russian crisis & imf

8/3/2019 Russian Crisis & IMF

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Russian Economic Crisis -

Semester 4

International Business &

Cross Culture Management

Assignment 1

Prof. Pooja Gupta

1998 & The Role of IMF

Presented & Submitted by - Group 4

Jayesh Dubey: PRN 09020842010Lakshmi Kedaraman: PRN 09020842013

Rahul Ranjan PRN 09020842028

Ram Prakash Singh: PRN 09020842033

Ritesh Kesharwani PRN 09020842034

Roopa Kushtagi PRN 0902084203522nd May 2011


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Agenda1. Economics & Finance

2. IMF The Institution

3. Russia The Country

4. Case Facts

5. Analysis of the measures

6. Role of IMF

7. Impact on other CIS Countries

8. Conclusion


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Economics & Finance


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Parity Conditions

1. Relative inflation rates

2. Relative interest rates

3. Forward exchange rates

4. Interest rate parity

Is there a well-developed

and liquid money and capital

Is there a sound and secure

banking system in-place to support

Economics & FinanceDeterminants of

Foreign

Exchange

Rates

Balance of Payments

1. Current account balances2. Portfolio investment

3. Foreign direct investment

4. Exchange rate regimes

5. Official monetary reserves

Asset Approach

1. Relative real interest rates

2. Prospects for economic growth

3. Supply & demand for assets

4. Outlook for political stability

5. Speculation & liquidity

6. Political risks & controls

pot

Exchange

Rate

market in that currency? currency tra ng act v t es


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IMF The InstitutionCreated in 1944, at the Bretton Woods conference to prevent the kinds of chain caused worldcurrencies to collapse like in the Great Depression of the 1930s.

Commenced operations in 1947 Headquarters:Washington, D.C.

Membership: 187 countries

Executive Board: 24 Directors representing countries

Staff: Approximately 2,500 from 160 countriesberCountries

Total quotas: US$340 billion (as of 1/31/11)

Additional pledged or committed resources: US$600 billion

Loans committed (as of 1/31/11): US$254 billion, of which US$190 billion have not been drawn

Biggest borrowers (credit outstanding as of 1/31/11): Romania, Ukraine, Greece

Surveillance consultations: Consultations concluded for 120 countries in FY2010 and for 88

countries in FY2011 as of 02/11/11

Technical assistance: Field delivery in FY2010192.5 person years

Transparency: In 2009, over 90 percent of Article IV and program-related staff reports and policypapers were published

Me


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IMF The Institution1. RolesExchange rate stability, Global trade promotion, Payment facilitation

2. Activity

Economic Resources Surveillance (Bilateral and multilateral), Tech assistance, Fin assistance

3. Nature of Financial assistance 3 major ones

A. Standby Arrangements

For Short Term BOP deficits of a cyclical nature

Tenor u to 18 months.

Drawings periodic and conditional cascade of tranche release Purchase of member country currency/sale of another to support its parity

Repurchase after 4-5 yrs

B. Extended Arrangements

For Medium Term Structural BOP problems

Purchase based support. Repurchase max 10 yrs

C. Structural Adjustment facility

Loans not purchases for typically LDCs. Drawls semi annual

Designed to address Long Term structural imbalances in

BOP situation

Easier terms. 0.5% Int. 10 yr Tenor. 1st Semi-annual repayment 5.5 yrs


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IMF The Institution


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IMF The Institution

The Executive Board meets three times a week, maybe more.

The Board has a voting system:

- The larger the economy, the more voting power it has

- But, most decisions are based on consensus


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IMF Operations, Policies &

Other Aspect


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IMF The Institution Monitoring economic and financial developments and policies, in

member countries and at the global level, giving policy advice to its

members based on its more than fifty years of experience.

Lending to member countries with balance of payments problems,

supporting adjustment and reform policies aimed at correcting the

underlying problems.

with technical assistance and training in its areas of expertise.

IMF looks at the performance of the economy as a whole

(macroeconomic performance)

Focuses also on the financial sector policies Ex: regulation and

supervision of banks and other financial institutions.

Pays attention to structural policies that affect macroeconomic

performance. Ex: labor market policies (affect employment and wage

behavior)


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IMF The Institution


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IMF The Institution IMF's main resource: Subscriptions (quotas)

Quotas

Determine the amount of financing that eachcountry can receive from the IMF

Are the main determinant of countries' voting

power in the IMF.

Broa y re ect mem ers re at ve s ze n t e wor

economy

Countries pay 25 percent of their quota subscriptions in

Special Drawing Rights (SDRs) or major currencies

IMF can call on the remainder, payable in the member's

own currency, to be made available for lending asneeded

The United States of America, the world's largest

economy, contributes most to the IMF, 17.5 percent of

total quotas

Members

with TenLargest

Quotas


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IMF The InstitutionHelping countries out of poverty; methods:

Guiding the countries to pursue sound

policies and good governance More effective international support

By providing technical assistance, the IMF

helps countries in:

Strengthening the International

Monetary and Financial System by

working with its member governments,and with other international

organizations, regulatory bodies, and

the private sector.

Globalization has increased the risk of

Direct Effect of the IMF Policies Indirect Effect of the IMF Policies

financial sectors Designing strong fiscal policies and

management

Budget formulation, expenditure

management, and the management

of internal and external debt Compiling, managing, and

disseminating statistical data and

improving data quality

Drafting and reviewing economic

and financial legislation

financial crisis. These crises exposed

flaws in the international financial

system. IMF covers that.

Reducing the risk of future financial

crises

Promote the speedy resolution of those

that do occur.


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IMF The Institution The structural adjustment is undemocratic and inhumane: Causing social

problems

Foreign corporations and investors take advantage of local cheap labor,

but have no regard for the environment

The gap between the rich and the poor is getting bigger?

The Other Aspect

For years, the Fund has set severe loan conditions that in many cases haveled to the deepening the crises.

There is widespread belief regarding the Asian and Latin American crises

that the IMF went too far on imposing policies such as:

Control on government spending

Higher taxes

Higher interest rates

Liberalized markets

Fewer state controls


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Russia - History

945. Treaty of Igor with Byzantium (Constantinople) establishes first claim to

government in the many lands of Russia, known as the many "Russias."

1237. Mongol tribesmen, invading from the East, conquer Russia and impose

foreign rule for over 240 years.

1802. Formation of the first government ministries, establishing a strong principle of

government control of the private economy.

1906. First Duma (parliament) established; first written constitution adopted

o ow ng e e ea o usso- apanese war

1985. Mikhail Gorbachev becomes communist party leader, calling for economicreforms (perestroika) and greater openness (glasnost).

1991. On 19 August, a group of Communist Party hardliners announce takeover of

the Soviet government. The takeover fails. Boris Yeltsin emerges as the most

popular politician.

1991. On 21 December, 11 high leaders of USSR meet in Alma-Ata, Kazakhstan, tosign the "Alma-Ata Declaration" ending the USSR and establishing the

"Commonwealth of Independent States" (CIS).

1992. On 2 January, Russian prime minister frees prices; Rouble value plummets;

prices skyrocket.

2000. Vladimir Putin is elected president and prudently managed the economy.


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Russia - Demography

Population : 139 million (2011)

Population Growth Rate : -0.47%

Age Structure 0 -14 years : 15.2% (1.06 male(s)/female )

15-64 years : 71.8% (0.92 male(s)/female )

65 yrs and above : 13% (0.44 male(s)/female)

Birth Rate : 11.05 births/1000

Death Rate : 16.05 deaths/1000

Life Expectancy at birth Total population : 66.29 years

Male : 59.8 years

Female : 73.17 years


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Russia - Demography

Population Density : 8.4 people/sq km

Densely Populated City Moscow (9 mn)

Net Migration Rate : 0.29 migrants/1000

Urban Population : 73%

Annual Rate of Urbanization : -0.2%

Literacy Age > 15 who can read and write

2.0%

1.1%

1.1%

0.9%

0.8%

10.3%

Ethnic Groups

Ethnic Russian

Tatar

Total Population : 99.4%

Male: 99.7% , Female: 99.2%

Universities : 48

Education Expenditure : 3.9% of GDP (2002)

Religions

Russian orthodox : 15 -20%

Muslims : 10 -15%

Other Christians : 2%

80.0%

.Ukrainian

Bashkir

Chuvash

Chechens

Armenians

Others


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Russia - Economy GDP

PPP : $2,229 bn (2010)

Real Growth Rate : 4.1% (Mar 2011)

Inflation Rate : 9.6% (Mar 2011)

Interest Rate : 8.25% (Mar 2011)


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Russia - Economy

Exports : $337.6 bn

Export Commodities Petroleum and petroleum products, Chemicals

Natural gas, Metals, Wood and wood products

Civilian and military manufactures

Imports : $237.3 bn

Import Commodities Machinery and equipment, Vehicles,

Labor Force : 75.55 mn (2010)

Labor Force by Occupation and GDP

Composition

Agriculture : 10% GDP : 4.2%

Industry : 31.9% GDP : 33.8%

Services : 58.1% GDP : 62%

Average Monthly Wage : $697.8

Industrial Production Growth Rate : 8.3%

, , , , ,

Semi-finished metal products.

nemp oymen a e : .

Population Below Poverty Line : 13.1% (2009)


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Russia - Economy

Current Account Balance : $65.85 Bn (stronger because of high oil prices)

Reserves of Foreign Exchange and Gold : $483.1 Bn

External Debt : $480.2 Bn

Stock of Direct Foreign Trade At Home : $306.8 Bn Stock of Direct Foreign Trade Abroad : $260.5 Bn


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The Russian Crisis 1998

Case Facts


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The Case Facts

Post collapse and dissolution of Soviet Union in 1991, Russian government implemented

reforms aiming to have a dynamic market economy

Price controls ended in January 1, 1992 which led to price surge and higher inflation

(3,000 % in 1992)

Factors contributing to spike in inflation:

Prices held at artificially low levels

Shortage of basic goods led to higher cash reserves

Government subsidy in operations of money-loosing establishments

Printing more money

Tumbling Ruble:

January 1992 $ 1 = R 125

Late 1992 $ 1 = R 480

Late 1993 $ 1 = R 1,500 Oct 1994 $ 1 = R 3,926

Apr 1995 $ 1 = R 5,120

July 1995 $ 1 = R 4,559


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The Case Facts

In 1996, on request from Russian Government, IMF sanction loan of$ 10 billion !!

In return, Russia agreed for:

Limiting growth in money supply

Reducing public sector debt Increasing government tax revenues

Pegging Ruble to Dollar

Debased Ruble, new R 1 = old R 1,000

IMF Help:

Stabilized economy initially in 1997

However:

o Public sector debt remained

o Government continued to spend more

o Taxes remained lower due to

Falling oil prices Underground economy

Complicated tax systems with loopholes


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The Case FactsCRISIS:

Unable to meet targets of IMF, payments suspended in 1998

Interest rates up in overnight loans

IMF bill directing government to take concrete steps was shot down by antigovernment

forces leading to

Stock markets plummeted and Ruble sales accelerated

To maintain value of Ruble, foreign exchange was bled

In response to crisis, on August 17, 1998, PM became indifferent to IMF and announced-

Restructuring of domestic debt market

Transforming short-term debt to long-term debt

90 day moratorium on the repayment of foreign debt

This resulted in

Increase in price of goods by 20%

Currency exchange points sold Dollars @ 9 Rubles / Dollar

Russian government debt lost 85% of its value


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The Case FactsAFTERMATH

IMF left Russia to manage its own mess

Government steps Slashed spending

Reformed tax systems

Rise in commodity (such as oil, natural gas, metals etc.) prices post 1998

STATUS OF RUSSIA POST 1998 CRISIS (in 2004):

Large current account surplus of $ 46 billion

Between 1998 and 2004, economy grew at average annual rate of 65%

Foreign debt declined to about 28% from 90%

Foreign reserves up 10 fold to $ 120 billion

January 2005, repaid entire obligations of IMF ahead of time


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The Case FactsPERSISTING WEAKNESSES

Economy dependent on commodity prices.

Poor banking and manufacturing systems

Large, deep rooted corruption

Mistrust in institutions of government

Reduced foreign investment


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Analysis of the Measures


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Analysis of Measures Slashed Government Spending

Reduced Public Debt

Reduction in Real Exchange Rates

Budget Deficits are reduced

Inflation Checked

Interest Rates Come Down

Tax System Reforms

Tax Payment became cheaper than the means to avoid tax/ Leakages stopped

Budgeted/ More than that, tax collection resulted

Revenue Targets are met

Inflation is checked/ Financial Markets Stabilized

Interest rates come down

Budget Deficit is reduced

Repayment of Debt

Repayment of Debt


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Analysis of Measures

Commodities prices increased

Higher Revenue Collected

Reduction in Balance Of Payment

Foreign Exchange is saved

Re a ment of Debt


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The Role of IMF


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Role of IMF

In 1996 Feb, released a $ 10 Bn Debt

Put harsh measures to implement and repay the debt instead of strengthening the

institutions, putting checks and balances and proper processes.

Arm twisted Russians to agree to its conditions and released additional $640 Mn.

Approved additional $ 11.2 Bn loan to stabilize Ruble by CBR (Central Bank of Russia)

intervention.

Held back $ 800 Mn of the $ 5.6 Bn (First Tranche) once the reform bill fell in Russian

Parliament.

Russian Government was forced to default on its Debt commitments.

This resulted in Ruble declining further and Russian Debt holders had nothing leftwith them. Further IMF withdrew completely without releasing any loan for

restructuring.

Instead of stabilizing the economic situation of the country, IMF because of its single

track approach made the crisis management even more difficult in Russia.


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Impact on Other CIS Countries


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Impact on CIS Countries

BalticEstoniaLatvia

Lithuania

1. Russian crisis affected Baltic countries more

than was expected. Estonia, Latvia and

Lithuania sank into recession. It has since

become clear that sidestepping the effects of

the Russian crisis was impossible.

2. The figures for 1999 showed a heavy decline in

Baltic's exports to Russia and a significant

decline in the growth rates of these economies

3. Food and beverage as well as processing

industries as a whole have suffered the most.

4. In Baltic interbank markets, interest rates rose

after the crisis, but returned fairly quickly tolower levels.

Eastern Europe Moldova

1. Moldova received an IMF special mission

advising the government on how to cope with

the effects of the Russian crisis.

2. After the Rouble crashed, most Russian

importers put deals with Moldova on hold.3. Moldovan president said the Russian crisis had

cost Moldova as much as five per cent of its

GDP.

4. The country's parliament was discussing a

program aimed at reducing imports and

searching for new markets outside Russia.


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Eastern Europe Belarus

1. Output growth fell from 8.5 percent in 1998

to 3.4 percent in 1999.

2. Both exports and imports contracted

substantially, resulting in a drop in the current

account deficit from 6.1 percent of GDP in1998 to 2.2 percent of GDP in 1999.

3. Externally, exports to Russia, which accounted

for more than 60 percent of total exports, fell

during the second half of 1998 by 10 percent.

.

through 1999

5. All the budget expenditures were smaller.

6. The biggest cuts were done in national

security (1.9 percent of GDP compared with

2.5 percent of GDP in the first quarter of

1998) and social policy (1.5 and 2.4 percent of

GDP, respectively) where the expenditures

were lowered almost by one third.

Eastern EuropeUkraine

1. The crisis cost a lot for Ukraine: the Hryvnia

devaluated by 60%

2. Domestic prices increased by 20%

3. The National Bank of Ukraine lost 40% of its

gross reserves.


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Central AsiaKazakhstan

1. Kazakhstan lost its price competitiveness and

its exports were in shambles.

2. On the other hand, cheap Russian goods were

flowing into the economy that was killing the

domestic industries.3. There was huge downward pressure on the

tenge and their balance of payments had

worsened.

4. However the NBK was still holding on to the

ten e.

5. In fact, they had spent close to a billion

dollars to maintain the level of tenge. Theirforeign exchange reserves halved.

Central AsiaUzbekistan

1. In the central Asian state, the government

banned the free unlicensed sales of food,

most of which is imported from Russia, as a

preventative measure against price rises and

panic.


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Region Country 1991 1995 2000 2005 2007Turnaround

year*

Balticstates

Estonia 100.0 76.0 99.6 143.7 166.0 1995

Latvia 100.0 60.9 80.3 118.4 138.1 1994

Lithuania 100.0 61.5 76.0 109.6 123.7 1995

Kazakhstan 100.0 68.9 77.8 127.1 148.7 1996

Change in Gross Domestic Product (GDP) in constant prices, 1991-2007

Central

Asia

Kyrgyzstan 100.0 56.6 74.3 89.1 98.7 1996

Tajikistan 100.0 43.5 50.0 78.2 89.5 1997

Turkmenist

an100.0 65.4 79.8 167.4 188.9 1998

Uzbekistan 100.0 82.5 93.6 117.2 132.0 1996

Transcauc

asus

Armenia 100.0 45.9 59.0 104.5 119.1 1994

Azerbaijan 100.0 41.5 58.1 101.2 157.0 1996

Georgia 100.0 35.8 47.3 66.3 74.1 1995

*The year when GDP decline switched to GDP growth.


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Region Country 1991 1995 2000 2005 2007Turnaround

year*

Central

Asia

Belarus 100.0 66.1 89.7 128.4 140.9 1996

Moldova 100.0 47.3 41.7 58.4 65.0 2000

Ukraine 100.0 52.4 47.5 68.7 73.3 2000

Russia 100.0 65.4 70.7 95.3 106.8 1999

Change in Gross Domestic Product (GDP) in constant prices, 1991-2007

Belarus 100.0 66.1 89.7 128.4 140.9 1996

*The year when GDP decline switched to GDP growth.


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Conclusion

Governments need to analyze all possible impacts before taking key financial decisions.

IMF may not always be the rescuer / savior in a desperate situation.

Concrete policies and procedures to be in place along with strong and effective Financial

Institutions and Banking systems to support a stable economy.

Financial decisions can not be taken without the Political will in a country.

Fallout of a wrong financial decision affects neighboring countries economies as well.

Fiscal and Monetary Policies need to go hand in hand.

Artificial support to the economy by means of price protection and subsidies may not prove

to be good long term strategy.

Basics of Financial Management can not be changed and should be followed strictly.

You Laugh & the world laughs with you ,

but you cry and you cry alone ..


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And the World moved on ..

Thanks for your time and attention

russian crisis & imf

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