation and the budget deficit. More precisely, these factors are related through the Tanzi-Olivera effect which depicts a positive relationship between inflation and the budget deficit . Indeed, high and persistent inflation leads to a greater budget deficit as tax collection are set in nominal terms and lose in real terms given high rates of inflation. As shown before, mark-ups on prices were rather controlled, in order to tame inflation and emphasised the extent of the Tanzi-Olivera effect. However, costs (mainly wages) were increasing with inflation, which gave a hard time to enterprises, pressuring for state subsidies, thus giving rise to a vicious circle making it harder for the government to impose hard budget constrains. By mid-1993, this programme was abandoned as it was strongly attacked in the Duma. Political turmoil led to the formation of another team, attempting to re-launch a new series of reforms by the end of 1993.

Finally, in order to have a complete understanding of the problems faced by Russia in its attempts for macro stabilisation, a reminder should be made. Corruption, race for power, political instability, inefficient bureaucracy, the oligarch’s power, inadequate institutions and so forth are some of the factors that hamper the implementation of sound, adequate and successful stabilisation programmes. Political problems, even at the international level were, as we saw concerning Russia’s relations with the Former Soviet Union, key determinants of the success of internal stabilisation.

[1]   Keon, Vincent, and Phillips, Steven, Price Liberalisation in Russia. Behaviour of Prices, Household Incomes and Consumption During the First Year, IMF Occasional Papers no.104.

[2]   Then lowered to 15%.

[3]   By 1990, according to CMEA statistics, the amount of saving stocks amounted over 10 months worth of a household’s expenditure.

[4]   For example it was about 49.0% for Armenia, 69.9% for Uzbekistan, and even up to 90.7% for Tajikistan.