SPILLOVER IN RUSSIA SANDIP SHAKYA APRIL 30 2009

SPILLOVER IN RUSSIA SANDIP SHAKYA APRIL 30, 2009

PRECEDENCE Massive currency depreciation Interrelated markets Strong ties to the Asian economic crisis

IN RUSSIA Breakdown of the Soviet Union Traumatic transition Rapid inflation Steep output decline Unemployment (largely unknown at the time in planned economies)

THE TRANSITION Privatization of the entire economy Financial markets and banking practices largely unknown Lack of Legal framework for Private economic relations or Corporate Governance Ambiguous Property rights

LACK OF FISCAL MACHINERY Lack of modern Fiscal machinery for Collection of Taxes Absense of Domestic Capital markets and cautious foreign investors Monetary printing press, the only means to finance needed social expenditures

REAL OUTPUT GROWTH – RUSSIA AND POLAND, 1991 -2003 (percent per year) 15. 00 10. 00 5. 00 0. 00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -2003 Russia Poland -5. 00 -10. 00 -15. 00 -20. 00

INFLATION– RUSSIA AND POLAND, 1991 -2003 (percent per year) 1800. 00 1600. 00 1400. 00 1200. 00 1000. 00 Russia 800. 00 Poland 600. 00 400. 00 200. 00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -2003

SHRINKING OUTPUT AND MASSIVE INFLATION Inability to collect taxes No control over government spending Burrowing instead of Seigniorage slowed inflation Decrease in the prices of oil and other key Russian commodity exports Increase in rates on government burrowing

THE IMF Agreement with Russia to back up Russian ruble’s exchange rate Billions in credit Fear of a Russian collapse Nuclear threat

RUSSIA’S ACTIONS Mid-August 1998, Abandoned its exchange rate target Defaulted on debts Froze international payments Panic around the world U. S. Federal Reserve lowered dollar interest rates sharply averting to a worldwide financial collapse