V. Conclusions

Benedicte Christensen
Published Date:
December 1994
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The balance of payments position of Russia has been subject to extensive public debate. Views have ranged from optimism about the great potential of the Russian economy and the scope for a quick payoff of the substantial financial assistance made to spur economic growth and external adjustment, given the rich natural endowment and highly educated labor force, to pessimism about the possibilities for introducing market reforms and the depth of the macroeconomic and structural problems. This paper has stressed the highly complex character of the external situation and the extreme uncertainties that surround its outlook: the unprecedented and multifaceted changes in the economic system, the domestic political uncertainties, and—not the least—those concerning Russia’s relations with the other states of the former Soviet Union.

Russia’s balance of payments difficulties did not begin with the reform process or the demise of the former U.S.S.R. External problems had accumulated in the U.S.S.R. because of growing macro-economic imbalances and structural problems. In some sense, a classical balance of payments crisis had occurred: large fiscal deficits had emerged during the second half of the 1980s; price distortions and a lack of efficient investment had slowed economic growth; the heavy reliance on military exports supported by export credits—which may have given Soviet policymakers the illusion that the external situation was stronger than it proved to be—could not continue; and a non-market-determined price structure did not promote agriculture and therefore led to heavy reliance on agricultural imports for a country that had been an exporter of agricultural products. Piecemeal trade liberalization, which was not supported by price and exchange rate liberalization or domestic stabilization policies, only aggravated the external problems. External adjustment was postponed to boost domestic consumption in support of glasnost and perestroika at the expense of a sharp buildup of external debt. Before the U.S.S.R. ceased to exist, external foreign exchange and gold reserves were almost exhausted, in part because of a bunching of debt-service payments and large net repayment of short-term debt to the commercial banks. Debt-service difficulties interrupted access to international capital markets and led to the cessation of private inflows, thereby limiting financing to official or official-guaranteed loans from abroad. At the same time, the channeling of these official loans through the Government maintained the central apparatus of import allocation to enterprises at subsidized prices.

The balance of payments developments in Russia during the early reform period, from the beginning of 1992 to mid-1993 following the collapse in central planning, showed the close correlation between economic policies and external developments. While the market-related policy reforms were clearly more comprehensive than in the past, some key policy measures were not taken. In particular, exports suffered from the maintenance of quantitative restrictions, which prevented the beneficial impact of the floating, unified exchange system from fully materializing. The level and distribution of imports was, to a large extent, determined by government decisions, while enterprises that had foreign exchange chose to build up large foreign exchange deposits with domestic banks, partly because of a lack of confidence in the financial policies. The maintenance of sharply negative real interest rates on ruble-denominated assets was also a critical factor behind large capital outflows.

Although financial assistance from bilateral sources continued to be disbursed, it was largely on relatively short-term maturities, which led to a sharp increase in the debt-service burden for the immediate future. The maturity structure partly reflected the commodity composition of related imports, including the large share of food products. Moreover, the particular form of tied credits that was available might not always have matched the demand for imports. Debt-servicing difficulties also led creditors to insist on collateral for new loans in the form of escrow accounts, with potentially serious macroeconomic and structural implications, including the segmentation of international reserves, the undermining of a domestic foreign exchange market, and less stringent project selection by both creditors and debtors.

The Memorandum of Understanding with external creditors was signed in a period when the U.S.S.R. was breaking apart and the responsibilities for external debt were not settled. By recognizing the responsibility for the debt of the former U.S.S.R., it helped maintain the flow of financing in a transition period after the breakup of the former U.S.S.R. However, it also proved difficult to implement in practice given the uneven external economic situation of the various states and the difficulties they had in reaching joint decisions. The rescheduling agreement with official creditors of April 1993 and the declaration by Russia of responsibility for the debt repayment provided the basis for regularizing the payment situation with external creditors. Bilateral relations between Russia and the other states concerning the debt and assets of the former U.S.S.R. remained to be settled.

Given the collapse in exports and the substantial increase in external debt on unfavorable maturities, Russia’s debt burden remains substantial. Russia’s external prospects and its debt-service situation should be evaluated on the basis of Russia’s export potential. Russia’s external situation also depends on the ability of the other states of the former Soviet Union and the developing countries to service their debt to Russia and any future lending from Russia. The evaluation of Russia’s external prospects, however, continues to be hampered by the poor quality of data. Major gaps in information, including on trade developments, have deteriorated further in 1993 so as to make a meaningful analysis of the external situation difficult.

External developments show the importance of the consistent implementation of economic reform, including a liberal trade regime. Russia’s ability to take advantage of an expansion of the traded goods sector will also depend on the willingness of its partner countries to prevent new protectionist trade measures and to relax existing ones. Economic reform, including the restructuring of large state enterprises, would be facilitated by financial assistance. The terms of such assistance will be crucial. Given the size of the debt burden, non-debt creating flows in the form of foreign direct investment will also have an important role to play as a means of financing, besides the transfer of new technology.

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