Russias Response to the GFC - Assignment Example

?Introduction The onset of the Great Recession of 2008 marked a turning point in the economic paradigm that many countries across the world were following till then. Since the crisis was global in nature spreading rapidly across the world due to the interconnected nature of the global economy, responses to the crisis from individual countries varied according to their unique economic conditions that were prevalent in those countries. This was because of the structural nature of the crisis which prompted responses from the countries in different manners since the economic structure of each country varies due to the way in which the economies are ordered (Vogt & Leuschel, 2011, 15). This paper considers the responses of two countries, Russia and India, which have markedly different economies, to the global financial crisis. The focus throughout this paper would be on assessing the response of Russia and India to combat the fallout of the global financial crisis as well as examining where they differed and why they differed. The emphasis of this paper is on seeking the underlying theory behind the responses from a macroeconomic perspective. It has been said that the rules of the game have changed after the onset of the global financial crisis and many have even said that it is the end of the world as we know it. This paper tries to understand the responses of Russia and India to the crisis from the unique perspective of the policy makers as presented in the sources that have been consulted for this paper. Russia’s Response to the GFC When examining Russia’s response to the global financial crisis, it would be pertinent to note that above all, the Russian economy is heavily dependent on exports of oil and this forms a significant percentage of the GDP for Russia. Since the Russian economy also has a dual financial system, which consisted of one part serving the households and the other part serving the corporates and foreign markets, the Russian response were a twofold and two pronged calibrated one. This two pronged approach is explained further in the succeeding paragraphs. It needs to be mentioned that Russia was relatively “prepared” for the global financial crisis and hence it’s response to the crisis must be seen in this context (Sestanovich, 2008). On one hand, Russia opted for step-wise devaluation of its currency so as to bolster the real effective exchange rate. As mentioned above, since the Russian economy was heavily dependent on exports of oil, the exchange rate at which oil was exported had to be “adjusted” to take into account the fall in exports. Hence, the Rouble was devalued in a phased manner to make the necessary revaluation of the exchange rate so that the real rate at which oil was exported would be competitive to Russian exporters of oil. The merits of a gradual depreciation of the Rouble as opposed to a one-off devaluation can be argued from the theoretical perspective of a steep fall in the value of a Rouble to a calibrated fall thus giving economic agents ample time to adjust their assets (Sutela, 2010). The second part of Russia’s response was to release the contingency fund or the reserve fund to support the financial system that was reeling under the impact of outflow of funds and which was dependent on foreign markets for business. The point to note here is that the debt held by these banks was mainly short term in nature; the reserve fund was never intended for longer term stabilization and was mainly geared towards softening the fall in fiscal revenue for the banks and the financial system. Further, the central bank could do little by way of monetary policy and it fell to the fiscal policy to support the financial system (Sutela, 2010). India’s Response to the GFC The Indian response to the Global Financial crisis was to provide stimulus and support to the economy by enacting three stimulus packages, one in December 2008 and two more in Jan and Feb of 2009. “The stimulus packages were also designed to rebuild confidence in the economy by: easing the liquidity crisis, especially the flow of credit to medium-sized and large enterprises; providing further incentives to export-oriented sectors and industries; enhancing access to capital for investment in infrastructure; and boosting local demand for selected goods and services” (ILO, 2010). The Indian response could be understood in the context of the relatively closed Indian economy that was not that much dependent on foreign markets and the absence of full capital account convertibility which meant that there was relatively lesser risk of capital outflow and flight of funds from the economy. However, India did not emerge totally unscathed from the crisis and because of the global nature of the crisis; the “decoupling” theory so favoured by many experts was not the case (Subbarao, 2009). The Indian response to the global financial crisis had three objectives; First, to maintain a comfortable liquidity position; second, to augment foreign exchange liquidity’ and third, to keep the credit delivery on track. The tools used in response were to reduce the interest rates in an aggressive and rapid manner, reduce the quantum of funds that is needed to be held by the banks with the central bank (Cash Reserve Ratio) and ensure that refinance facilities for export credit were not affected. These measures, taken in tandem by the fiscal and monetary authorities ensured that the Indian economy pulled itself out of the woods in a short time as opposed to the lengthy nature of the recession in other countries (Reddy, 2009, 98). It has already been mentioned in this paper that India “managed” its economy far better than expected thanks to the incumbent government which ensured that foreign players and financial institutions were regulated to a greater extent than in the other BRIC (Brazil, Russia, India and China) bloc and hence the response to the crisis was more in the nature of containing the fallout rather than fire fighting the contagion that quickly spread across the world in the winter of 2008 (Reddy, 2009, 45). Differences in Responses As has been explained in the sections above, the difference in the response of Russia and India to the global financial crisis has to be understood in the context of the Russian economy being much more of an “open” economy as opposed to the Indian economy which is relatively “closed”. Of course, the fact that both Russia and India anticipated the crisis and “prepared” for it by providing for a contingency fund in the case of the former (Russia) and by not opening up the financial sector fully nor allowing the use of “exotic” financial products like derivatives on par with other countries in the case of the latter (India) worked in their favour. However, the similarity ends there as Russia devalued its currency because of its dependence on oil as a major source of revenue whereas the Indian response was more domestic in nature as well as to protect the sectors that were global in nature and hence affected by the crisis (Magnus, 2010, 87). As the following quote makes it clear, the above inference and analysis is well supported by the expert opinion, “While Russia has weak institutions, many countries with even weaker institutions, such as India and Indonesia, were unaffected by the crisis. But these countries are not open economies. Foreign trade is a small portion of their national product, capital flows is controlled in various ways, and the banking sector is protected” (Sutela, 2010). The other major difference in the responses of India and Russia were to do with the fact that the Russian economy is much more bigger than the Indian economy (Russia was once a superpower and is again flexing its muscles whereas India is an emerging economy) and hence the policy responses were miniscule as opposed to the Russian response that was larger in comparison. An evidence of this disparity can be found in the way international “think tanks” and economists covered the Russian response in detail whereas the coverage of the Indian response to the crisis was muted in nature. Conclusion The Great Recession of 2008 which was global in scope affected almost all countries with sizeable economies. As this paper has discussed, the Russian and Indian responses differed to a large extent but both countries had the advantage of being prepared for it. While for Russia, it was a feeling of deja vu after its experiences in the Asian financial crisis of 1998, for India it was more in the nature of observing the successive global crises which gave the policymakers ample room to anticipate and protect the country. In conclusion, both Russia and India represent successful case studies of how to combat global economic and financial crises though the Indian case can be said to be stronger because of the inherent structure of the economy. Given the fact that the global economic crisis represents a structural shift from the “heady” days of the nineties and the first decade of the 21st century, the “Age of Anxiety” that is now staring at the face of the second decade of the 21st century represents a challenge for the West and it is hoped that the countries of the West learn a thing or two from these countries (Rachman, 2011, 35). References Duvvuri Subbarao. 2009. Impact of the Global Financial Crisis on India Collateral Damage and Response. [ONLINE] Available at: http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/Speech%20-%20as%20sent-%20Modified%20_4_.pdf. [Accessed 02 March 11]. ILO. 2010. India’s Response to the Crisis. [ONLINE] Available at: http://www.ilo.org/public/libdoc/jobcrisis/download/g20_india_countrybrief.pdf. [Accessed 02 March 11]. Magnus, G, 2010. Uprising: Will Emerging Markets Shape or Shake the World Economy. 1st ed. London: John Wiley and Sons. Pekka Sutela. 2010. Russia’s Response to the Global Financial Crisis. [ONLINE] Available at: http://carnegieendowment.org/files/russia_crisis.pdf. [Accessed 02 March 11]. Rachman, G, 2011. Zero Sum World: Politics, Power and Prosperity after the Crash. 1st ed. London: Penguin. Reddy, YV, 2009. India and the Global Financial Crisis. 1st Ed. New Delhi: McGraw-Hill. Stephen Sestanovich. 2008. Russia and the Global Economic Crisis. [ONLINE] Available at: http://www.cfr.org/economic-development/russia-global-economic-crisis/p17844. [Accessed 02 March 11]. Vogt, C and Leuschel, R, 2011. The Global Debt Trap. 1st Ed. New Jersey: John Wiley and Sons. Read More

 

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