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Economic Growth in Russia after the Collapse of the Soviet Union - Essay Example

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For economic and political reasons, the Union of Soviet Socialist Republic collapsed in 1991 and broke down into 15 independent states, which came to be called newly-independent states or NIS. During its break-down the economy of the independent states struggled to become market economies. …
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Economic Growth in Russia after the Collapse of the Soviet Union
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Download file to see previous pages Russia’s economic performance “after the fall” has been negatively described by many including members of the United States Congress. But in 2003, President Bush praised Russian President Putin over his democratic ideals in ruling present-day Russia.
Let us examine first how Russia encountered those challenges in the early years after the fall of the Soviet Union. Russia first experienced currency devaluation due to large deficit. The newly-independent states (NIS) experienced a dramatic drop in the Gross Domestic Product by more than 40% for the period 1990 to 1995 (qtd. in Mondal 140). This situation led to numerous reforms in the economy, particularly the reconfiguration of the public finances. The international community helped to provide economic reform and infuse foreign aid. This led to an improved GDP.
At the start, Russia had to depend on foreign capital to sustain economic growth because of internal factors like slow revenue collection and excessive state expenditures. The government was also encountering low savings rates and Russian banks refused to provide finance for domestic investment. Research on the Russian economy found that the legal system was “an obstacle to foreign investment” and there was no proper legal regulatory framework to provide efficient foreign trade arrangements. Other factors considered obstacle were spot-market and hierarchical transactions which are common in low-performance economies. The strategy of liberalization and internationalization changed the configuration of demand, price signals and transaction costs because of Russia’s “large territorial distances and fragmented economic space” even if Russia has rich natural resources and human capital.
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nalization changed the configuration of demand, price signals and transaction costs because of Russia’s “large territorial distances and fragmented economic space” (qtd. in Kirkow 80) even if Russia has rich natural resources and human capital. Liberalization and new foreign trade arrangements were faced with bureaucratic encroachment by means of export and import tariffs and quotas as these were opposed by resource-based industries (in metallurgy, oil, etc.) and “crony legal entities.” There were also external factors like export restrictions imposed by EU regulations and international cartels (Kirkow 81). These factors impeded the flow of foreign capital, technology and technological knowledge, and prevented the creation of new jobs and industries. Two industrial sectors supposed to attract FDI in Russia in 1993-1994 were not considered labor-intensive, and manpower was not a major FDI magnet. Moreover, there was a linking of the traditional and new approaches since the Russian government had “active state participation” over matters relating to Russian exports. This policy applied to what the government called “strategic resources,” such as military hardware, natural gas and precious metals. There were also export restrictions conducted by the government, like issuance of export licenses and quotas, taxes, the limitation of export producers, the monopoly of FTOs in acquiring export products on the domestic market and the policy to remit a portion of the hard currency revenues to the government (Kirkow 82). State-owned banks set up during the Soviet era and still operating abroad continued to provide state control and coordination of foreign trade. These banks were set up to provide credits for Russian firms at lower than domestic interest rates and ...Download file to see next pagesRead More
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