الگوی اقتصادسنجی فدراسیون روسیه

This article presents a new model of the Russian Federation and applies it to the recent crisis. It examines a range of policy options designed to improve the current economic situation. The objective is to show that the decline in output can mainly be explained by a fall in the potential output that has rendered the economy supply-side constrained. More precisely the Russian crisis may be explained by capital stock obsolescence that has rendered enterprises unable to face international competition. Hence, the optimal policy should not focus on fiscal consolidation alone, but, rather, to achieve this while undertaking supply side reforms aimed at rebuilding the capital stock.

This article presents a new model of the Russian Federation, which has been developed at the Economic Expert Group of the Russian Ministry of Finance as part of a Tacis programme from the European Expertise Service. Structural change is the key to recent economic developments in Russia, as in other Eastern countries. In this article the objective is to provide a macro-model for the Russian economy that fully integrates this structural change. The most important feature of the Russian economy is the sharp declining of output, e.g. GDP growth was −4.3% in 1995, −3.6% in 1996, 0.83% in 1997, and −4.5% in 1998.1 Its level is now only 57% of its pretransitional level. This is a larger fall than was experienced in the other transitional economies where the average fall was approximately 20% of pretransitional levels.2 Following this fall, public debt is now approximately 125% of GDP, and has become unsustainable. We argue that output has declined mainly because of a sharp decline in potential output. Investment has fallen by 34%.3 The capital stock has become older: compared with 1970 the average age of capital equipment rose from 8.4 to 12 years in 1992 and 14 years in 1995. Only in the energy and ferrous metallurgy sectors did investment exceed depreciation, in contrast to manufacturing as a whole where the capital stock has become increasingly obsolete. The condition of the capital stock has rendered firms unable to face international competition. Moreover, with operations with GKO and OFZ (short-term government bonds) the Russian banks have provided little investment into industry. This decline of investment and capital stock obsolescence has led to the economy facing a supply-side constraint as the effective capital stock has fallen.4 The recent crisis was a direct result of this structural deficiency. The collapse of the ruble has led to a decline in imports of more than 50%. Exports have remained constant, but the net effect has been largely trade surpluses. Export have failed to grow, as we might have expected, due to the inability of domestic supply to face international competition. This emphasizes the importance of investment, both to expand the amount of capital stock and also to improve its quality. As an example, Gavrilenkov et al. (1999) forecast that devaluation could lead to a sharp increase of exports. They recognize that this may be too optimistic as it depends on the capacity of the capital stock to expand output to meet the potential new demand. In our model such an increase appears in the very short-term (mainly because of reallocation of resources towards exports), but in the long-term the low level of potential output actually reduces exports. The policy conclusion of his paper is that to expand output we must first expand the capital stock. Basically this policy advice emphasizes the role of increasing public intervention, either to promote investment, or to invest directly, when the private sector cannot invest itself, or when it is helpful to private investment. In fact, due to the supply-side constraint, this model shows that contrary to a standard model where public investment crowds out private investment, in the Russian economy, public investment will help to expand private investment. The rest of the paper is organized as follows: Section 2 describes the structure of the model; Section 3 provides simulation results from different economic policies; and Section 4 concludes. The reader will find the complete model at the following web site: http://www.col.ru/eeg/model/present.html.

This paper has presented a new model of the Russian Federation. The policy implications of the model are that the recovery of growth will depend on the capacity of the Russian economy to promote investment. With this model it is possible to explain how public intervention may lead to this improvement. Nevertheless, this does not only involve economic policy, but also institutional reforms, concerning the banking system, a stronger struggle against capital flight and more generally a more stable environment to attract foreign investors. Regarding the private sector, prospects for improvements are low considering the collapse of the banking and financial sector, the extent of leverage in the corporate sector, particularly the oil and gas sector, and the lack of restructuring at the enterprise level. Moreover, the paralysis of the banking sector is not generating a major disruption in the functioning of the economy. This is a testimony to the fact that since the beginning of the transition, the banking sector has not been playing a normal role in Russia. This is particularly true of the provision of financial intermediation to firms, which is probably a determining factor in allowing access to capital and investment and thus in putting the economy on a trajectory of sustained growth. The investment climate remains particularly unattractive to foreigners due to the combination of political uncertainty, adverse legal, regulatory, and tax environment, weak property rites, endemic corruption and inadequate infrastructure. Foreign investors are extremely wary of taking chances with an unpredictable exchange rate policy: to attract capital, one must have a transparent and stable exchange rate. Capital inflows will not occur if currency risks are not hedged. Earnings are typically recycled abroad rather than reinvested in the company to upgrade the capital stock. As a consequence, companies have lost significant market share in recent years. Trends in the balance of payments suggest that capital continues to fly away. Some part of the foreign exchange that is repatriated is purchased for the purpose of capital flight (through fake import contracts). Taking official numbers for the trade surpluses over the period from January to June 1999 and estimates of public and private sector debt payments (interest and principal) gives the following: US$ billion Trade surplus 13.3 Public debt payments −6.0 Reserves change 0.0 Difference 7.3 Table options As can be seen there is still a large amount (approximately US$1.2 billion monthly) which is difficult to account for and is typically lumped together as capital flight (formally the main components include non-repatriated export earnings and errors and omissions). Hence, the improvement of private investment will not only depend on the increase of public investment, as it is shown in this model, but also on structural reforms, that involve a legislative framework for bank restructuring, but also a tighter struggle against capital flight. The full model structure is posted in the Macro Models Repository on the homepage of Economic Modelling. To access the Repository, please go to View the MathML source and then click on Economic Modelling’.