The Great Recession 0f 2008 - Russia

[pic 1]

In 1999–2008, Russia was one of the fastest growing economies in the world. In 2009, it was one of the worst affected by the global economic crisis. A triple shock––to oil prices, capital flows, and external financing––led Russia’s real GDP to fall 7.9 percent in 2009, and was driven by the drop in domestic liquidity and collapses in industrial production (IP) and aggregate demand. . Unemployment and poverty rose, and the ruble fell. The fiscal surplus turned to deficit for the first time in a decade. The banking sector, which had relied heavily on non-deposit financing, faced severe liquidity constraints. A deposit run at the end of 2008 exacerbated the liquidity crunch, and threatened financial stability.

[pic 2]

The Russian economy experienced a sharp fall in external demand, mainly for raw materials, and suffered a steep decline in industrial production and cargo turnover. Reduced external demand was offset by a build-up in domestic demand from an increase in budget expenditures—social expenditures (mainly pensions), capital injection in the banking sector, and budget guarantees for the real sector

The traditional central bank response to a recession should have been an easing of monetary policy. However, the Central bank of Russia (CBR) chose to forgo this route, as the easing of monetary policy during periods of falling oil prices had previously led to speculative pressure on the ruble. The CBR spent significant amounts of its foreign exchange reserves, but could not alleviate the pressure on the ruble.  The pressure on the ruble ended as soon as the CBR abandoned its efforts to keep the ruble from weakening and started to tighten the money supply.

[pic 3]

This approach, on the one hand, inevitably lowered the real sector and household sector’s demand for credit and led to a further drag on the economy. Also, a devaluation of the ruble was inevitably accompanied by the acceleration of inflation. Approximately half of consumer goods on the Russian market are imported, and a weak ruble pushed the prices. In turn, the increase in inflation increased inflationary expectations and kept the CBR from reducing interest rates. Caught in the middle of trying to balance economic growth, the exchange rate, and inflation, the CBR is still unable to clearly articulate its policy.

Also unemployment and poverty rose due to the recession. One major mistake Russia made was to provide continuous subsidies to inefficient companies. Part of the reason was political, as many such large companies employ a significant part of the population of the cities in which they are located, and their bankruptcy caused some popular protests. To a good extent, government formulated some policies. The policy response was especially effective in stabilizing the financial sector, and also helped to reduce unemployment and poverty. Unemployment rose less than expected––from full employment before the crisis to 8.2 percent at end 2009 in part due to the large anti-crisis response, but also reflected labour hoarding, part time employment, and involuntary vacations. Poverty also increased less than expected, reaching 14 percent at end-2009, compared to the 17 percent anticipated without the government’s interventions, which included sizeable increases in minimum and public wages, pensions (which had been announced before the crisis, but the timing of which helped cushion the social impact), and less significant increases in unemployment benefits.
 The Russian financial system came out of the acute financial crisis virtually unscathed, and unemployment remained under control; the Russian government managed to stick to most of its fiscal commitments. Finally, the government postponed the increase in social taxes, which was planned for 2010 to finance an increase in pensions. Such an increase would have had a devastating effect on employment.

The comparatively low rate of joblessness in industrial regions is also due to the policies of entrepreneurs, who widely resort to wage-cutting, the withholding of pay and the widening of the sector of short-term unemployment—thereby avoiding mass layoffs. The government also enacted a large stimulus package equivalent to almost 7 percent of GDP—a broadly adequate size, given the force of the demand collapse and the country’s relatively weak automatic stabilizers. The policy response was especially effective in stabilizing the financial sector, and also helped contain unemployment and poverty. The Great Recession did not lead to a currency crash, major bank failures, or large-scale corporate defaults in Russia.