The Russian Federation in Transition - External Developments


WP/93/74-EA

The Russian Federation in Transition:
External Developments by Benedicte Vibe Christensen
Russia's balance of payments difficulties are rooted in the basic
structure and economic developments of the Soviet economy. A classical
balance of payments crisis developed: macroeconomic imbalances increased,
and structural problems created by decades of price distortions and central
planning slowed domestic growth, including oil production. Three major
systemic events had an impact on the balance of payments: the changes in
external economic relations, including the disbanding of the Council for
Mutual Economic Assistance (CMEA) in 1991; the disintegration of the
U.S.S.R.; and the dismantlement of central planning and the introduction of
market-related reforms in Russia from 1992. Although its savings balance
has deteriorated since 1990, Russia has benefited from a decline in the
implicit price subsidies to the former CMEA countries and the other states
of the former Soviet Union.

The reform period in Russia that began in early 1992 has provided
tentative lessons concerning the importance of a comprehensive set of
economic policies and appropriate financial assistance. Although progress
was made in price liberalization and in the reform of the exchange system
during 1992, some key policy measures were not taken. In particular,
interest rates were sharply negative in real terms and financial policies
were loose, which gave rise to large capital outflows. In addition, the
export regime remained highly restrictive. The policy of keeping domestic
raw material prices below world market prices and protecting supplies for
the domestic market through export quotas and tariffs restricted exports
while encouraging illegal transactions.

Financial assistance from abroad increased substantially during 1992.
Besides debt deferral, assistance came almost entirely from official
creditors or was officially insured and linked to imports. It was extended
on relatively short maturities, partly owing to Russia's heavy reliance on
credits for imports of agricultural products and other consumer goods, which
will burden debt service in the coming years. The experience showed the
importance of determining responsibility for the external debt and assets of
the former Soviet Union, agreeing on the amount and terms of the financial
arrangements at the government level with the other states of the former
Soviet Union, and regularizing relations with external creditors so as to
ensure uninterrupted flows of financial assistance.

Russia's external prospects should be evaluated on the basis of its
potential as an exporter to both the states of the former Soviet Union and
other countries. External adjustment, including a reversal of the sharp
export decline, will depend critically on economic policies, access to
foreign markets for Russia's exports, and external financial assistance on
appropriate terms, including non-debt-creating flows in the form of foreign
direct investment.