Central Bank of the Russian Economy - Essay Example

The Russian Economy by Economics for Global Business School 28th March A. How successful have the Government and the Central Bank of your chosen country been in running its economy over the last two years? The Russian economy is still in the process of transitioning towards a more democratic and market-oriented economy. The economic performance so far has not been spectacular because of the challenges entailed in the change from a command to market economy. The Government and the Central Bank of Russia are working to achieve new economic objectives. They have been successful in several fronts, but there are also areas of failure and difficulties. In order to explain the role of the government and the central bank, it will be helpful to outline the context in which they have to operate. Russia has to deal with persistent economic problems, which include: the existence of huge structural distortions: the authoritarian and centralised economic policymaking has led to institutionalization of monopolies, economic autarky and price regulation; there is a mismatch with regard to social spending and the economic output; domestic and external macroeconomic disequilibria are prevalent, leading to the state impotence in controlling economic and social life; there were chronic deficits of non-Russian republics in trade with Russia (Kaminsky, 1996, p. 43). The consensus and eventual policy position taken in Russia was that in order for the Russian economy to develop and benefit from the increasing integration of the global market and trade, policy reforms must be instituted. These reforms should directly address the challenges cited above. The past few years saw policy pronouncements that include price reform, the privatization of enterprise, macroeconomic stabilisation and fiscal decentralisation. Beginning in 1992, the government began instituting economic reform in these areas and based on the trajectory of growth of the Russian economy up to the present, it is clear that some of the governmental policies have worked. Terterov (2004), for example, cited how investments to the country has overtaken capital flight, which has been the pattern in the past. As a result the economy has received a substantial boost, particularly in manufacturing and industrial sector, helping to create jobs and revenue for the state (Terterov 2004). Empirical research has also shown the positive link between governmental reform and wage increase and unemployment (Gerber 2006). Wolf and Lang (2006) in a study for the RAND Corporation reported that the recent impressive economic performance can be attributed to decentralized decision-making and the change in resource allocation from the previous state and bureaucratic allocation to the resource allocation through the market. During Vladimir Putin’s administration, Russia was finally recognized as a market economy. The United States and the European Union declared this in June 2012. This is important for Russia because being classified as one means better opportunities for trade with other countries. For example, as a result of the recognition, the United States has removed several restrictions and guidelines that govern the US trading relationships with nonmarket economies (Maclean 2006, p. 75). The Central Bank of Russia (CBR) also plays an important role in the economic reform and policies, contributing to the favorable performance of the Russian economy. Like other central banks, it controls monetary policy and, hence, the country’s inflation rate. The OECD released an in-depth study and analysis of CBR and its role in the Russian economic reform initiatives and during the domestic and international crises. Primarily, the report highlighted that CBR was critical in stabilizing the Russian macroeconomic environment since it was able to contain inflation to low double digit levels, particularly after a decade of economic transition (OECD 2012, p. 110). The CBR primarily pursues a monetary policy that seeks to limit real appreciation of the ruble and the limitation of the tensions and risks entailed in the process. The OECD emphasized the impact of CBR particularly in an environment that is typified by large current account surpluses and strong private capital inflows – variables that often lead to missing the inflation target (OECD, p. 109). On the other hand, there several areas where Russia fail in its efforts and strategies to improve its economy. This is widely supported in the empirical studies, particularly after the first decade of the transitioning economy because the period began to reveal the impact of policies instituted. Unfortunately, despite the improved economic growth, there is a perceived underperformance on the part of the Russian economy. Many observers believe that this could be attributed to the fact that the government has never really implemented the ideal or complete economic reform policies or that the policy mechanisms and institutions that could support developments such as competition and market efficiency are still not in place. Hardt reported to the American Congress, for instance, that even though most enterprises have passed out of full state ownership, the corporate governance, the judicial system and land ownership system are not in the position to support and encourage them to perform better. Instead, they pose problems and hinder growth as in the manner by which statutes still distort property rights and how tariffs for energy, transport and communal services are kept below market levels by adverse administrative decisions (Hardt 2003, p. 26). The World Bank (2012a, p. 2) also recently noted that foreign investment are slow in coming while non-oil fiscal deficit claim up to 10% of the GDP. When compared with other Central European and Baltic countries, particularly those other states that emerge from the former Soviet Union, Russia exerts governmental control and intervention, keeping the economy from the benefits of the market system since this governmental behavior distorts market competition and provides ample opportunities for corruption. The reduction of governmental interference is supposedly part of the economic reform. The failure to do so, however, as evidenced in recent developments undermines economic performance in several respects. There is, for example, state ownership of several key enterprises. The OECD pointed out the Russian state is an ineffective owner and that continued state ownership of productive assets creates conflicts of interests for the authorities especially in instances where the state’s role as regulator is in tension with its role as owner (OECD 2006, p. 140). Today, this characteristic is still deeply entrenched. For example, there is the case of high product market regulation. This level was significantly higher than most market economies and that it restricts competition as depicted in a series of product market assessments from 2000 to 2012 (OECD 2012, p. 126). This entails related problems such as the proliferation of monopolies and cartels. There is a growing unease about the Russian economic performance today. A school of thought is emerging that the positive economic performance of the country in recent years is actually due to revenues from oil and other exported raw materials. Authors such as Terterov have been pointing out that liberalism and market economy is never really part of or aligned with the Russian national character and that state centralism. Whether this position is valid or not, there is still the legitimacy of the concern for the centralism of the state in Russia, with the increasing aggressive state regulation of the economy. It is behind the failures in the market and in policymaking that stunt economic growth. This is unfortunate because the liberalism and free market objective pursued in the economic reforms started during Putin’s first term was widely hailed as a step towards the right direction. B. Describe and evaluate the main macroeconomic policies used by the Government and Central Bank of your chosen country over the last two years. Russia has undertaken a massive privatization of its enterprises as the government came under pressure from industrialists and the forces of globalization. This began in 1992 when a privatization legislation was enacted, allowing workers and Russian citizens to purchase stocks from enterprises. Today, the firms that remain under state control include those that are within the energy sector and certain financial institutions such as Agroprombank, Promstroibank and Zhilotsbank. The existence and proliferation of state-owned enterprises is not the issue with this legislative development. Rather, there is now the existence of private ownership framework, which should form a huge incentive for the development of the country’s economy. The outcome of these initiatives has been positive. For example there is the case of improved performance of both state-owned and commercial enterprises (World Bank 2012b). There is also the higher degree of diversity in the economic activity as well as greater investor confidence. In recent years, the privatization policy has been augmented by other legislations and policy decisions such as the liberalization of prices as well as attempts at fiscal discipline. During his inauguration in 2012, Vladimir Putin issued several presidential decrees, a number of those constituted vital economic policies that is currently being implemented. The most notable of these involved the increase of investment rate to 27 percent of GDP by 2018 and the creation of at least 25 million jobs by 2020 (Muradov 2012). The policy pronouncement did not include the roadmap for achieving the outlined targets but there was an indication that this will entail huge public expenditure. According to Muradov, the long-term policy would require the consolidation of existing government programs and the delivery of new ones that must provide the frameworks for public procurement and investment. The International Monetary Fund reported the same objectives, introducing the general governmental goals of economic diversification, encouraging growth and the reduction of economic vulnerabilities. The IMF noted, however, that Russian policy is prioritizing the management of inflation over other goals, a policy that include the achievement of flexible exchange rate, the absence of fiscal dominance and the strengthening of financial institutions (Brekk 2012). For this purpose, the Central Bank of Russia is instituting new measures such as operational independence and communication; control over policy instrument and transmission; and, increased forecasting capability (Brekk). This has been highlighted because inflation remains the leading economic problem for Russia. The second half of 2012, for example, saw a sluggish economic growth because of an uptick in inflation, which aggravated weak domestic and external demands (World Bank 2012a). Specific policies that were designed to stimulate growth also include fiscal policy tightening in 2013, which is targeted to constitute ½ percent of the GDP (Brekk 2013). Essentially, the economic policies in the past two years or so are still anchored on governmental stimulus such as in the effort to prop up domestic demand. This is consistently achieved through budgetary and monetary policies. Experts believe that this is not ideal in spurring the Russian economic growth. The IMF, for example, is proposing a focus on policies that would boost productive investment such as those funneled on the supply side of the economy (Brekk 2013). CBR, on the other hand, has adopted sound policies in the past two years and, most certainly even earlier. The policies are placing it on the path to becoming a truly effective inflation-targeting regime. The bank has adopted more flexible exchange rate policies. The policies adopted so far could be credited to the former CBR head, Sergei Ignatiev, who has followed strict monetarist orthodoxy, which saw the effective management of Russian inflation through the years (see Table below). Last year, for example, despite mounting pressures both from the politicians and from the business sector, he refused to cut interest rates until inflation went down again (Adomanis 2013). The initiatives of Ignatiev’s successor indicate the same policy stand with regards to monetary policy and monetary market rates. In the last quarter of 2013, for instance, CBR refused to cut interest rates anew in order to keep the inflation rate within target. Economists point out that this position is analogous to the bank, saying, “nothing has changed in its assessment of risks to growth and from inflation (Rose and Tanas 2013). source: Adomanis 2013 As the Russian economy is almost grinding to a halt this year, the spotlight is on CBR to get it to grow again. This is particularly the case since the institution decides on the Russian monetary and fiscal policies. Several microeconomic policies are that are expected to be adopted include: lowering of interest rates, depreciating the ruble, the expansion of refinancing instruments as well as the delay of the adoption of Basel 2.5 and Basel III capital frameworks (Larionova and Shelopov 2013, p. 73). All in all, Russia in the past two years is pursuing macroeconomic stability. On the part of the government, there is the step on the right direction when it recently initiated the adoption of new fiscal rule that involves fiscal tightening. On the part of the Central Bank, there is the transition towards inflation-targeting regime and the adoption of flexible exchange rate policy. These economic policies are expected to become the foundation of more economic policies that should allow the stability that has eluded the Russian economy so far. References Adomanis, M 2013, The Russian Central Bank And How Russia Is (Slowly) Becoming A More Normal Country. viewed 27 March 2014, Forbes, . Brekk, O 2012, Russian Federation: Economic Outlook and Policy Changes. International Monetary Fund. Brekk, O 2013, Economic Outlook and Policy Challenges for Russia 2013. International Monetary Fund. Gerber, T 2006, Regional Economic Performance and Net Migration Rates in Russia, 1993-2002. International Migration Review, vol. 40, no. 3, pp. 661-697. Hardt, J 2003, Russias Uncertain Economic Future: With a Comprehensive Subject Index. M.E. Sharpe, New York. Kaminski, B 1996, Economic Transition in Russia and the New States of Eurasia. M.E. Sharpe, New York. Larionova, M & Shelepov, A 2013, Reinvigorating Growth Potential: Priorities for the Central Bank of Russia. Brookings Institution, Washington, D.C. MacLean, G 2006, Clintons Foreign Policy in Russia: From Deterrence and Isolation to Democratization and Engagement. Ashgate Publishing, Ltd., New York. Muradov, K 2012, Russias economic policy under Putin 2.0. viewed 27 March 2014, East Asia Forum, . OECD 2006, OECD Economic Surveys: Russian Federation 2006. OECD Publishing. OECD 2009, OECD Economic Surveys: Russian Federation 2009. OECD Publishing. OECD 2012, OECD Economic Surveys: Russian Federation 2011. OECD Publishing. Terterov, M 2004, Doing Business with Russia. GMB Publishing Ltd., London. Wolf, C and Lang, T 2006, Russias Economy: Signs of Progress and Retreat on the Transitional Road. RAND Corporation, Santa Monica, CA. The World Bank 2012a, Russian Economic Report 28: Reinvigorating the Economy. The World Bank. Available from: . [28 March 2014]. The World Bank 2012b, Russian Economic Report: Moderating Risks, Bolstering Growth. The World Bank. Read More