Russia's Transition Toward the World Economy: Is the Market Mechanism Working?

Abstract

By the end of 1993, the unified and freely convertible ruble on current account represented a major step in Russia's foreign exchange management. The monetarist model of this paper (which gives a robust estimate of the real exchange rate) suggests that the impact of the gap between available cash supply and cash demand (in the next month) on the real rubledollar exchange rate (for the period beginning July 1992 and ending in December 1994) was small. Perhaps this parametric value reflects the restrictions on foreign exchange transactions, and the intervention of the Central Bank of Russia (CBR) in the Moscow Interbank Currency Exchange (MICEX) which determines the exchange rate. In contrast to the unification and current account convertibility of the ruble, progress during 1992-94 in the foreign trading arrangements was halting. Export trading was hobbled by export quotas, licensing and passport surveillance. There were no quantitative restrictions on import activity which nevertheless was subjected to steadily rising import tariffs (evidently calculated to counter the impact of the appreciating real ruble). The estimates of the trade equations suggest that the real exchange rate had no impact, ceteris paribus, on export performance but it influenced import flows. The changing pattern of Russia's trade, in terms of (export-import) commodity composition and orientation, has to be judged in the context of the asymmetrical impact of the exchange rate on that pattern. 1 The literature on the various aspects of Russia's transition to an open market economy is substantial. In fact, no aspect of the process has been left outside the scope of scholarly inquiries or the watchful scrutiny of governmental and multinational agencies. In particular, the impact of the uncontrolled inflation on the exchange rate, the continuously changing trade and foreign exchange arrangements, the structure and orientation of Russia's trade with the post-Soviet states and the rest of the world—and more—has been analyzed thoroughly by Easterly and da Cunha (1994), Drebentsov (1994), Illarionov (1994), Konovalov (1994), Kuznetsov (1994), Lucke (1994), Panich (1994), Rogovski (1994), Sarafanov (1994), and Sutela (1994), and in Economic Bulletin for Europe (1994, hereafter Bulletin), and Economic Survey of Europe in 1994-1995 (1995, hereafter Survey). From this perspective, there is little to add to the existing material on Russia's trade and financial interaction with the outside world as it moves toward a stable market economy. The focus of this paper is different. It starts from the available information on and policy changes in the exchange rate, foreign trade and institutional arrangements (section I), describes Russia's foreign trade performance with regard to its pattern and orientation (in section II); and then develops a model (in section III) for estimating the ruble-dollar real exchange rate. Import demand, export supply, and net export equations in which the observed real exchange rate (with a lag) is used are also presented in section III. The estimates (in section IV) of the monetarist model of the exchange rate adjustment indicate that the real exchange rate was not very sensitive with respect to the gap between the available real cash balances (in a given month) and the demand for real cash in the next month during 1992-94: the estimated elasticity is 0.15. The trade equations (in section IV) suggest that 2 during the period, the exchange rate had no role in the emerging pattern of Russia's exports to the non-FSU (former Soviet Union) countries but that imports were influenced by the exchange rate. In particular, the export control and licensing arrangements with respect to Russia's major exports seemed to have influenced its export performance. On the other hand, imports increased with a steadily appreciating real exchange rate despite rising but low average tariffs on imports. While the results need to be improved, they represent the very first attempt to construct a (monetarist) model of exchange rate determination for Russia and to analyze the role of the exchange rate in Russia's foreign trade performance. I. The Exchange Rate, Foreign Trade, and Institutional Arrangements Three factors are relevant for analyzing Russia's interaction with the world economy beginning 1992. The first relates to the policy makers' efforts to dismantle the remnants of the multiple exchange rates (which were inherited from the Soviet days) and manage an exchange rate policy that can effectively promote export competitiveness and contribute to inflation control. The second is the emerging regime of import and export policies that govern Russia's foreign trade. The institutional arrangements under which the Soviet Foreign Trade Organizations (FTOs) were increasingly replaced by private exporters and importers constitute the final feature. The Exchange Rate Regime A variety of exchange rates prevailed in early 1992. Arrangements with Regard to Current Account Transactions Among the major rates were those at which exporters were required to sell foreign exchange earnings and importers could acquire critical items such as food and medicines for