The Russian Federation in Transition
External Developments
Author: Ms. Benedicte Vibe Christensen
Publication Date:
01 Sep 1993
eISBN:
9781451849516
Language:
English
Keywords:
WP; long-term debt; FSU area; CMEA country; FSU government; short-term debt; zero option
Download PDF (3.8 MB)

This paper discusses Russia’s balance of payments developments in recent years: the initial macroeconomic imbalances and systemic shocks which set the stage for the critical balance of payments difficulties Russia faced in the early 1990s; the lessons from the early phases of Russia’s economic reforms; the choices faced by the Russian Government and the international community in supporting the government’s reform efforts; and the external debt situation. This analysis also points to external adjustment issues which Russia will face in the period ahead, including the potential for an early reversal of the export decline and the nature of external financing and debt problems.

Abstract

This paper discusses Russia’s balance of payments developments in recent years: the initial macroeconomic imbalances and systemic shocks which set the stage for the critical balance of payments difficulties Russia faced in the early 1990s; the lessons from the early phases of Russia’s economic reforms; the choices faced by the Russian Government and the international community in supporting the government’s reform efforts; and the external debt situation. This analysis also points to external adjustment issues which Russia will face in the period ahead, including the potential for an early reversal of the export decline and the nature of external financing and debt problems.

I. Introduction 1/

“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 economic developments in recent years have been virtually unprecedented in modern world history in terms of a confluence of major events. First, the increase in macroeconomic imbalances and structural problems during the 1980s. Second, changes in external economic relations, including the break-up of the Council of Mutual Economic Assistance (CMEA). Third, the disintegration of the U.S.S.R. during 1990-91 which 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. (FSU). Finally, the collapse of central planning, followed by Russia’s embarking on major economic reforms in a transition to a market economy. Each of these events would by themselves have had a powerful impact on the economy. Taken together they led to a collapse in foreign trade, shortages of imported inputs which 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, the systemic changes in that country extended far beyond its borders.

This paper focuses on Russia’s external developments in recent years. It describes the initial macroeconomic imbalances and each of the three systemic shocks, which 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 which Russia will face in the period ahead, including the potential for an early reversal of the export decline, and the nature of external financing and debt problems.

While the purpose of this paper is to discuss the external developments of Russia, it is necessary first to describe the developments of the U.S.S.R. The U.S.S.R. formally ceased to exist in December 1991, 1/ and the developments of the U.S.S.R. and Russia cannot be meaningfully separated until the end of 1991. The year 1991--particularly the period after the attempted coup d’etat on August 19-21, 1991--represents a period of dissolution of the U.S.S.R. with the union government increasingly losing 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 what constitutes the balance of payments of Russia before 1992, this distinction is somewhat artificial as the U.S.S.R. was one 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./Russia and abroad. In the past, balance of payments information was classified, and received only restricted internal distribution. In fact, the balance of payments was never compiled. Only the foreign exchange budget of the plan was put together. The release of information proceeded slowly beginning from July 1990, when the former Soviet Government first began to open its books to outside bodies, 2/ followed by the formal commitment to release economic information following 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 the FSU states’ acceptance into membership of the IMF in the course of 1992 (Russia on June 1, 1992). 3/

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 FSU. 1/ Compilation of new information became necessary because of the break-up of the FSU 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 in some of these areas new statistics have been established, the quality of the trade statistics for both the FSU and non-FSU countries has continued to deteriorate so as to prevent a meaningful analysis of trade developments in the first half of 1993.

Partly because of lack of timely and reliable statistics for transactions with the FSU area, the analysis of Russia’s balance of payments from 1992 has typically focused on transactions with the countries outside the borders of the FSU. 2/ However, both FSU and non-FSU transactions are of great economic importance and are closely interrelated. It would therefore be highly misleading to focus only on the balance of payments with non-FSU countries. This paper therefore covers Russia’s external transactions with all countries.

Section II of this paper describes first the initial macroeconomic and structural problems and then the three systemic shocks separately, although clearly they were interrelated: the changing external economic relations, the disintegration of the U.S.S.R., and the beginning of economic reforms of Russia with a focus on external sector reforms. 3/ Section III presents the balance of payments developments in the pre-reform period and from early 1992, 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.

II. The Stage Setting--Macroeconomic Imbalances and Three Systemic Shocks

1. Macroeconomic and structural problems

The balance of payments difficulties did not begin with the demise of central planning, the disintegration of the U.S.S.R., and abolition of the CMEA trade and payments arrangements. During the second half of the 1980s, the external situation had already deteriorated in tandem with the increase in financial imbalances and growing structural problems.

The trade balance of the U.S.S.R. deteriorated from a surplus of US$4 billion in 1985 to a deficit of US$5 billion in 1989. This mirrored the increase in the fiscal deficit from 2 percent of GDP in 1985 to 9 percent of GDP in 1988-89. The deterioration in both the fiscal and external accounts reflected, in part, the impact of a terms of trade loss in 1986 (11 percent) and again in 1987 (9 percent) as world market prices on oil declined, which had an immediate impact on receipts on exports to industrial countries and a delayed impact on receipts from the former CMEA countries. 1/ From 1987, enterprises were also given greater autonomy in the setting of wages and bonuses, which resulted in a sharp increase in the wage bill. However, as they were not subject to a hard budget constraint, monetary growth accelerated and pent-up demand (in the absence of price liberalization) rose. As discussed in Section II.4, external policies were liberalized in a piece-meal fashion, which led to higher imports, particularly of food and other consumer goods. The increase in imports was a deliberate policy of the Soviet government to support domestic consumption and thereby also glasnost and perestroika.

Structural problems affected, among others, exports of oil and arms and imports of agricultural products. From 1989, exports suffered from declining oil production (Section III.4). Arms exports continued to decline sharply. To the extent that arms exports had previously been financed by the extension of medium-term credits, however, it did not immediately worsen the overall balance of payments situation, although it had obvious effects on domestic production. On the import side, the lack of domestic agricultural reform and the interruptions in deliveries of goods traditionally provided by other FSU states raised import demand for food and food products from non-FSU states.

As a result of the increasing external imbalances, the external debt and debt service obligations in convertible currencies rose rapidly in the late 1980s and 1990. Thus, external debt doubled from US$31 billion at the end of 1986 to US$61 billion at the end of 1990.

2. Changes in external economic relations

The easing of East-West political tensions and--perhaps more importantly--the escalation of the U.S.S.R.’s economic problems--led to major changes in the external economic relations from the late 1980s, which, in the short run, were both beneficial and disadvantageous to the U.S.S.R. The abolishment of the trade and financing arrangements within the CMEA was accompanied by a collapse in trade. However, it also implied a terms of trade improvement for the U.S.S.R. as implicit price subsidies were eliminated. The U.S.S.R.’s grants and export credits to developing countries in support of arms sales were drastically cut which implied a sharp fall in exports. Finally, some relaxation of trade restrictions took place between the U.S.S.R. and the industrial countries.

a. CMEA trade

In the late 1980s, trade with the nine other members of the CMEA 1/ accounted for roughly 60 percent of the foreign trade of the U.S.S.R. The CMEA bloc formed a trading group characterized by close integration--on planning rather than market principles--and with little interaction with the rest of the world. Trade was based on annual trade protocols within five-year agreements. During the past decades, and particularly since the 1973-74 oil price hike, the U.S.S.R. subsidized the other CMEA countries as the terms of trade between its exports (mainly raw materials such as energy products) and its imports (mainly machinery and equipment) were less favorable to the U.S.S.R. than if world market prices had been applied. 2/ While there were increasing difficulties fulfilling the contractual obligations already in the 1980s, the disintegration of trade accelerated from 1990. The impetus came, in part, from market-related reforms in some Eastern European countries. However, the decentralization in the system of planning and management in Russia, as the center was losing control of economic transactions and regions were asserting greater autonomy, and the deliberate diversion of Russia’s exports from the CMEA area to the convertible currency area were also important factors.

Some Eastern European partners had argued for transforming the CMEA into a more flexible trading arrangement. In the face of mounting domestic economic problems, however, the Soviet government took the initiative to stop subsidization of trade and the CMEA was abolished from the beginning of 1991. From then on, in principle, all trade was to take place at world market prices and be settled in convertible currencies. This implied an immediate terms of trade gain for the U.S.S.R. (see Section III.1). Since the convertible currency reserves were low in all previous CMEA member countries, initially, the settlement took place only partially in convertible currencies and, as a transition measure, clearing accounts were established for some critical goods covered by bilateral trade agreements. These agreements, however, proved difficult to implement as both parties no longer were in control of the production and distribution process. For the enterprises, trade settled through clearing accounts became an unattractive alternative to trade with the convertible currency area. For the states that turned out to be net creditors (the Eastern European countries in 1990-91 and Russia in 1992), the accumulation of nonconvertible assets also became undesirable. Therefore, during 1991-92, the agreements increasingly lost importance and in 1993, the Russian Government decided not to renew them.

For the U.S.S.R., the abolition of the CMEA implied a substantial improvement in the terms of trade vis-à-vis the other CMEA countries estimated at 40-45 percent (Section III.1). 1/ At the same time, trade volume collapsed on both the export and import side so that the U.S.S.R. could not take full advantage of the terms of trade improvement. The collapse was a result of a confluence of events. The decentralization of trade and the changes in the settlement system played an important role. Trade was also affected by the sharp fall in domestic output and investment and therefore by both supply and demand factors in the U.S.S.R. and in Eastern Europe (although trade and output declines were clearly interrelated). The tight foreign exchange constraints of Soviet enterprises also played a role since they had to finance imports from retained foreign exchange. From accounting for around 60 percent of total trade of the U.S.S.R. in the second half of the 1980s, the former CMEA dropped to less than one fifth of Russia’s trade with the non-FSU area in 1992 (Chart 1). After the abolition of the CMEA system, the U.S.S.R. was left with a net creditor position vis-à-vis the former CMEA countries as a whole, in particular Cuba, Viet Nam and Mongolia, but with a net debtor position vis-à-vis some of its Eastern European partner countries (Section VI.1).

CHART No 1
CHART No 1

RUSSIAN FEDERATION TRADE WITH NON-FSU COUNTRIES, 1990-92

(In billions of U.S. dollars)

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Source: Goskomstat of the Russian Federation.

b. Export credits and arms trade

The Soviet government also reduced its financial support for the developing world. During the 1980s, in particular, the U.S.S.R. had extended sizeable export credits to developing countries, mainly to finance arms exports (Chart 2). As a result, the U.S.S.R. had accumulated large claims on the developing countries. It is likely that the resulting export performance might have misled the policy-makers about the underlying weaknesses in the U.S.S.R.’s external position as the country was accumulating claims on developing countries which nominally more than offset the growing indebtedness to other countries, but turned out to be largely illiquid. As the U.S.S.R. encountered serious balance of payments difficulties on its own and as most of the debtor countries proved unable to repay their debt, the Soviet Government largely stopped extending new export credits. This policy was continued by the Russian Government from the end of 1991. In the balance of payments, this was reflected both in a sharp reduction of exports and in related export credits.

CHART No 2
CHART No 2

RUSSIAN FEDERATION ARMS EXPORTS AND FSU CLAIMS ON DEVELOPING COUNTRIES 1/

(In billions of U.S. dollars) 2/

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Sources: CRS Report for Congress. July 1993, Vneshekonombank, and staff estimates.1/ The data refer to the former U.S.S.R. for 1986-91 and most of the arms export is believed to have come from Russia. External claims on other countries also refer to claims of the former U.S.S.R.; those claims have been taken over by Russia to the extent that Russia has concluded zero-option (debt for asset) agreements with individual FSU states.2/ For Illustration, both the exports and claims have been converted Into U.S dollars using the official exchange rate of the former Gosbonk since this exchange rate wos used ro convert total external trade from rubles into U.S. dollars for the period 1986-90.3/ The data for end-1990 is staff estimate; for 1992, the data refers to end-June 1992.

c. Trade restrictions by industrial countries

Relaxation of trade restrictions has been another result of the changes in external economic relations. To assist the integration of the FSU states into the world economy, from 1990 industrial countries began relaxing trade restrictions on goods exported to the U.S.S.R. of sensitive nature, including high-tech goods. For instance, in the context of the 17-nation Coordinating Committee on Multilateral Export Controls (COCOM), export restrictions were eased in 1991 and 1992, including on the export of telecommunications equipment (Annex I, Table 1).

Some progress has been made in gaining improved access to western markets for Russia’s exports. For example, Russia has now been granted MFN treatment by most OECD countries; also, the EC, together with a few other countries, have granted Russia GSP eligibility for a range of goods. However, Russian exports continue to face serious constraints in western markets. These partly reflect Russia’s export mix, as well as nontariff barriers (faced also by many developing countries) such as import prohibitions on live animals and meat products, quotas on exports of textiles, steel, and steel products, and minimum import prices for fish and fish products. Moreover, Russia’s exports to the EC effectively face higher than average tariffs vis-à-vis their competitors (e.g., Eastern Europe and EFTA countries) as the latter enjoy preferences in the EC market. Finally, Russian exports are particularly vulnerable to antidumping/countervailing duties imposed by industrial countries--the incidence of these is rising (e.g., on aluminum, uranium, and fertilizer).

In conclusion, Russia’s exports are likely to have been somewhat impeded by trade restrictions imposed by other countries which were motivated by several concerns, including of competition, dumping, health and security. The next crucial test of cooperation will occur when Russia abolishes its quantitative export restrictions, which cover 70 percent of its exports. The need for making improvements in access for Russian products to international markets, including membership of the GATT, was recognized by the G-7 countries in their statement of April 15, 1993. 1/ Russia formally applied for GATT membership in June 1993.

3. The disintegration of the FSU

The second major shock was the disintegration of trade and financial relations among the FSU states. The Soviet economy had been characterized by a high degree of specialization and close integration among the 15 former republics, partly for strategic and self-sufficiency reasons. Thus interstate trade (at domestic prices) averaged 70-75 percent of the Soviet republics’ total FSU and non-FSU trade prior to independence. 2/ The economy also had an integrated network of infrastructure, including railway systems, sea and air transport, and pipelines.

From 1988, trade began to suffer as economic problems intensified and the autonomy of the republics increased. During 1990-91, the republics began to erect trade barriers against each other. For instance, Russia encountered trade restrictions on its imports of food and other consumer goods, particularly from republics that sought early independence. Similarly, Russia imposed restrictions on some of its exports. These restrictions were partly justified by the different degree of financial stabilization, especially from 1991 onward, and different speed of price liberalization that led to trade arbitrage among the republics. In addition, by 1990 a large monetary overhang in the economy had accumulated so that enterprises were reluctant to accept rubles and pushed for barter or compensation deals to obtain goods in short supply from other republics in exchange for goods they delivered. Nevertheless, central planning continued to largely determine interstate trade through the first half of 1991. From then on, and particularly after the failed coup d’etat in August, the republics no longer respected the directives of the union bodies.

To prevent a collapse of trade in the resulting vacuum of organizational structure and in the face of increasing trade restrictions, bilateral trade agreements at the government level were concluded among the republics in the second half of 1991, which covered trade in the so-called strategic goods for 1992. These comprised--for Russia--energy products, timber and other raw materials on its export side, and food, other consumer goods, and machinery on its import side. The record of compliance with the fulfillment of these agreements, however, was poor on both sides. In Russia, enterprises were no longer obliged to fulfil the agreements and the Government had lost effective control over their trade. In some of the other states, highly unstable political situations also adversely affected trade. As a result, in 1993, the scope of the agreements concluded by Russia was limited to 17 groups of strategic commodities (and only part of trade in these commodities). Direct enterprise trade was expected to account for up to three quarters of Russia’s interstate trade in 1993, which meant that decentralization of foreign trade to a large extent had been achieved, even in interstate trade.

From 1992, following Russia’s independence, interstate trade was also affected by the Russian Government’s decision to sharply reduce the implicit net price subsidies to the FSU states. The reduction in real resource transfers was, in the first instance, to take place through a greater volume reduction in Russia’s exports to than in its imports from the other FSU states. Therefore, trade agreements in 1992 were based on trade volumes consistent with a reduction in Russia’s trade surplus measured at world market prices from US$22 billion in 1991 to US$4-5 billion in 1992. As it turned out, the FSU governments had difficulties controlling the volume of interstate trade in 1992 and both export and import volume tumbled. Therefore, although subsidies were reduced, the trade surplus at world market prices is estimated to have bean larger (an estimated US$14 billion) than initially intended by the Russian Government (Section III.1).

While the Russian Government also aimed at reducing subsidies by raising the prices of energy products and other raw materials to world market prices--according to information from the Russian side--the terms of trade may have actually initially changed to the disadvantage of Russia in 1991 and 1992, 1/ as other FSU states raised the prices of the goods they supplied more rapidly to world market prices than did Russia. Toward the end of 1992, with energy prices rising quickly, this is likely to have changed. The lack of accurate trade data resulting from the breakdown of the previous reporting system and the virtual nonexistence of customs borders (except with the Baltic states) make it difficult to estimate the changes in the terms of trade and volume of trade. However, based on information from the Russian authorities, it seems likely that by the end of 1992 the implicit subsidies provided by Russia had been reduced mainly because of the reduced volume of trade rather than by changes in the terms of trade.

The lack of policy coordination among the FSU states also contributed to increasing disintegration of the economies. In particular, the lack of monetary coordination resulted in competing credit expansion, accelerating inflation and loss of confidence in the ruble. As the Russian Government and Central Bank of the Russian Federation (CBR) tried to regain control over the ruble money supply after July 1992 by restricting the automatic access to CBR credit, the restrictions on capital flows resulted in different values of the non-cash rubles.

The settlement system also deteriorated after the dissolution of the FSU. From early 1992, with a view to maintaining control over the payments transactions, the Russian authorities instructed that all settlements be cleared through the central banks of each of the states. This centralization, by itself, slowed down settlement. During 1992 and the first half of 1993, commercial banks in Russia were still not in a position to freely open correspondent accounts with banks in the other member states of the ruble area. As a result, barter transactions and compensation deals, with the associated inefficiencies, gained in importance. Cross-border interenterprise arrears also became an important source of finance.

The introduction of national currencies for a few of the FSU states (e.g, the Baltic states, Ukraine, and Kyrgyzstan) did not solve the problem of financing those states’s trade with Russia to the extent that these states had current account deficits with Russia but no convertible currency reserves for settlement. Therefore, the other states remained dependent on the Russian government or the CBR’s willingness to extend credit to them since commercial bank relations were still in an embryonic stage.

The policy dilemma faced by the Russian authorities in early 1993 was that, on the one hand, Russia’s own balance of payments problems and its need to contain inflation would argue against continued subsidization of and lending to the other FSU states (ruble and non-ruble area), while, on the other hand, Russia also had an economic (and political) interest in preventing a further collapse in trade and financial relations with these states because of the close specialization and integration of the economies.

4. External sector policies

The third major shock was the dismantlement of central planning and introduction of market-related reforms. Reforms had begun already in the U.S.S.R. in the late 1980s, but the major change took place in Russia from 1992.

a. Reforms in the U.S.S.R.

Liberalization of the foreign exchange and trade system in the U.S.S.R. had begun already in the late 1980s. While under the central planning system trade and capital transactions had been determined in the context of the annual foreign exchange plan, from 1987 exporters were allowed to retain a part of foreign exchange earnings and use them for imports within certain limits, mainly for consumer goods. Also in 1987, the Government began giving trading rights to other entities than state foreign trade organizations; further decentralization followed in 1989, particularly for exports of manufactured products. So-called differentiated foreign exchange coefficients were introduced in 1987 to make enterprises more sensitive to changes in foreign currency prices. Foreign exchange auctions were established from the end of 1989, although they continued to be of little significance until 1992. In 1989, the foreign exchange monopoly of the Vneshekonombank (VEB) was terminated and licensed commercial banks allowed to deal in foreign exchange. The VEB, however, remained dominant in such operations until 1991 when foreign exchange transactions became diversified in the banking system.

The liberalization measures were implemented in a piecemeal fashion in the context of continued price controls and in tandem with increasing financial destabilization. Instead of promoting the traded goods sector, they contributed to boosting effective demand for imports, while not stimulating exports. As a result, the liberalization measures contributed to the external disequilibrium that grew during the second half of the 1980s and to the increase in external debt (Section III.b).

b. Reforms in Russia

During October-November 1991, while Russia was becoming an independent country, new policy makers, who were strong advocates of market-related reforms, took office. The economic reforms which began from 1992 represented the beginning of the transformation of the Russian economy to a market economy. One of the great successes of the reform efforts was the introduction of convertibility of the ruble for current transactions for residents, which was completed in November 1992 with a new foreign exchange law and the elimination of numerous multiple foreign exchange rates and the virtual unification of the exchange market by August 1992. This supplemented the domestic price liberalization from early 1992 and thus provided the basis for the establishment of new domestic price relations.

Less progress was made in trade liberalization, particularly for exports. 1/ The motivation for maintaining quantitative controls was partly to keep domestic prices on important raw materials well below world market prices. For energy products, the domestic prices which had been as low as 2 percent of world market prices (converted at the market exchange rate) in early 1992 were raised to about 25 percent in the second half of 1992 and continued at that level through the first half of 1993, For many other products, raw material prices were about 60 percent of world market prices in early 1993. Because of the large price differences, however, official regulations were circumvented to the detriment of foreign exchange repatriation and surrender and domestic tax collection. Attempts to control foreign exchange transactions during 1992 and the early part of 1993 proved largely futile, partly because of lack of economic incentives to hold ruble denominated assets, as well as the economic and political risks. Besides holding down domestic prices, the quota restrictions on exports also served to ensure a certain supply of goods to the domestic market. Another step backwards from trade liberalization was the introduction of the so-called centralized exports in 1993, which implied government purchases of goods from domestic producers for exports. This measure, which further taxed exporters, was primarily a result of the lack of financial stabilization and appropriate interest rates.

The import regime was partly liberalized from 1992. Licensing requirements were virtually abolished. The import tariff, which was introduced in mid-1992, was relatively low. The only major exception to a market system was the large share of government imports--the so-called centralized imports--which accounted for more than 40 percent of total imports from the non-FSU area in 1992. Centralized imports were financed mainly by external credits from foreign governments but also by the use of official foreign exchange reserves. Imports were distributed at highly subsidized prices to enterprises during 1992 as enterprises paid, on average, only 5-10 percent of the import value in domestic currency, thereby allowing for an inefficient allocation of imports. There was also a question as to whether there would have been demand for those particular imports, for which financing was available, without the heavy use of subsidies. The centralized import scheme was administered according to principles of central planning: the administration estimated domestic requirements of goods by enterprises, sectors and regions and made import decisions and central distribution of the imported goods accordingly. The centralized import scheme was scaled down in 1993 and import subsidies expected to be sharply reduced from mid-1993.

Despite the substantial improvement in competitiveness which accompanied the unification of the exchange system and the floating rate regime, the balance of payments did not fully benefit from it for several reasons. First, as the experience of other countries has shown, liberalization of the exchange system needs to be supported by liberalization of the trade system to permit the expansion of the traded goods sector relative to the non-traded goods sector. Exports did not fully benefit from the increase in competitiveness between 1991 and 1992 because of quantitative restrictions and the reintroduction of government exports in 1993 for key commodities, and the composition and level of imports was distorted by the centralized allocation and high subsidization of a large part of imports. Second, domestic policies did not support the exchange rate policy. Financial policies remained loose and interest rates sharply negative in real terms, which gave rise to capital outflows (see Section III.3). The absence of a sharp increase in interest rates to market levels and hard budget constraint on enterprises is also likely to have prevented destocking from taking place, which could have boosted exports. On trade policies, the question that faced Russian policy-makers in 1993 was whether to permit a faster liberalization of exports at the expense of an immediate increase in domestic raw material prices, but to the benefit of exports in the short term and improved resource allocation and growth in the longer term.

III. Balance of Payments Developments. 1990-93

1. An overview: Russia’s savines balance

The external developments in recent years can be illustrated by the net savings balance vis-à-vis the rest of the world (Table 1). The balance on goods and non-factor services vis-à-vis the FSU and non-FSU countries reflects by definition the difference between gross national savings and investment. While there are estimates of this balance in relation to non-FSU countries, the estimate vis-à-vis FSU states is incomplete since there is no information on services. Moreover, the conversion from rubles to U.S. dollars for FSU transactions is subject to great uncertainties because of the changes in the exchange system during the period 1990-92. 1/ Two alternative methods are presented for converting transactions in rubles into dollars: (i) actual exchange rates during 1990-92 and (ii) purchasing power parity exchange rates with 1991-92 as the base period. 2/ Since the two conversion methods give widely different results, the figures should be interpreted with great caution. The external balance shows that during 1990-92 Russia had a surplus on the balance of goods and non-factor services, which indicates that Russia had excess savings which it used to finance the rest of the world. Since the Government had negative savings, the household and enterprise sectors had large positive savings. Before the price liberalization in 1992, this represents partly "forced" savings (in the form of bank deposits) resulting from shortages of goods at officially fixed prices. The positive savings balance, however, declined substantially from 1990 to 1992. The decline amounted to US$5 billion between 1990 and 1992 vis-à-vis the non-FSU area and US$11 billion or virtually no change, respectively, vis-à-vis the FSU states, depending on the conversion method used. The decline in savings mirrored the increase in dissavings of the government as the fiscal imbalances rose substantially during this period.

Table 1.

Russian Federation: Net Savings Balance, 1990-92

(In billions of U.S. dollars)

article image
Source: Information provided by the Russian authorities and staff estimates.

Converted at actual exchange rates. For a description of the calculation, see Annex II.

The development in the savings balance substantially understates the decline in real transfers (on a net basis) that has taken place from Russia to the rest of the world because Russia also has benefitted from the improvement in the terms of trade as a result of the decline in Russia’s implicit price subsidies to the other former members of the CMEA and the other FSU states (Annex II). The measurement of these price subsidies is subject to great uncertainty because the goods were often tailored to particular specifications with no equivalence in the world market. According to rough staff estimates, if world market prices had been applied to 1990 trade flows, the terms of trade would have been 35-40 percent higher vis-à-vis the other union republics and 40-45 percent higher relative to the CMEA states. The price subsidies, which also have severe measurement problems, are estimated at US$18 billion vis-à-vis the CMEA countries and US$40 billion vis-à-vis the other republics. Such calculations ignore the price elasticity of the demand for goods and therefore overstate what would have been the actual trade surplus if world market prices had applied. The price subsidies were generally abolished in 1991 vis-à-vis the other former CMEA countries. However, Russia continued to provide implicit price subsidies, albeit declining, to the other FSU states.

Although Russia had a net positive savings balance vis-à-vis the rest of the world during 1990-92, it had a large external financing requirement vis-à-vis the non-FSU area, primarily because of very large debt service obligations. During 1990-91, this led to a depletion of reserves and accumulation of external payments arrears. In 1992, the financing requirement rose further as the trade and services balance deteriorated and capital outflows increased. In addition, there was a need to replenish official reserves. The reasons for the deterioration in the net savings balance and the external debt developments are described in greater detail below.

2. Balance of payments in pre-reform period

a. Non-FSU area

The increasing macroeconomic imbalances and structural problems (Chart 3) during the second half of the 1980s, as described in Section II.1 above, left the U.S.S.R. with a rising external debt. During the second half of the 1980s, the U.S.S.R. had borrowed US$2-3 billion annually in medium- and long-term loans from all creditor groups (i.e., official creditors, commercial banks, and uninsured suppliers), including through international bond issues. As the financing requirement rose and the credit worthiness constrained the possibilities for raising additional medium-term and long-term financing, the Soviet Government stepped up its short-term borrowing. About half of the debt owed to commercial banks and one third of total external debt in convertible currencies was short-term debt at the end of 1989 (US$18 billion). With an increase in the economic and political risk, commercial banks and suppliers became less inclined to extend loans to the U.S.S.R., which were not insured by creditor governments or official export credit agencies and a rollover of the short-term debt became increasingly difficult. This created a bunching of debt service obligations beginning from 1990 (Table 2).

CHART No 3
CHART No 3

RUSSIAN FEDERATION ENERGY PRODUCTION AND NON-FSU EXPORTS

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Sources: Goskomstat of the Russian Federation; IMF, International Financial Statistics; and staff estimates.1/ World market price on oil.
Table 2.

U.S.S.R. and Russian Federation: Balance of Payments (Excluding FSU Transactions), 1990-92

(In billions of U.S. dollars)

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Source: CIS Goskomstat and Goskomstat of the Russian Federation; Central Bank of Russia; Vneshekonombank; and Fund staff estimates.

The balance of payments for Russia for 1990-91 is derived from that for the U.S.S.R. The trade data are based on statistics of the Goskomstat (all military exports of the U.S.S.R. have been allocated to Russia, which accounted for perhaps only four fifths of the total of such exports). Russia’s share in total trade has been used to derive its share in transportation. For debt service obligations, 61 percent has been used. The allocation of grants and credits by republics is not economically meaningful but the 61 percent has been used. Any balance is allocated to the interrepublican residual.

Includes imports of US$2.9 billion which, according to the CIS Goskomstat, could not be allocated among the 15 republics.

The Government mobilized several sources of exceptional financing. To refinance emerging arrears to foreign suppliers, in 1990 the U.S.S.R. obtained a large credit (DM 5 billion) from German banks (most of which was guaranteed by the German Government) and several bilateral credits from other governments. Further foreign exchange was raised through the collateral of future diamond exports (US$1 billion), The Government also stepped up gold sales and swaps from both current production and reserves. However, the renewal of gold swaps became increasingly difficult as commercial banks became concerned about the ownership of the gold reserves, and foreign banking supervisory agencies tightened the provisioning requirements. In 1990, the U.S.S.R. also ran up sizeable debt in transferable rubles vis-à-vis Eastern European CMEA partners. Foreign exchange reserves were also used to finance the balance of payments and they declined sharply, beginning from August 1989. Despite these exceptional efforts by the Soviet Government to finance the balance of payments, external arrears on import payments rose to US$4-5 billion by the end of 1991 on obligations other than those of, or guaranteed by, the VEB. The VEB, however, which had hitherto been a first rate borrower on behalf of the Soviet Government, remained current on debt service obligations on its own debt or debt it had guaranteed until October 1991.

The size of debt service obligations and the large share of short-term debt was one of the key factors behind the liquidity crisis in 1990-91; actual debt service payments were nevertheless sizeable in both 1990 and 1991:

Table 3.

External debt service obligations of the FSU and Russia

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Source: Vneshekonombank and Fund staff estimates.

Gold and foreign exchange reserves were virtually exhausted (Chart 4) as most of the short-term debt to commercial banks was repaid. External debt was serviced at the expense of a severe compression of imports, which created shortages of essential input for the oil and agricultural sectors and several branches of the light industry. Thus, when Russia became an independent country (December 1991) and subsequently embarked on the reform program, it was already in a critical balance of payments situation.

CHART No 4
CHART No 4

RUSSIAN FEDERATION OFFICIAL RESERVES 1/

(In billions of U.S. dollars)

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Source: IMF, Economic Review, The Economy of the Former U.S.S.R. in 1991 ond IMF, Russian Federation, 1993.1/ For 1986-91, the reserves figures apply to the former U.S.S.R.2/ Valued at market prices.

At the time, the immediate financing needs for 1991 were not known to the outside world, in part because of the reluctance of the former Soviet authorities to reveal the balance of payments and reserves data. The appropriate form of assistance depended, in part, on the extent to which the U.S.S.R. was suffering from a short-term liquidity crisis or a longer-term balance of payments problem. The outlook for the balance of payments was clouded with uncertainty because the future economic policies had not yet been defined. During 1990-91, uncertainties also prevailed concerning the future of the U.S.S.R., including the size of its economic space, the distribution among the union republics of international reserves, future foreign exchange flows and external debt service obligations. The seriousness of the balance of payments situation might have been underestimated because of lack of understanding of the economic facts and forces that eventually led to the break-up of the U.S.S.R. with its resulting economic consequences.

The Soviet Government did not request a rescheduling of its debt service obligations from external creditors during 1990 and the first half of 1991, but instead sought untied, financial assistance to overcome what was considered a liquidity crisis. Such assistance, apart from the above-mentioned refinancing operations, did not materialize from industrial countries (Annex III). 1/

There were arguments both against and for debt rescheduling. Arguments against were: the U.S.S.R. had an excellent payment record; external debt service obligations in 1990 were not considered sizeable in relation to total Soviet export earnings in that year; the experience of other countries, including in Latin America, had shown the difficulties for countries that once had begun rescheduling of emerging from repeated rescheduling; rescheduling also had implications for private inflows. At the same time, however, there were also compelling arguments for a rescheduling: dealing with the debt service problem through new private inflows without creditor government guarantees was unrealistic in the short term because of the high political and economic risks; also, if a debt rescheduling was generally anticipated by creditors, it should come sooner rather than later to avoid a negative impact on new official inflows. 1/ However, it was not until October 1991 that the Soviet Government requested debt relief. By that time, a serious balance of payments crisis had already developed.

b. FSU area

During 1990-91, the trade and financial relations between the union republics became increasingly complex due to the growing ethnic, social and political tensions. Despite declining domestic oil production, Russia decreased only slightly its energy exports to the other union republics (Table 4.). Increasingly, however, trade was hampered by trade barriers between the individual states, which limited Russia’s imports of food and other consumer goods. Trade is estimated to have fallen by about 15 percent in volume terms during 1991. Although this is roughly in line with the estimated decline in output in the U.S.S.R., the contraction in interrepublican trade is likely to have contributed to the fall in output. The specialization of the different republics, including the high degree of monopolization, made the output highly vulnerable to interruption in traditional trade links.

Table 4.

Russian Federation: Energy Balance, 1990-92

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Sources: Goskomstat; Ministry of Fuel and Energy; and IMF staff estimates.

Consumption has been derived as a residual of domestic production plus imports minus exports, thus implicitly assuming no change in stocks.

There is some uncertainty in relation to the values for 1990 and 1991; in particular some official data show larger export numbers.

There is no information on the flow of funds through the commercial banks and enterprises. Such flows, in any case, would provide only an incomplete picture of the financial relations within the U.S.S.R., which also encompassed resource transfers and income redistribution among the republics through taxation and expenditures policies in the union budget. During 1990-91, almost all trade was settled in rubles and barter transactions were still of minor importance although it was already on the rise.

3. Balance of payments developments at the beginning of reform. 1992-93

a. Non-FSU area 2/

In early 1992 at the beginning of the Russian reform program, an important question for the Russian Government and the international community was the outlook for the balance of payments and the need for external financial assistance. There were several uncertainties. First, although the reform policies of the Russian Government were described in general terms in a Memorandum of Economic Policies of the Russian Government presented to the IMF in March 1992, much of the quantification of the macroeconomic framework was missing. In particular, the monetary targets and the relation with the other ruble area states remained unclear. Second, the external relations with the other FSU states, both the volume of trade, the terms of trade and the financial relations were uncertain, which also influenced the financing requirement in convertible currencies. For example, it was unclear whether Russia would charge domestic or higher prices on its exports to the other states. There were also possibilities for substitution of its exports of oil and other raw materials and imports (including of food) between the FSU and non-FSU area, which implied that the balance of payments with the two areas had to be projected together.

In light of the preceding sharp import decline, particular attention in discussions between IMF staff and the Russian authorities was given to projecting the import level which would promote a resumption of future economic growth. For humanitarian reasons and to ensure social support for the economic reforms, imports of food and medicine were also emphasized. A microeconomic approach to determining the needs of individual sectors based on import coefficients of 1990 (i.e., before the import collapse), however, could not be used if market forces determined imports. In addition, there was no historical experience with the price and income elasticities. The break-up of the U.S.S.R. also had unpredictable effects on Russia’s need for imports from the non-FSU area. A sharp decline in imports from the FSU area, for example, might result in higher import demand from the non-FSU area. In the end, imports were projected to increase by 10 percent in U.S. dollar terms compared with 1991, which was believed to allow for adequate food and medical supplies in addition to critical imports for restructuring purposes. Based on balance of payments projections agreed between the Russian authorities and the Fund staff, the major creditor countries announced a financing package of US$24 billion (see Annex III for details).

The 1992 balance of payments turned out significantly different than projected: exports and imports declined by more than projected; the total net financing available was broadly the same as originally assumed but the composition was different; capital outflows and the negative errors and omissions were much higher than projected (Table 2). The outturn in each of these areas illustrated the close correlation between economic policies and external developments and also the importance of appropriate form and terms of financial assistance.

Exports to non-FSU countries turned out to be US$40 billion, some US$9 billion lower than projected (Table 2.). 1/ Energy exports were slightly higher than initially projected despite lower domestic production, as exports were diverted from other FSU states to non-FSU states. However, non-energy exports had been substantially overestimated. There were several reasons. Russia’s quantitative restrictions on non-energy exports were not removed as initially envisaged by mid-1992. Therefore, exporters could not take advantage of the real effective depreciation which took place between 1991 and 1992. The continued decline in arms exports--where no official information was made available–might also have been underestimated. Another important factor was underrecording of trade. The quantitative restrictions on exports, heavy export taxation, 1/ and the existence of large price differentials between domestic and world market prices for raw materials are likely to have encouraged illegal export transactions; such exports might have encompassed primarily non-energy products, which were more difficult to control by the authorities than energy products which were transported mainly through pipelines that could be monitored. Another loophole was exports to third countries through other FSU states. Certain other FSU states have reported large exports of raw materials to the outside world that were not available in those states; it is generally believed that these reflected transit trade originating from Russia that might not be captured by the Russian statistics.

Imports at US$36 billion were some US$13 billion lower than initially projected. They dropped by 18 percent in U.S. dollar terms compared with the year before or by slightly more in real terms than real GDP (Chart 5). As on the export side, the recorded import decline might have overstated the actual decrease that took place because of unofficial imports. The ability of a declining economy to absorb an increasing amount of imports might have been overestimated, particularly since domestic investment continued falling. The decline in export receipts and capital outflows also diminished the supply of foreign exchange for imports. In addition, the sharp real effective depreciation of the exchange rate compared to the year before probably dampened import demand. The large exporters, mainly of oil and gas, chose to accumulate large foreign exchange deposits, instead of selling foreign exchange to the interbank market or using them for their own imports. The composition of imports is also likely to have reflected the grant element of government imports and might therefore not have been efficiently allocated. While agricultural imports stabilized the food situation, they might also have slowed down the pace of domestic reforms of the agricultural sector. The imports of certain investment goods were so heavily subsidized as to make domestic substitutes noncompetitive. Other imports, such as certain investment goods, e.g., railway cars, might not have been imported in the absence of heavy subsidies.

CHART No 5
CHART No 5

RUSSIAN FEDERATION IMPORTS AND NMP (GDP), 1986-92

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Source: COSKOMSTAT and staff estimates.1/ For 1986-89, the chart refers to the former U.S.S.R. and for 1990-92, to Russia.2/ Net material product (NMP) until 1990 and gross domestic product from 1991.

While the total financing available in 1992 of about US$31 billion, as described in Annex III, was close to the Initial promised financing package of US$24 billion plus deferral of principal payments of US$7 billion, the composition was rather different (Table 5.) Bilateral creditors extended larger assistance which was not conditional on policy performance whereas assistance from multilateral organizations was lower because it was linked to implementation of policy reforms. While arrears on external debt service payments might not have significantly slowed down bilateral disbursements in 1992 (although they did in early 1993), bilateral official creditors began securitized lending through escrow accounts tied to future export receipts to guarantee debt service payments. The new commitments made to Russia in 1992 had average maturities of only three years, which partly reflected the heavy reliance on external financing for imports of food and other consumer goods.

Table 5.

Financial Assistance to Russia in 1992

(In billions of U.S. dollars)

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Sources: Press release of U.S. administration of April 2, 1992; Russian authorities; and IMF staff estimates.

Grants and loans. Since the details of the US$24 billion package were never announced, the composition of the actual disbursements might be different from the original package. For example, the package apparently excluded housing grants from Germany, which were part of the actual disbursements (US$1.1 billion).

The external assistance, excluding technical assistance, amounted to US$1 billion from the Fund, US$1 million from the World Bank, and US$8 million from the EBRD.

The US$24 billion package assumed rescheduling or deferral of interest on pre-cut-off medium- and long-term debt. Although this was not granted in 1992, the corresponding interest obligations were not paid, which is reflected in arrears accumulation. Official bilateral creditors agreed in April 1993 to a more comprehensive rescheduling of interest falling due in 1992.

Foreign direct investment contributed only to a small extent to the financing. Net inflows are estimated to have amounted to only US$0.7 billion, as the legal framework was still unclear and the economic and political risks remained high (Section III.5).

Capital outflows through Russian commercial banks amounted to nearly US$6 billion. This reflected placement abroad by Russian banks of the counterpart to Russian enterprises’ foreign exchange deposits with them (Chart 6). 1/ The foreign exchange deposits have increased from a relatively insignificant share to more than half of the total money supply in Russia in early 1993, as the return on ruble denominated assets relative to the market terms offered on the foreign exchange deposits promoted foreign exchange for ruble substitution; the valuation effect resulting from the rapid depreciation of the exchange rate also raised the share of the foreign exchange deposits in the money supply. It also played a role that the foreign exchange deposits of enterprises that were held with the Vneshekonombank were frozen at the end of 1991 and enterprises had a need to build up new working balances of foreign exchange.

CHART No 6
CHART No 6

RUSSIAN FEDERATION FOREIGN ASSETS, FOREIGN EXCHANGE DEPOSITS AND REAL INTEREST RATES

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Sources: Central Bank of the Russian Federation, Goskomstat, ond IMF, International Financial Statistics, and staff calculations.1/ Foreign currency deposits of residents with commercial banks in Russia, excluding official foreign exchange holdings of the Russian government and CBR with domestic banks.2/ Three-month LIBOR deposit rates deflated by the monthly change in consumer prices in the USA.3/ Interbonk auction rate deflated by the monthly change in consumer prices.

Large negative errors and omissions were also recorded (US$8 billion). By nature, it is impossible to know the source of these outflows, which might represent both current and capital transactions and might also reflect transactions with the FSU area. 2/ It would therefore be incorrect to interpret the total of US$8 billion, in addition to the already identified US$6 billion, as capital outflows. One possible explanation for the errors and omissions is that imports have been underrecorded, possibly to avoid import tariffs. Another possibility is that export proceeds were not repatriated to the Russian banking system but kept in banks abroad. To the extent that both export and import transactions were not recorded, this would not show up in errors and omissions.

b. FSU area 1/

Russia’s trade with the FSU area is estimated to have contracted by nearly 30 percent in volume terms, which greatly exceeded the decline in domestic output. In 1991, the non-FSU area had borne the burden of export decline in oil and oil products (38 percent compared to 12 percent for the FSU area), but in 1992–after the break-up of the FSU–exports dropped by 35 percent to FSU states compared with only 7 percent to non-FSU states (Table 4). Lack of imported raw materials, including cotton, and specific inputs are reported to have aggravated the output decline in Russia. The recorded trade surplus of Russia amounted to about rub 0.3 trillion or US$1.5 billion (converted at the interbank market rate) (Table 8.). Russian enterprises are also estimated to have accumulated liabilities of a similar magnitude in the form of overdue payments (i.e., capital inflow). The overall balance of payments is estimated at around rub 1 trillion or US$5 billion, which is the financing provided by the CBR to the central banks of the other FSU states. 2/ An unexplained positive item of rub 0.4 trillion or the equivalent of US$2 billion might partly indicate capital inflows to Russia to obtain access to the foreign exchange market or take advantage of the higher interest rates prevailing in Russia than in certain other states. 3/ The risk of introduction of national currencies and uncertainties about the future of the foreign exchange regime, including restrictions on capital movements, might also have led to capital inflows to Russia. Other explanations include the services transactions, where information Is missing as well as the exclusion of transit trade with the rest of the world. 1/

Table 6.

Former U.S.S.R.–External Debt in Convertible Currencies, 1986-92

(In billions of U.S. dollars; end of period)

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Sources: Ministry of Finance of the U.S.S.R., Vneshekonombank, and IMF staff estimates.

Before 1991, total external debt excludes outstanding letters of credit because of lack of information. At the end of 1992, Russia had additional liabilities to the IMF of US$1 billion.

Table 7.

FSU States–Status by end-June 1993 of Agreements on External Debt and Assets of the FSU

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Memorandum of October 28, 1991 signed by FSU states at meeting with G-7 representatives recognizing the joint and several responsibility for the FSU debt. Georgia and Ukraine signed the MOU in 1992.

Interstate agreement signed on December 4, 1991, which defined the shares of debt service payments and assets and established the Interstate Committee on Managing External Debt and Assets of the FSU.

Bilateral agreements between Russia and the other FSU states, where Russia takes over the debt service responsibilities of the concerned state in exchange for the other state giving up its claim on FSU external assets.

Protocols signed in November 1992 and, for Ukraine, in March 1993 which gives Russia the right to negotiate with external creditors on the debt of the FSU and to manage the assets of the FSU on behalf of the other FSU states. The protocols were expected to be followed up later by bilateral agreements, including the zero options.

Table 8.

Russian Federation: Balance of Payments with FSU States, 1991-93

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Sources: Goskomstat; Central Bank of the Russian Federation; State Committee on Economic and Financial Relations with CIS States; and Fund staff estimates and projections.

Excluding currency issue.

Although no interest or repayment terms were established on CBR lending to the other FSU states in 1992 or the first quarter of 1993, subsequently, agreements have been concluded on the terms of the outstanding lending. The loans have been converted into government loans denominated in U.S. dollars with market-related interest rates in most cases (LIBOR plus a spread) and repayment that average about five years. By mid-1993, agreements had been reached with nine FSU states for a total of US$4.7 billion. If these agreements are honored, the related debt service obligations could contribute to a strengthening of the balance of payments position of Russia in the coming years.

4. Trends in exports and imports with the non-FSU area

The trends in Russia’s exports and imports and the reasons for the recent collapse in trade provide some insight into the macroeconomic and structural problems of adjustment in the period ahead. In particular, the turnaround in energy exports will require substantial investment in new fields, pipeline repairs, and on progress in domestic energy conservation, which will depend, in part, on appropriate pricing policies, a clear legal framework and taxation policies. Arms exports have plunged to a record low and although some recovery could not be precluded, it seems unlikely that previous levels, which were tied to the provision of substantial export financing, will be reached. Non-energy raw materials might have a major export potential if quantitative restrictions on exports are lifted; one of the uncertainties, however, relate to foreign countries’ willingness to open their markets.

a. Exports

From 1990, Russia suffered declines in all its major exports, including oil, gold, arms, and machinery and equipment. In 1990, oil and oil products accounted for one third of Russia’s total exports to the non-FSU area; in terms of volume, they were slightly smaller than Russia’s oil exports to the other republics. All energy exports, including in particular natural gas, accounted for nearly half of Russia’s export proceeds. After peaking in 1988 at 569 million tons (Chart 3), oil production has declined in each year, to only 393 million tons in 1992, or 69 percent of its previous peak level. This decline was attributed partly to lack of oil field equipment and spare parts and pipelines in disrepair. However, current production had been maintained for years through the exploitation of new large fields using water flooding which boosts short-term production at the expense of longer-term production. 1/

Since both the FSU and Russian governments followed the policy of protecting the supply for the domestic market, exports adjusted in line with the decline in production. Exports dropped by more than 40 percent between 1990 to 1992 and by 55 percent since the 1988 peak level, thereby exceeding the decline in domestic output. Domestic consumption–which is apparent consumption calculated as the residual between production plus imports minus exports–did not decline in tandem with general demand in the economy, partly because of declining relative energy prices and partly because environmental measures to reduce the use of nuclear power had led to oil (and natural gas) substitution. Consumption, as measured, might also include some element of stockbuilding in the expectation of future price increases. Exports of natural gas were broadly maintained from 1990, but domestic production stagnated. Although there is a great potential for foreign direct investment in the energy sector, so far is has been limited, partly because of problems in clarifying the legal framework.

Gold production of the U.S.S.R. peaked in 1989. Since then, according to information provided by the Russian authorities, it declined by a cumulative one fourth through 1991. An increase in illegal transactions might also have played a role in the recorded decline. In 1991, Russia produced 156 tons and in 1992 146 tons. Production has been adversely affected by the lack of investment in the gold mines, partly reflecting low gold prices to domestic producers. Since May 1992, in an effort to boost gold production, first the Government and subsequently the CBR began to purchase gold from the producers at world market prices converted at the interbank market exchange rate. More recently, gold production has been reported to have suffered from shortages of fuel and an exodus of workers from the mines because of low salaries.

Traditionally, gold exports took place when the country needed foreign exchange. Thus, in the mid-1980s when the U.S.S.R. suffered a decline in the terms of trade following the drop in oil prices, gold sales were boosted. Similarly, from 1989 to 1991, heavy gold sales took place from both current production and reserves, largely exhausting official reserves of the U.S.S.R. As a consequence, the scope for further gold sales diminished and Russia’s gold sales declined significantly in 1992.

Arms exports are estimated to have accounted for a significant share of U.S.S.R. ‘s total exports during the 1980s, although no official figures have been released. 1/ Based on the U.S. Congressional Research Service (CRS) Report for Congress, arms deliveries of the U.S.S.R. amounted to nearly US$13 billion in 1990; the Stockholm International Peace Research Institute (SIPRI) estimated them at US$10 billion. Both sources report that arms exports were much higher during the late 1980s. Such exports were mainly supported by export credits (Chart 2). However, as many of the importing countries experienced payment difficulties and failed to honor their debt service obligations to the U.S.S.R., arms exports were cut. Deliveries of conventional weapons to other CMEA partners and certain developing countries (e.g., Ethiopia, Iraq and Syria) declined sharply in 1989 and arms supplies were eliminated to Afghanistan, Angola, and North Korea from 1991. 2/ In 1992, arms exports are estimated by Russian sources 3/ at about US$3 billion and by the CRS Report for Congress at only US$2.3 billion. 4/ Russia has suffered, in part, from arms embargoes on Libya, Iraq and Yugoslavia–countries which previously were able to pay for the arms deliveries. Russia’s share of the international arms market is reported to have fallen from 39 percent in 1989 to 17 percent in 1992, 5/ with fierce competition in many areas, including in aircraft.

b. Imports

The recorded imports declined sharply in 1991 and 1992. The cumulative decline amounted to 49 percent in U.S. dollar terms. The decline was particularly sharp for imports from the former CMEA countries (84 percent), partly reflecting price declines during the transition to world market prices. For instance, for some goods the prices declined by 40-50 percent. 1/ There are major uncertainties as to the volume decline in imports, but it is estimated at 30-35 percent during 1990-92, thereby exceeding the decline in real GDP during the same period (26 percent). There are indications that the lack of some essential imports was a contributing factor to the decline in real GDP in 1991, when imports dropped significantly. The lack of inputs adversely affected production in the oil sector, lack of imported fertilizer reduced agricultural output, and shortages of key inputs had an important impact on several branches of light industry, including the tire and furniture industries. Moreover, the break-up of the U.S.S.R. meant that certain supplies which had previously been available from other republics–e.g., food from Ukraine, cotton from Uzbekistan, and oil pipes from Azerbaijan–dropped in volume terms, in part because of trade restrictions but also because of restructuring and, in some cases, domestic unrest in the newly independent states.

Although Russia has a rich agricultural endowment, it is heavily dependent on food imports (Table 10). 2/ Russia was the largest food importer of the union republics. Food imports rose as a share of total imports from about 15 percent of imports in 1990 to 27 percent in 1992 (Table 11.). Low domestic prices, a poor distribution network, slow progress in land reform, and domestic price subsidies have slowed the restructuring of agricultural production and raised import demand. Centralized (government) imports of agricultural products and substantial import subsidies have also been a major impediment to restructuring and output growth in the agro-industrial sector. Many of these imports are sold in domestic markets at prices well below those charged by domestic producers, thus discouraging domestic production of grain while supporting an artificially high level of livestock herd. This is an area where there exists a major potential for import substitution.

Table 9.

Russian Federation: Trade with Non-FSU Countries, 1990-92

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Source: CIS Goskomstat.

Bulgaria, Cuba, former Czech and Slovak Republics, Hungary, Mongolia, Poland, Romania, and Viet Nam.

Humanitarian assistance.

Table 10.

Russian Federation: Imports of Agricultural Product from Non-FSU Area. 1990-92

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Sources: CIS Goskomstat, Goskomstat of the Russian Federation, and U.S. Department of Agriculture.

Because of reporting difficulties, the estimates for 1991 are likely to be incomplete.

In tons.

In addition to the categories above, this estimate also includes additional beverages, tapioca, oil seeds, and oil seed meals.

Table 11.

Russian Federation: Non-FSU Trade by Product Group, 1990-92

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Sources: Goskomstat of the Russian Federation; and IMF staff estimates.

First nine months; 1992 data is not directly comparable with data for 1990-91, because of the change of classification from the material product system to the harmonized system.

5. Foreign direct investment

Foreign direct investment in Russia has so far been relatively small. Although 6,000 joint ventures were registered at the end of 1992, the number actually in operation was much smaller. Moreover, most of the joint ventures are very small. They are mainly concentrated in trade, services and counseling. In addition, there is also some investment in the energy sector, ferrous metals, timber, and chemicals sector.

Despite its vast potential, foreign direct investment has so far made only a small contribution to both foreign financing and the transfer of technology from abroad. There are several reasons: the unstable macroeconomic and political situation, the lack of clarity concerning the laws, regulations and investment procedure, including those that relate to the competence of central versus regional bodies, the distortions in the tax system, and the restrictions on the ownership and use of land. Foreign investment is guided by a foreign investment law introduced by the Russian Government in July 1991. However, there have continuously been proposals for changes in the law and proposals were under discussion in the Supreme Soviet in mid-1993.

The considerable risks associated with investment in Russia has raised the demand for insurance for foreign investors. Russia is a member of the Multilateral Investment Guarantee Agency (MIGA)–part of the World Bank Group–which offers investment insurance to mitigate political risk through its guarantee program and provides promotional and advisory services to assist member countries to attract and retain foreign direct investment. Several foreign governments have also offered insurance coverage for the operations in Russia of investors of their respective countries.

IV. External Debt and Assets

1. Size and structure of external debt and assets

To evaluate Russia’s present external position, it is necessary to take into account that Russia is both a major debtor and creditor to the outside world. Russia has external debt in both convertible currencies and nonconvertible currencies; the debt in convertible currencies is primarily to industrial countries and that in non-convertible currencies is especially to Eastern Europe. Its claims include claims of the former U.S.S.R. on developing countries and the newly agreed government claims on the other FSU states denominated in U.S. dollars (Section III.3.b). Thus, the future outlook for the balance of payments of Russia would need to take into account debt service payments and receipts from all these sources subject to an evaluation of risk of non-repayment.

The external debt in convertible currencies of the FSU rose sharply from the mid-1980s with the increase in external imbalances from US$31 billion at the end of 1986 to US$55 billion at the end of 1989. The accumulation of debt, however, accelerated during 1990-92 and debt outstanding reached US$78 billion at the end of 1992 (Table 6.). An increasing share of outstanding debt has been to official creditors or officially insured (more than half of medium-and long-term debt outstanding at the end of 1992). In recent years, the rise in external debt has taken place in tandem with a sharp fall in exports so that the debt service obligations rose substantially in relation to export proceeds (Chart 7 and Table 14.). Thus, total debt service obligations of the debt of the FSU and new debt of Russia rose from 29 percent of Russia’s exports to the non-FSU area in 1990 to 39 percent in 1992. Although the debt service ratio is sizeable, it is below that in some reforming countries in Eastern Europe and several in Latin America. As balance of payments transactions with the FSU area are beginning to be settled in convertible currencies (other than in rubles), and given the scope for trade diversion between the FSU and non-FSU area, debt service obligations should be evaluated against total export earnings, both to the FSU and non-FSU area.

CHART No 7
CHART No 7

RUSSIAN FEDERATION EXTERNAL DEBT OF THE FSU AND EXPORTS

(In billions of U.S. dollars)

Citation: IMF Working Papers 1993, 074; 10.5089/9781451849516.001.A001

Sources: Vneshekonombonk, ooskomstat of the former U.S.S.R. and Goskomstat of the Russian Federation.1/ Excluding debt originnlty in nonconvetible currencies, such as debt to Eastern Europe.
Table 12.

Russian Federation: Exports of Selected Products, to the FSU Area, 1991-92

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Sources: Goskomstat; and staff estimates.

Billions of rubles.

Volume in millions of tons.

Volume in billion cubic meters.

Staff estimate.

Volume in million units.

Volume in million cubic meters.

Volume in cubic meters.

Volume in thousand tons.

Volume in thousand units.

Volume in million meters.

Table 13.

Russian Federation: Imports of Selected Products from the FSU Area, 1991-92

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Source: Goskomstat

Billions of rubles.

Volume in millions of tons.

Volume in billions of cubic meters.

Volume in thousand units.

Volume in thousands of tons.

Volume in million of units.

Volume in million of pairs.

Table 14.

Former U.S.S.R.–External Debt Service Obligations in Convertible Currencies, 1986-92

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Sources: Vneshekonombank and IMF staff estimates.

In 1992, indluding interest on arrears and on the 1992 deferral.

Merchandise exports.

In addition, the FSU had gross external liabilities denominated in transferable rubles to the former CMEA countries amounting to 19 billion transferable rubles at the end of 1991, of which Trs 7 billion to Poland, Trs 6 billion to Germany and Trs 2 billion to each Czechoslovakia and Hungary. Only with a few countries, including the now Czech Republic, the Slovak Republic and Hungary, have agreements been reached about the exchange rate to be used for conversion of the balances from transferable rubles into convertible currencies and, to some extent, the terms and means of settlement. Russia has also obligations to provide natural gas to several Eastern European countries as part of the Yamburg agreement relating to a natural gas pipeline project.

The claims on developing countries which were associated with the extension of export credits by the U.S.S.R. in the past amounted to about rub 90 billion at the end of 1991. A major outstanding question concerns the appropriate exchange rate to be used for conversion of these assets into convertible currencies. So far, the Russian authorities have suggested on using the former official exchange rate of the Gosbank of the U.S.S.R., which was defined in terms of a basket of six currencies. Thus converted, the value of the assets would be the equivalent of US$162 billion at the end of 1991. Many of the debtor countries, however, have had balance of payments problems and are therefore not currently servicing their debt to the FSU. 1/ Although the Russian Government has held discussions with several debtor countries on the exchange rate to be used and the future debt service schedule, by mid-1993 agreement had been reached with only a few countries, including India and Jordan.

2. Division of external debt and assets of the FSU

The question about the responsibility for the external debt of the FSU and how to divide the external claims of the FSU greatly complicated the relations between external creditors and the FSU states, on the one hand, and among the FSU states, on the other. The relations with external creditors were clarified temporarily with the signing of the Memorandum of Understanding in October 1991 between representatives of the union republics and the G-7 countries. It reached a new phase at the rescheduling agreement with official creditors in April 1993, when Russia declared itself responsible for the entire FSU debt. The internal division of debt service responsibilities among the FSU states and of the external assets of the FSU remained largely unsettled by mid-1993. An internal agreement in this regard was signed in December 1991 but remained inoperative. It was subsequently replaced by bilateral agreements between Russia and some of the other states.

a. Agreement with external creditors--Memorandum of Understanding

At the London Summit of the Heads of State of the G-7 countries in July 1991, President Gorbachev had urgently requested financial assistance from Western governments because of the imminent balance of payments crisis. In the context of responding to this request, external creditors were concerned about clarifying the legal responsibility for the old debt of the FSU because of unresolved constitutional questions. All 15 union republics had declared either independence or sovereignty of their laws over those of the union. In addition, several republican governments had also declared that they would no longer be responsible for new commitments of financial assistance made by the union government and contested the authority of the union bodies to take decisions in this regard on behalf of all the former republics. 1/ In the absence of a clear legal framework, however, creditors were not willing to enter new commitments or disburse from existing commitments.

In the course of 1991, the external debt questions were discussed on several occasions among the republican governments in connection with the broader issue of coordination of economic policies and the future of the union. The disagreements among the republics centered around the criteria for dividing the responsibilities for that debt and the very different capacities of the republics to service that debt. In addition, they discussed the scope for committing new credits jointly, in particular food credits, the future role of the Vneshekonombank in making new commitments and debt service payments, and mechanisms for mobilizing foreign exchange. Most republics also emphasized that the question of external debt could not be divorced from external assets. They argued over the size of the assets–the liquid foreign exchange holdings, gold, other precious metals, embassies and other real estate abroad–and they also held unrealistic expectations about the extent to which the external claims, which nominally exceeded external debt, could be mobilized to service or cancel out against debt. This was an important consideration behind their willingness to recognize responsibility for the outstanding debt of the FSU.

In October and November. 1991, the Prime Ministers (or their designates) of 12 republics of the former U.S.S.R. met with representatives of the G-7 countries. 1/ In the end, the representatives of 8 republics (all except Azerbaijan, Georgia, Ukraine, and Uzbekistan) signed the Memorandum of Understanding (MOU): (i) to be jointly and severally responsible for the existing external debt; 2/ (ii) to designate the VEB, or its legal successor, as the debt manager; and (iii) conclude an agreement for servicing the debt, on a joint and several basis. Subsequently during 1992, Georgia and Ukraine also signed the MOU.

The republics also undertook to put in place appropriate macroeconomic policies, which would address, in particular, reducing fiscal deficits, public expenditure, and monetary growth and liberalizing prices and the exchange rate. They also agreed that they would seek to maintain free interstate trade. The signatories intended, "in full consultation with the IMF, to adopt and implement during the first quarter of 1992 comprehensive and ambitious macroeconomic and structural adjustment programs taking into account the recommendations of the IMF." 3/ The unusual character of this commitment should be interpreted against the background of the status of the republics’ relations with the Fund. The U.S.S.R. was not a member of the Fund but only had Special Association; 4/ at the time, there were no formal, bilateral relations with the individual republics, although such relations were possible under the Special Association.

On this basis, the G-7 representatives offered a financial package consisting of a deferral of principal payments on medium- and long-term debt contracted before January 1, 1991 and covering maturities falling due up to the end of 1992, with a review date of March 31, 1992, the maintenance of open short-term credit lines by export credit agencies, and a possible emergency financing in the form of a gold swap of up to US$1 billion. 5/

The deferral of debt was implemented in January 1992 between the representatives of 17 governments meeting as the Group of Creditor Countries of the former U.S.S.R. and its Successors and representatives of the Interstate Council on Supervision of Foreign Debt Servicing and of Utilization of Assets and of the VEB. 1/ Commercial banks agreed on December 16, 1991 to deferral on comparable terms, in the first instance for principal obligations for the first quarter of 1992. By March 1992, the Russian Government had formulated a reform program for market reforms. During 1992, several meetings were held with the official creditors and the commercial banks, which granted deferral on principal payments due on medium-and long-term debt contracted before the cut-off-date (January 1, 1991) on a quarterly basis. No formal rescheduling took place during 1992, however, as agreement could not be reached about the terms of and the legal framework for the rescheduling.

b. Interstate agreement–debt service shares and zero option

On December 8, 1991, eight states (somewhat different from the signatories of the MOU–Table 7.) agreed on the criteria for determining the share of debt of each of the FSU states. The share of each country was based on four indicators (population, national income, and exports and imports in convertible currencies during 1986-90). The signatories were committed to deposit foreign exchange with the VEB to service external debt. An Interstate Committee for Managing the External Debt and Assets was established with members of the signatory countries. In the event, the agreement never functioned as Intended. Only Russia deposited foreign exchange with the VEB. Few of the states, besides Russia, sent representatives to the Interstate Committee’s meetings, thereby impeding both the resolution of issues with foreign creditors and negotiations with foreign governments indebted to the FSU.

During 1992, it became clear that the interstate agreement did not work as intended and that it would be difficult to reach joint decisions. As a consequence, the Russian Government proposed to each of the other FSU states the so-called zero option, which implied that Russia would take over the responsibility for servicing the external debt of the FSU if the other FSU states would agree to transfer their share of the external claims of the FSU to Russia. The delay in concluding these agreements was one of the major factors for the delay in reaching agreement with official creditors on a rescheduling. Since Russia concluded only a few of the zero options agreements in 1992, it also concluded protocols with other countries, including Ukraine in March 1993, which allowed Russia to manage external assets and act on behalf of the other FSU states and thereby to proceed with the rescheduling agreement. By the end of June 1993, zero options agreements had been signed with only four countries (i.e., Belarus, Turkmenistan, Uzbekistan, and Kyrgyzstan) (Table 7.). The Interstate Committee was dissolved in November 1992.

c. Rescheduling in April 1993

In early April 1993, Russia agreed with its official creditors on a rescheduling of the debt of the FSU based on a declaration from the Russian Government that it would be responsible for the debt service obligations. 1/ This was a milestone as external creditors now considered the MOU as inoperative with respect to their own claims concerning the debts defined in the Russian declaration and would not seek payment of such claims from other successor states that had entered into bilateral agreements with Russia. The rescheduling agreement did not prejudge the outcome of the bilateral agreements between Russia and the other FSU states.

The MOU had served the purpose of allowing external creditors to proceed with commitments and disbursements of financial assistance to all the signatories of the MOU in a transition period where the responsibilities of the FSU states were ill-defined. At the same time, it proved impossible in practice to implement the joint and several responsibility, given the widely different external situation of the states and the coordination of external debt policies it forced upon states that were in the process of dissolution.

V. Tentative Conclusions

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 pay-off of substantial financial assistance 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 intended to stress 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 political uncertainties domestically and–not the least–in Russia’s relations with the other FSU states.

The balance of payments difficulties of Russia 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. over several years because of growing macroeconomic 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 lack of efficient investment had slowed economic growth; the heavy reliance on military exports supported by export credits–which may have given the illusion to Soviet policy makers 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 in the past had been 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 build-up of external debt. Before the U.S.S.R. ceased to exist, external foreign exchange and gold reserves were almost exhausted, in part due to 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 cessation of private inflows, thereby limiting financing to official or official-guaranteed loans from abroad. At the same time, the channelling of these official loans through the government maintained the central apparatus of allocation of imports to enterprises at subsidized prices.

The balance of payments developments in Russia during the first year of reform 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 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 lack of confidence in the financial policies. The maintenance of sharply negative real interest rate on ruble denominated assets was also a critical factor behind large capital outflows.

While 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. The 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, 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 FSU, it helped maintain the flow of financing in a transition period after the break-up of the FSU. However, it also proved difficult to implement in practice given the uneven external economic situation of the FSU states and the difficulties of the states 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 while the bilateral relations between Russia and the other states of the FSU debt and assets remained to be settled.

Given the collapse in both FSU and non-FSU exports in recent years and the substantial increase in external debt on unfavorable maturities, the debt burden remains substantial for Russia. Russia’s external prospects and its debt service situation should be evaluated on the basis of Russia’s export potential to both FSU and non-FSU countries. Russia’s external situation will also depend on the ability of the other FSU states 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 and major gaps in information, including on trade developments which have deteriorated further in 1993 so as to make difficult a meaningful analysis of the external situation.

The experience with external developments in recent years shows the importance of consistent implementation of economic reform, including a liberal trade regime. The possibilities for Russia 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. The economic reforms, 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.

ANNEX I Trade Measures Taken by Selected Industrial Countries and the EC 1/

Table 1

Liberalization Trade Measures Against FSU/Russia Taken by Selected Industrial Countries and the European Communities

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Sources: EC Commission, European Report, various issues, GATT, and initial sources.

For simplicity, all references in this Annex are to the former U.S.S.R. or FSU since since many of the measures span a period before and after the dissolution of the U.S.S.R.

Annex Table 2.

Restrictive Trade Measures Against FSU/Russia Taken by Selected Industrial Countries and the European Communities

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ANNEX II FSU and CMEA Trade–Price Subsidies

For several years prior to the dissolution of the CMEA in 1991, the U.S.S.R. provided large Implicit price subsidies, on a net basis, to the former CMEA member countries through the terms of trade between the energy products and other raw materials it exported and the manufactured and other products it imported. Similarly, within the FSU, Russia has subsidized the other FSU states through the price system. The calculation of total resource transfers that took place among the FSU states, however, is more complicated and comprises not only trade but financial transfers, including those that took place through the union government budget. 1/

1. CMEA trade

The estimate of implicit trade subsidies of the U.S.S.R. in 1990–the last year of the existence of the CMEA--indicates the difference between trade that took place in 1990 valued at world market prices and actual prices. It is thus a measurement of the opportunity cost for the U.S.S.R. of trade with the former CMEA countries. It does not imply that the trade surplus would have been higher by that amount vis-à-vis CMEA countries because trade volumes are assumed to be constant. In reality, traded goods are likely to be price elastic. Trade might have been diverted, however, to other countries depending on market conditions and transportation or other constraints.

The estimate for the implicit price subsidies for 1990 is based on the actual changes in traded goods prices that took place between 1990 and 1991 between the U.S.S.R, and the former CMEA countries. It is based on information provided by the CIS Goskomstat on the value and volume of trade (at 1986 constant prices), which was checked against partial information available from Eastern European partner countries. Based on this information, the terms of trade of the U.S.S.R. improved by 42 percent between 1990 and 1991 vis-à-vis former CMEA countries, which–by definition–is equivalent to a terms of trade deterioration of 30 percent of the CMEA countries vis-à-vis the U.S.S.R. 2/

If the prices obtained for trade in 1991 are applied to the 1990 volume of the U.S.S.R.’s total exports and imports with the CMEA area, including the former G.D.R., the trade balance of the U.S.S.R. would improve