1 A.Nekipelov Russian Economy: Current Developments And Strategic Options Presentation to the Conference “Sixth Annual Middlesex Conference on Economics and Security ”, London, June 2002

2 Topics Evolution of economic situation after the August crash of 1998 Major challenges facing the Russian economy in the medium- and long run Economic strategy of the government and its alternatives

3 I. Evolution of economic situation after the August crash of 1998

4 Indicators of Economic Growth, (% Increase to the Corresponding Period of the Previous Year) GDP Industrial Output Gross Investments in Fixed Assets Retail Trade Turnover Foreign Trade Turnover Exports Imports Sources: Goskomstat, MEDT

5 Industrial Growth by Sectors

6 Distribution of Investments

7 Consolidated State Budget Incomes, Expenditures and Deficit (Proficit) As Percentage of GDP Budget incomes25.1%25.5%29.4%27.3% Budget expenditures30.7%26.4%26.5%23.6% Budget deficit(-), proficit (+) -5.7%-0.9%1.9%2.9% Source: Goskomstat

8 Major Characteristics of the Situation in the Monetary Sphere Reserve money (% change) * Broad money (% change) * Inflation (CPI), % Nominal exchange rate (% change to Dec. previous year) Real exchange rate (% change) Foreign exchange reserves (without gold), US $bln., EOY ** *November2001/November 2000 ** December 2001 Sources: Goskomstat, IMF

9

10

11 II. Major challenges facing the Russian economy in the medium- and long run

12 Major Challenges Facing the Russian Economy in the Medium- and Long Run "Problem 2003" Debt problem Danger of loosing a significant part of industrial capacities as a result of their massive depletion Serious distortions in the economic system Problems with corporate governance system Lack of necessary transparency of businesses Persisting arrears Gap between financial and production sectors High level of corruption within the civil service, inefficient system of law enforcement, high level of criminalization of the economy Source: IMF

13 Capital inflows and outflows in Russia, гг. (mln. US $) InflowOutflowNet inflow Capital account, n.i.e Capital account (n.i.e.): credit Capital account (n.i.e.): debit Financial account, n.i.e Investments abroad - assets Investments in Russia - liabilities Net errors and omissions Total Source: Calculated on the basis of data from “International Financial Statistics”

14 Net outflow of capital from Russia, (by years, mln. US $) Net outflow (mln. US$) Net outflow as % of GDP -9.9%-4.7%-6.9%-2.0%n.a.-13.9%-12.6% Source: Calculated on the basis of data from “International Financial Statistics”

15 Factors of Capital Flight and Slow Capital Inflows from Abroad Immaturity of Market System Basic distortions of property rights and their consequences Weakness of other market institutions (imperfect legal system, problems with law enforcement, undeveloped financial infrastructure, inadequate social security system etc) Macroeconomic instability

16 III. Economic strategy of the government and its alternatives

17 Two periods a гг. – Economic activity of the government was practically limited to the implementation of the policy of macroeconomic stabilization. The culmination of the policy – financial collapse of August 1998 b. After August 1998 crash the government has shifted an emphasis on institutional reforms

18 Structural Reforms De-bureaucratization of the economy Improvements in corporate governance system, strive for more transparency, introduction of international standards of accounting Reform of the banking sector Reforms of natural monopolies Tax reforms Land reform Reform of the pension system Reform of utilities Legal reform etc.

19 Controversial Issues The problem of systemic character of institutional reforms Does Russia need an industrial policy? Does Russia need capital? Is Russian economy ready to absorb it? And is it, therefore, necessary to struggle for getting back the capital flown from Russia? Is regulation of transnational movement of capital needed? Can Russia afford itself radical liberalization of foreign exchange regime?