A Tale of Two Crises
| Author | Erik Berglöf; Alexander Plekhanov; Alan Rousso |
| Position | Chief Economist - European Bank for Reconstruction and Development; Economist - European Bank for Reconstruction and Development; Director for Strategy and Analysis - European Bank for Reconstruction and Development |
| Pages | 15-18 |
Page 15
Russia is still a resource-dependent economy that must diversify in a market-friendly way
RUSSIA’S reversal of fortune is striking. Just before the global financial crisis hit the country with full force in late 2008, Russia looked invincible. Nearly 10 years of impressive economic performance, prudent macroeconomic management, fiscal and current account surpluses, the third-largest foreign exchange reserves in the world, and a growing middle class were just some of its achievements.
But now the picture has changed dramatically. A sharp reduction in output in the fourth quarter of 2008 and the first quarter of 2009, the near-failure of a few sizable banks, and struggling major industrial groups coupled with an alarming rise in unemployment, have put things in an entirely new light. And then there is the fact that nearly one-third of the country’s reserves—used mainly to prop up the ruble during its gradual slide—have evaporated.
Where have we heard this story before? The whipsaw shift in sentiment and economic performance as well as several other features of the current crisis are strangely reminiscent of the 1998 financial meltdown. From 1995 to early 1998, Russia was described by many respected western analysts as a major global success story. Thanks to the early efforts of the first reform team, under President Boris Yeltsin and Acting Prime Minister Yegor Gaidar, Russia, according to these analysts, had become a market-oriented democracy in less than five years.
Then, as in 2008, Moscow had the feeling of a boomtown to which young profes-Page 16sionals flocked to make their fortune. The stock market, although small and illiquid, was one of the best performing in the world, and a middle class was taking shape. Russia was thought to be too big and too important (and too nuclear) to fail, so fears that it would become infected by the Asian crisis—which was spreading throughout emerging markets in the second half of 1997 and early 1998—were thought to be unfounded. We know the rest of the story. In August 1998 came default, devaluation, despair.
What then can be learned from these two crises, which occurred almost exactly 10 years apart? Russia has moved on in many ways since the last major crisis hit. What we may gain by looking back at the events of 1998 is some comfort, knowing that Russia today is more robust now than it was back then. But some apprehension is also warranted: the economy’s rebound may be less immediate and profound this time.
What we are certain to find is that Russia has not done enough to inoculate itself from recurring crises that stem, in large part, from a sharp drop in the price of oil. Russia is still a resource-dependent economy that must take meaningful steps to diversify in a market-friendly way.
Both crises were caused primarily by a sharp drop in the price of oil, the key external variable for the Russian economy, whose diversification away from oil, gas, and other commodities remains a key long-term challenge.
Prior to the crisis in 1998, oil and gas accounted for almost half of Russia’s export revenues and directly for one-fifth of federal government revenues. By 2008 the share of oil and gas in export receipts had reached 68 percent, and natural resources directly accounted for half of federal government revenues. Extraction industries accounted for more than 10 percent of the total value added, and their true contribution to GDP was much higher, because about 60 percent of industrial production was concentrated in...
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