Fiscal crisis and macroeconomic policy in Russia

Abstract

From the beginning of market reforms a low level of production investment has been one of the major problems for the Russian economy. The investment crisis occurred in spite of the relatively high level of domestic saving, exceeding 20% of GDP. During all the years of market transformation, the excess of domestic saving over investment lead to the capital flight from Russia. Without changing this negative tendency, neither sustained economic growth nor efficient integration of Russia into the global economy are possible. This article is concerned with analysis of the macroeconomic conditions favouring a rise in real investment activity in the poststabilisation period. The economic liberalisation in 1992 allowed Russia to solve various urgent problems: to liquidate monetary overhang and shortage of goods, create moneybased market mechanisms of exchange, improve public finances, start negotiations on the restructuring of the excessive sovereign debt accumulated by the Soviet Union and raise official foreign reserves, and open the economy for international trade. Among important institutional changes at that time were establishment of a two-level banking system, privatisation of a considerable part of state enterprises and creation of a capital market. However, while all these steps were necessary for the first stage of reforms, they were not sufficient to improve the investment opportunities and environment significantly. In particular, the political situation in Russia in 1992-96 was the main obstacle to macroeconomic stabilisation and reform of public finances.