What lessons should Russia’s leaders learn:
? If the socialist economy no longer functions, the government should try to disinflate as rapidly as possible. A delayed disinflation will be much more painful.
? If the government is confronted with delayed disinflation, it should cut budget deficits radically.
? The illusion of being able to finance the deficit out of a short-term portfolio should be abandoned.
? It should be understood that hardening the budget constraint is important not only for raising budget revenues but also for allowing market mechanisms to work and thus for increasing the efficiency of the economy.
So what is it that Russia can do to assure that it continues to progress towards its rightful place as a world economic power?
At the very least Russia’s political leaders must:
? Understand that the policy of seeking ever more cash from the West is not a policy that will develop Russia politically or economically.
? In short the Duma must accept responsibility for its crucial role in Russia’s future. Short-term political ambitions and partisan hopes that the failure of “Yeltsin’s reforms” will lead to greater political advantage for the opposition in the Duma must yield to the reality that international lenders will not keep lending to Russia forever.
? And most importantly, take immediate, positive steps to encourage long-term foreign direct investment (“FDI”) in Russia.
Why to focus on FDI?
Unlike portfolio investment in equities and debt, FDI directly creates jobs and cannot be withdrawn by a computer keystroke. The comparatively miniscule amount of FDI in Russia should be a source of acute embarrassment to the Duma and a stimulus to prompt, decisive action. Foreign investors do not expect guarantees of profit or protection from market forces. They do require some hope of tax stability and reasonable support, rather than interference, from the Government. To date Russia has attracted a meager amount of FDI even without offering such conditions.
Appendix
Exchange rate of Russian ruble comparatively to US dollar (the denomination in the 1998 is not considered)
Percentage of changing of Exchange rate of Russian ruble
comparatively to US dollar
S. Commander, C. Mumssen, Understanding Barter in Russia. (EBRD Working paper 37, 1998).
Professor A Kennaway The Russian Political Economy 1999. Royal Military Academy Sandhurst
Jeffrey A. Burt, Board of Directors of the Russian-American Chamber of Commerce?. 14 June 1999
Michel Camdessus ;Managing Director of the International Monetary Fund European-American Business Council New York, September 15, 1998
http://www.wright.edu/~tdung/imf_wb_nyt.htm