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The Russian Economy

The Russian Economy. A Transition From Socialism to Free Market Economy Gone Awry. Introduction To The Dilemma at Hand. Breakup of Soviet Union in 1991 Attempted but failed transition from Socialism to a free market economy

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The Russian Economy

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  1. The Russian Economy A Transition From Socialism to Free Market Economy Gone Awry

  2. Introduction To The Dilemma at Hand • Breakup of Soviet Union in 1991 • Attempted but failed transition from Socialism to a free market economy • Repeated failures to mend an ailing economic policy have caused a massive contraction in the economy (40%) • Failures include privatization, removal of price controls, foreign trade, and reducing inflation

  3. Russia: a closer look • Economic performance has been and continues to be well below potential • Per capita income is approx. $4,200. The world average stands at 5,200 • Russia falls behind Algeria, Costa Rica, Colombia, Panama, Mexico, Brazil and other countries typically considered to be “poor” • Russia’s potential for growth, however, is much larger than these countries

  4. Reasons Contributing to Russia’s Potential for Growth: Part 1 • Output of goods stands at approx. half of that which is already possible given Russia’s current infrastructure. • Nine year ago, GDP was significantly more it is now: that potential still exists in large part given the effective use of current resources. • Many enterprises underreport production in order to reduce tax liabilities

  5. Reasons Contributing to Russia’s Potential for Growth: Part 2 • Industrial investment is fairly high and should allow a much higher level of output than is currently being achieved. • Russian stock levels per worker show that and additional 44-55% more goods should have been produced • What this means: Enough money exists to provide companies with what they need to be productive and successful. It’s just not being used properly.

  6. Reasons Contributing to Russia’s Potential for Growth: Part 3 • Russia’s workforce is highly, or at least sufficiently, educated • Yet, once again, production is below that which would be expected given the conditions of the situation • Other countries with the same number of years of education per employee have about a 35% higher income per capita. (slightly old figure, from a late 1980’s study)

  7. Reasons Contributing to Russia’s Potential for Growth: Part 4 (BIG ONE) • A high percentage of Russian produced goods can be described as “Negative Value Added” • A dollar’s worth of raw ingredients produces less than a dollar’s worth of product • Results from arbitrary, artificial, distorted and government subsidized prices • Halting production of many goods by Russian firms would actually RAISE the GDP

  8. Reasons Contributing to Russia’s less then Ideal Economic Situation • Remnants of Socialism’s continue to penetrate the economy and society as a result of its prolonged existence. • Socialism brought with it certain securities, but in it’s absence, a lack of social legal and institutional infrastructure becomes apparent. • A successful market economy does not arise over night or simply as the result of policy changes. As stated earlier, infrastructural aspects present in even underdeveloped market economies are absent in Russia.

  9. Russia’s Banks, a Source of Further Economic Woes • Russian banks do not operate as true banks • They do not accept deposits or make loans as true banks do. Do not encourage investment and therefore do not contribute to economic growth. • They do serve as the financial arms of the government. Distribute resources to favored individuals, companies, enterprises, and industries • The creation of legitimate independent banks is one way to break the financial chain of socialism

  10. Russia’s Sketchy Choice for Privatization • Countries assets divided into two parts • Highly profitable: • Remain the property of the state • This includes most importantly Russia’s natural resources • Less Profitable: • Converted into Joint stock companies • Tradable in the form of “vouchers” which are distributed to every Russian citizen.

  11. Russia’s Sketchy Choice for Privatization:Initial Results • From October 1992 - June 1995, voucher distribution and use results in the sale of more than fifteen thousand state owned enterprises • This is achieved for the most part through the use of Investment Privatization Funds (IPFs) • Results of IPF were in many ways more negative than positive…

  12. The skinny on Russia’s big, fat, IPFs • Most Russians contribute their vouchers into largely unregulated IPFs in good faith. • Many of the funds mysteriously vanish; citizens are left scratching their heads and wondering what the bought or what they are owed. • Dividends to individual investors are as rare as they are small. • Banning of IPFs is considered to combat widespread fraud.

  13. Russia’s Sketchy Choice for Privatization:What happens next • Russia next moves to sell its truly valuable assets not included with its voucher privatization. • Government gives select banks “temporary trust” in valuable resource firms in exchange for loans to fund the national budget. • These loans are supplied to the government from deposits that were initially made by the government.

  14. Russia’s Sketchy Choice for Privatization:What Happens Next Continued • Government defaults on these loans, which comes as no surprise to anyone, except the stupid, the slow, and the weak. • The chosen banks then become the sole owners of a large percent of Russian natural resources. • The sale of 25 percent of a telecommunications company was possibly the one exception to the preferential giveaway of state assets, and raised almost half as much as all previous privatizations combined.

  15. Russian Economy, A Current Snapshot • Nearly all production is in Private hands • What appears private isn’t always, as nearly all firms share a common budget with the public sector. • This is tied closely with the previously mentioned fact that a large percentage of Russian companies produce what is called “Negative Value Added”

  16. How Negative Value Added Binds Companies with government closer than some Siamese twins • In an economy that is privately financed, companies cannot produced negative value added for long without going bankrupt • In order to stay in business, private enterprises rely on government subsidies • Any company that receives regular aid from the government is thereby linked to it through a common budget. • This results something other than a true Free market economy because all prices embody either taxes or subsidies

  17. Further effects from Regular Government Subsidies • Because their bottom line is constantly being “bumped” with government funds, there is little or no incentive for individual enterprises to remain competitive or make wise economic decision. • This only encourages the owners of such businesses to strip their companies of any real economic value. • The remaining value of each original asset is then only what it can effectively steal from the rest of the economy, be it in subsidies, unpaid taxes or defaulted loans.

  18. Another Note On Russian Subsidies • Unlike traditional government subsidies that are given BY the government TO the enterprise, individual enterprises create their own subsidies; with or without the consent of the government • This is like many individual governments working in parallel, each taxing the population independently from one another. • The problems that arise from this this system, apart from those already mentioned, are an overlap of taxation as well as an increase in corruption

  19. Russia’s Situation From Another Perspective. • Nobel Laureate Ronald H Coase states: • Tradable assets will end up in the hands of the most efficient owners • They will bid the assets away from their original owners with the expectation of securing higher returns • The Case in Russia • The best extractor of Government subsidies will secure property rights through bribery, force, or political allegiances • Property ends up in the hands of the most capable predators of public wealth, rather those who would use the resources most effectively from an economic standpoint.

  20. What’s Russia Doing About Its Rogue Corporations, and is it right? • When an enterprise becomes too powerful, or begins to act up, the Russian government very quickly seizes power through “legal” measures. • While this may appear to be a valid solution, it only serves to transfer power back into the hands of the Government, thereby undoing any good caused during the 1990’s through privatization. • In addition to resembling a return to Socialism, these acts also unnerve investors thereby hurting the entire economy in addition to the individual people and enterprises being targeted for wrongdoing. • The recent arrest of Mikhail Khodorksovsky, head of the giant oil company Yukos is an example of the Russian government recapturing personal power/property in this manner.

  21. Some Additional Examples the Russian Government Raping Private Enterprise

  22. China, a Nearby Neighbor’s Approach to Economic Reform • The creation of bond and stock markets, allowing for the creation of “joint-stock” companies, allowing for formerly state owned assets to enter private hands, under state “guidance”. • Opening doors to foreign investment, causing both the quality of goods and efficiency to rise due an exogenous shock from competition. • Through the influx of foreign investment/goods, the standard of living rises as well, as increased efficiency allows for price drops – allowing more people to afford products – thereby increasing demand.

  23. Cumulative Economic Growth and Private Income in Post Communist Economies------or------Why smart private enterprises that steer clear of the subsidy web are essential to economic growth

  24. Russia Today • In the early to late 90’s massive losses were incurred by the GDP • From 1999 till today, significant improvement has been made • Still, the GDP remains down approximately 22.3% from it’s levels in 1992

  25. Recapping the Situation With Some Positive Advise • Control must be gained over government subsidies in order to increase competition and protect individuals from exploitation • Private enterprise must remain just that; apart from the Government • A true commercial banking system must be created to encourage investment and economic growth • Property rights must be assured. The Government cannot simply grab control of companies it feels threatened or insulted by, or believes to be too powerful

  26. Bibliography • From Predation to Prosperity: How to Move from Socialism to Markets • http://www.russiaeconomy.org/predation.html • Fixing Russia’s Banks: A Proposal for Growth • http://www.russiaeconomy.org/fixingrussia.html

  27. REJOICE, FOR RUSSIA IS SAVED!

  28. One More Thing Before We Close… Roons Word: Check that Roons Word: and then send it to everyone James Z Bao: no James Z Bao: macro's f*cking blowoff James Z Bao: why the f*ck do you guys even bother doing a powerpoint James Z Bao: you've just wasted your time James Z Bao: you should feel dumb

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