- Benedicte Christensen
- Published Date:
- December 1994
- “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the age of incredibility, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us …”CHARLES DICKENS, A Tale of Two Cities
Russia’s recent economic circumstances have been virtually unprecedented in modern world history because of a confluence of major events.1 First, there was an increase in macroeconomic imbalances and structural problems during the 1980s; second, there were changes in external economic relations, including the breakup of the Council for Mutual Economic Assistance (CMEA); third, the disintegration of the U.S.S.R. during 1990–91 caused severe disruptions in traditional trade and payments links as well as an internal dispute over the division of assets and liabilities of the former U.S.S.R.; and finally, after the collapse of central planning, Russia embarked on major economic reforms in a transition to a market economy. Each of these events would, in itself, have had a powerful impact on the economy. Taken together, they led to a collapse in foreign trade, shortages of imported inputs that aggravated the decline in domestic output, and difficulties in financing the balance of payments and servicing external debt. Because of Russia’s economic size and political importance, systemic changes extended far beyond its borders.
This paper focuses on Russia’s external developments up to mid-1993. It describes the initial macroeconomic imbalances and the three systemic shocks that set the stage for the critical balance of payments difficulties Russia faced in the early 1990s, the interrelationship between domestic and external developments in the early phases of Russia’s reform, and the external debt situation. This analysis also points to external adjustment issues that Russia will face in the future, including the potential for an early reversal of the export decline, and the nature of the external financing and debt problems.
Although the purpose of this paper is to discuss the external developments of Russia, it is necessary first to describe the development of the U.S.S.R., that formally ceased to exist in December 1991,2 and, before then, the developments of the U.S.S.R. and Russia cannot be meaningfully separated. During 1991, particularly after the attempted coup d’etat on August 19–21, 1991, the union government increasingly lost control over the union republics. Therefore, this paper describes first the external developments of the U.S.S.R. until the end of 1991 and subsequently those of Russia. The discontinuity in country coverage also implies a discontinuity in data. Although attempts are made to disentangle the balance of payments of Russia before 1992, this distinction is somewhat artificial because the U.S.S.R. was a closely integrated economy.
The weaknesses in the balance of payments data and previous secrecy surrounding the information have hampered the analysis of external developments and policy decision-making, both in the U.S.S.R. and abroad. In the past, balance of payments information was classified and received only restricted internal distribution. In the event, the balance of payments was never compiled. Only the foreign exchange budget of the plan was put together. The release of information proceeded slowly from July 1990, when the former Soviet Government began to open its books to outside bodies,3 followed by the formal commitment to release economic information after the establishment of Special Association between the U.S.S.R. and the IMF on October 5,1991. Further disclosure of balance of payments information accompanied membership of the IMF in the course of 1992 (Russia on June 1, 1992).4
Existing information suffered from weaknesses relating to the deterioration in enterprise discipline in reporting foreign trade transactions; underreporting to avoid the obligatory foreign exchange repatriation and surrender, and domestic taxation; and changing institutional responsibilities for statistical compilation as agencies of the Russian Federation took over from those of the former U.S.S.R.5 Compilation of new information became necessary because of the breakup of the U.S.S.R. into 15 independent states; the decentralization of foreign exchange transactions in the commercial banking system and at the enterprise level; and the lack of data on services transactions and foreign direct investment flows. Although new statistics have been established in some of these areas, the quality of trade statistics has continued to deteriorate, preventing a meaningful analysis of trade in 1993.
Partly because of the lack of timely and reliable statistics for transactions with the former U.S.S.R. area, the analysis of Russia’s balance of payments from 1992 has typically focused on transactions with the countries outside the area.6 However, transactions both inside and outside the former U.S.S.R. are of great economic importance and are closely interrelated. It would be highly misleading to focus only on the balance of payments with countries outside the former U.S.S.R. This paper therefore covers Russia’s external transactions with all countries.
Section II of this publication describes first the initial macroeconomic and structural problems and then the three systemic shocks separately, although clearly they were interrelated: changing external economic relations; the disintegration of the U.S.S.R.; and the beginning of economic reforms in Russia, with a focus on external sector reforms.7 Section III presents balance of payments developments in the pre-reform period and from early 1992 to mid-1993, when the Russian Government initiated major economic reforms. Section IV discusses the external debt situation. Finally, Section V suggests some conclusions and lessons for the future.