The first five post-Soviet years in the Russian economy can be called the era of stagflation.
The overall economic activity measured by gross domestic product (GDP) declined by some 40%. This slump was even deeper than the Great Depression in the USA in the 1930s. Amid economic decline there was a very strong inflationary wave after freeing prices from the strait-jacket of central planning.
Presumably the output decline gives clear evidence of economic deterioration. However, in post-Soviet studies some features of the previous system must be taken into consideration including an overproduction of many input goods, a prevalence of worthless output, the non-existence of some claimed output, and waste of output that was produced. Given the very uneconomic nature of the central planning, systemic change was basically reasonable.
In the early period of the systemic change, public sector subsidies to industry were reduced which forced many firms to cut production. Facing a steep slump, the officials started pumping money into the economy accelerating the inflation. Solid investment decisions became hard to made since accurate forecasting of economic conditions was virtually impossible. At the same time, a golden era of capital flight was established.
Amid the post-Soviet stagflation, average monthly gross wages measured in hard currency (ECU, or European currency unit which is the predecessor euro) showed an amazing boom.
Average monthly gross pay increased from ECU 18 in 1992 to ECU 53 in 1993 - an increase of almost factor three. Between 1993 and 1997, there was again a nearly 3-fold increase to ECU 145. It can be concluded that in this period (1992-1997), the real exchange rate of rouble (RUB) appreciated extremely strongly, which means that Russian strong inflation was not reflected in nominal depreciation of the external value of rouble, which was floating on the market.
In 1997, it was assumed that the strong inflationary wave is over and a new semi-fixed exchange rate (ER) policy was discussed. As a result of this, a managed floating regime of RUB was introduced at the beginning of 1998. In this system, the central rate of rouble was fixed at RUB 6.2 = US$ 1. Fluctuations of 15% were permitted in that system (± 15% around the fixed central rate) to allow market flexibility.
2 This chapter was written by professor, Ph.D. Tauno Tiusanen, Director of Northern Dimension Research Centre
This system of semi-fixed ER of rouble collapsed in August, 1998. The market lost confidence in the correctness of the central exchange rate (RUB 6.2 = US$ 1) and the Russian Central Bank (RCB) was unable to defend the set 15% depreciation limit that in absolute terms was about RUB 7 per dollar. Panic took over on the Russian currency market bringing RUB rate in a couple of months to 20 roubles per dollar. The Central Bank used some US$ 10 billion in defending the lower limit of the managed floating and gave up the flight after that (for details see [44]).
The rouble devaluation crisis became an important watershed in the transitional period of Russian economy. The post-crisis exchange rate gave an incentive to invest in import-substituting branches in the Russian economy – for example, in food and beverage production. A revival of investment activity took place.
An essential increase in oil price occurred between 1999 and 2000. This price hike gave a strong boost for Russian export which consists mainly of oil and natural gas. Export value increased by no less than 60% in 2000 helping the Russian economy to recover. Soaring export income has also allowed to balance the books in the public sector which showed serious deficits in the pre-crisis period.
Table 1. Main Economic Indicators (real growth, p.a. %)
1997 1998 1999 2000 2001 2002 2003
GDP 1.4 -5.3 6.4 10.0 5.1 4.7 6.8
Investment -5.0 -12.0 5.3 17.7 8.7 2.6 12.5
Average gross
monthly wage, RUB 4.7 -13.3 -22.0 20.9 19.9 16.2 10.4 Retail trade turnover 4.7 -3.3 -6.1 9.0 10.8 9.0 8.0 Consumer price
inflation 14.8 27.6 85.7 20.8 21.6 16.0 13.6
Export 8.3 -13.3 6.5 60.5 0.1 -0.2 6.0
Import 18.2 -18.4 -28.5 31.0 23.6 7.5 3.0
Source: WIIW, 2003
The table above shows that GDP declined in the crisis year of 1998, but recovered strongly already in 1999. Economic growth accelerated to 10% in 2000 (after 6.4% growth in 1999) amid a very strong export boom (export value increased by 60.5%). In that year (2000) two indicators of living standard (average wage and retail trade turnover) show strong recovery, while inflation abates after the post-devaluation peak of 1999.
The most important detail in the above table is the growing tendency in investment: it can be assumed that the period of capital flight, which occurred in the early period of transition, is over. High propensity to invest is the best guarantee for sustainable economic growth.
It is interesting to analyze Russian income figures on the basis of euro-calculations. Rouble devaluation in 1998 affected average wages in Russia, but the exchange rate blow to living standard was rather mild.
In international living-standard comparisons it is important to take different price levels into consideration. Official exchange rates do not necessarily reflect relative prices correctly.
The crude method to make living-standard comparisons between nations is to take GDP (gross domestic product) figures per capita in terms of the national currency and convert them into dollars or euros at the going exchange rate. This standard method neglects the fact that price levels in various countries differ considerably from each others.
Thus, international living-standard comparisons of real income presently contain purchasing power parity (PPP) adjustment - the rate of exchange between currencies, which gives equal purchasing power over commodities. In principle, PPPs can be calculated for every good and service: a higher price is normally demanded in a rich country than in a poor one.
The basic idea of PPP adjustment is to take an average “basket” of goods and services and measure what the content of this basket costs in different countries. In transitional economies, goods and services are cheaper than in the West, and thus, PPP adjusted GDP figures are higher than the original ones. By dividing PPP adjusted GDP figures by the original ones (both per capita) it is possible to get so called ERDI - figures (exchange rate deviation index).
ERDI measures the level of exchange rate bias in countries under review. In Russian case, the average consumer “basket” is essentially cheaper than in euro-area, and thus, ERDI has a relatively high figure indicating that rouble is essentially undervalued.
Table 2. Average Monthly Gross Wage (euro-based), 1997-2003
1997 1998 1999 2000 2001 2002 2003
A: Nominal (ER) 145 95 58 85 124 147 160
B: ERDI 2.15 3.12 4.35 3.18 2.80 2.82 2.92
C: “Real”
(A*B=C)
312 296 252 271 348 414 466 Source: WIIW, 2003
The table above shows that the “real” (euro-based) average wage decreased in the crisis year of 1998 and further in 1999, but recovered already in 2000. The real monthly pay in 2001 was already on a higher level that in 1997. The equivalent figure in 2003 was almost 50% higher than in 1997.
ERDI values in the latest years of the table are about three: it means that every euro has about three times more value in Russia than in euro-area (prices in Russia are in average one third of euro-area prices).
In this context, it is important to note that some prices are very distorted in Russia. Housing costs, including energy prices, are much lower in Russia than in Western Europe. It can also be assumed that Russians have in average more non-monetary income than West Europeans:
many Russians have private plots in which they cultivate potatoes and vegetables.
Moonlighting is wide-spread, etc. Personal income taxes are essentially lower in transitional economies than in Western welfare states.
In sum, gross income levels cannot be easily measured in international manner. It can only be assumed that in Russia there is some discretional income left after paying for taxes and necessities, even gross income figures are relatively low (in comparison, the gross average monthly wage in Finland was € 2300 in 2003).
In all transitional economies, mobile phone operators have been able to achieve very rapid growth rates after the systemic change. The market system has brought about essentially higher phone penetration rates in comparison to the communist period. Presently, citizens are free to communicate with each other’s and are obviously willing to pay for this pleasure.