1. ECONOMIC POLICY:
ON FEBRUARY 22, 1996, THE GOVERNMENT AND CENTRAL BANK OF RUSSIA ANNOUNCED A THREE-YEAR ECONOMIC STABILIZATION PROGRAM. THE PROGRAM EXPANDS ON THE TIGHT FISCAL POLICY, RESTRICTIVE MONETARY POLICY, AND TRADE AND ENERGY SECTOR LIBERALIZATION INITIATIVES BEGUN IN 1995, AND FORMS THE BASIS FOR A THREE-YEAR $LO.2 BILLION EXTENDED FUND FACILITY (EFF) CREDIT FROM THE IMF. THROUGH MAY OF THIS YEAR, RUSSIA SUCCESSFULLY MET THE MONTHLY AND QUARTERLY TARGETS UNDER THE IMF PROGRAM, ALTHOUGH POOR REVENUE PERFORMANCE SUBSTANTIALLY COMPRESSED SPENDING PATTERNS AND ELECTION UNCERTAINTIES SHARPLY DROVE UP BORROWING COSTS. IN JULY, THE IMF DELAYED FURTHER DISBURSEMENT UNDER THE EFF PENDING SUBSTANTIAL IMPROVEMENT IN THE REVENUE SITUATION. EVEN AS THE BUDGET CRISIS DEEPENED IN THE FIRST SIX MONTHS OF THIS YEAR, THE AUTHORITIES CONTINUED TO PURSUE TIGHT MONETARY MEASURES, WHICH HAVE LED TO A DROP IN INFLATION FROM 17.8 PERCENT A MONTH IN JANUARY 1995 TO 0.7 PERCENT A MONTH IN JULY 1996.
A CURRENCY CORRIDOR HAS BEEN EMPLOYED BY THE GOVERNMENT SINCE JULY 1995 TO INCREASE RUBLE STABILITY AND TO HELP DAMPEN INFLATIONARY EXPECTATIONS. THE RUBLE IS CURRENTLY TRADING AT ROUGHLY R5189/$, AND ALTHOUGH THE TREND IS GENERALLY TOWARDS DEPRECIATION, OCCASIONALLY APPRECIATION PRESSURES ON THE RUBLE APPEAR, OFTEN CONNECTED WITH EXTERNAL DEMAND FOR DOMESTIC GOVERNMENT SECURITIES. ON JULY 1, 1996, THE CORRIDOR WAS REPLACED WITH A CRAWLING BAND MECHANISM, WHOSE PARAMETERS ARE TO SHIFT GRADUALLY FROM R5000- R5600/$ ON JULY 1, TO R55OO-R610O/$ BY THE END OF THE YEAR.
EARLY SIGNS OF STABILIZATION OF GROSS DOMESTIC PRODUCT (GDP) AND INDUSTRIAL PRODUCTION IN THE LAST HALF OF 1995 GAVE WAY TO A SLUMP IN OUTPUT IN THE FIRST HALF OF 1996 OF OVER 8 PERCENT COMPARED TO THE FIRST HALF OF 1995, THOUGH THE DATA CONTINUES TO UNDERREPORT NEW ECONOMIC ACTIVITY. SIGNIFICANT TAX-AVOIDANCE BEHAVIOR BY FIRMS IN THE RUN UP TO THE JUNE PRESIDENTIAL ELECTIONS SUGGESTS THAT INDUSTRIAL OUTPUT MAY ALSO HAVE BEEN HIDDEN FROM THE STATISTICAL AGENCIES, AS SECONDARY INDICATORS OF ECONOMIC ACTIVITY SUCH AS ENERGY OUTPUT AND FREIGHT HAULAGE CONTINUE TO SUGGEST A LESSER PRODUCTION DECLINE. CERTAIN SECTORS -- ESPECIALLY RAW MATERIALS PROCESSING AND SOME MANUFACTURING INDUSTRIES -- HAVE CLEARLY BEGUN TO RECOVER, ALTHOUGH GROWTH IS UNEVEN AMONG REGIONS.
2. BUDGET:
THE 1996 FEDERAL BUDGET AS PASSED PROVIDED A STRONG UNDERPINNING FOR THE GOVERNMENT'S
STABILIZATION PROGRAM, WITH REVENUES AS A PERCENT OF GDP MAINTAINED AT 1995
BUDGETED LEVELS WHILE EXPENDITURES DECREASE SLIGHTLY. HOWEVER, SEVERE REVENUE
SHORTFALLS IN THE FIRST HALF OF THE YEAR HAS RESULTED IN A HIGHER THAN EXPECTED
DEFICIT EVEN THOUGH THE GOVERNMENT HAS COMPRESSED EXPENDITURES STRONGLY. THE
DEFICIT, TARGETED TO EASE IN 1996 TO 3.85 PERCENT OF GDP FROM LAST YEAR'S
BUDGETED LEVEL OF 4.5 PERCENT OF GDP, REACHED 6.9 PERCENT IN THE FIRST HALF
OF THE YEAR. THE GOVERNMENT HAS BEEN FORCED TO INCREASE IT BORROWING, WHICH
HAS RAISED INTEREST COSTS AND FURTHER SQUEEZED DISCRETIONARY SPENDING. EVEN
AS THE REVENUE SITUATION BEGINS TO EASE, THE GOVERNMENT WILL HAVE TO KEEP
A TIGHT LID ON SPENDING IN THE SECOND HALF OF 1996 TO STAY WITHIN THE LIMITS
OF THE IMF PROGRAM.
3. PRIVATIZATION:
ACCORDING TO THE GOVERNMENT, ALMOST 120,000 ENTERPRISES HAVE BEEN PRIVATIZED IN WHOLE OR IN PART, REPRESENTING 75 PERCENT OF MANUFACTURING ENTERPRISES AND 85 PERCENT OF MANUFACTURING OUTPUT. MORE THAN 80 PERCENT OF RUSSIA'S INDUSTRIAL WORKERS ARE NOW WORKING IN PRIVATIZED OR QUASI-PRIVATIZED FIRMS. THE FEDERAL GOVERNMENT'S PORTION OF THE POST VOUCHER OR CASH PRIVATIZATION PROGRAM, UNDER WHICH THE GOVERNMENT IS SELLING RETAINED HOLDINGS IN PRIVATIZED FIRMS AS WELL AS ENTERPRISES WHICH HAVE NOT YET BEEN PRIVATIZED, BEGAN IN THE FALL OF 1995 AFTER SUBSTANTIAL DELAYS. THE LOANS-FOR-SHARES PORTION OF THE PROGRAM HAS PROVEN CONTROVERSIAL AND THE ENTIRE PRIVATIZATION PROGRAM IS CURRENTLY UNDER REVIEW.
4. TARIFF REGIME/TRADE:
SINCE THE BEGINNING OF 1995, RUSSIA'S TRADE REGIME HAS MOVED INCREMENTALLY TOWARDS GREATER LIBERALIZATION, ALTHOUGH ELECTION YEAR POSTURING HAS OBSCURED THIS SOMEWHAT. LAST YEAR, PRESIDENT YELTSIN ABOLISHED THE OIL EXPORT QUOTA REGIME; BEGAN THE PROCESS OF ELIMINATING WIDE-SPREAD EXEMPTIONS FROM TAXES AND DUTIES; AND ABOLISHED THE SPECIAL EXPORTER REGIME. ALL EXPORT TARIFFS WERE PHASED OUT BY JULY 1, 1996. THE GOVERNMENT CONTINUES TO MAKE CHANGES TO THE TARIFF REGIME - LOWERING PEAK TARIFFS, AND (FOR REVENUE REASONS) RAISING SOME NULL TARIFFS, RESULTING IN AN AVERAGE WEIGHTED TARIFF RATE OF 13-14 PERCENT. THE RUSSIANS CONTINUE TO SHOW A STRONG INTEREST IN ACCESSION TO THE WORLD TRADE ORGANIZATION (WTO), A PROCESS THAT MAY TAKE SEVERAL YEARS TO COMPLETE.
5. DEBT:
IN APRIL, THE PARIS CLUB OF OFFICIAL CREDITORS AGREED TO RESCHEDULE RUSSIA'S OUTSTANDING STOCK OF DEBT (MORE THAN $40 BILLION AND INCLUDING DEBT INHERITED FROM THE FORMER SOVIET UNION) OVER 25 YEARS. THE AGREEMENT IS SUBJECT TO PERIODIC REVIEWS WHICH ARE TIED TO PERFORMANCE UNDER THE IMF EFF PROGRAM. IN MAY, THE LONDON CLUB OF COMMERCIAL BANK CREDITORS FLESHED OUT AN AGREEMENT IN PRINCIPLE WITH THE RUSSIAN GOVERNMENT REACHED IN NOVEMBER 1995 TO RESCHEDULE $32.5 BILLION IN DEBT, NOW EXPECTED TO BE FINALIZED BY AUGUST 28. THE AGREEMENT CALLS FOR PRINCIPAL TO BE REPAID OVER 25 YEARS, WITH A SEVEN-YEAR GRACE PERIOD.
6. CAPITAL MARKETS:
THE FEDERAL COMMISSION ON SECURITIES AND THE CAPITAL MARKET WAS RENAMED ON JULY 1, 1996, AS THE FEDERAL COMMISSION FOR THE SECURITIES MARKET (FCSM). DMITRY VASILIEV WAS REAFFIRMED AS CHAIRMAN OF THE COMMISSION, AND, ON JULY 20, PRESIDENT YELTSIN SIGNED AN EXECUTIVE ORDER APPOINTING THE REMAINING FIVE COMMISSION MEMBERS, THUS BRINGING THE COMMISSION'S STRUCTURE IN CONFORMITY WITH THE SECURITIES LAW.
OVER THE LAST YEAR, THE FCSM HAS MOVED STRONGLY TO INCREASE OVERSIGHT OF RUSSIA'S CAPITAL MARKETS. INFRASTRUCTURE DEVELOPMENT, INCLUDING THE ESTABLISHMENT OF AN INDEPENDENT LARGE REGISTRAR AND OF AN ELECTRONIC OVER-THE-COUNTER TRADING SYSTEM, HAS MOVED FORWARD. SECURITIES LEGISLATION THAT WOULD CREATE A SOUND LEGAL BASIS FOR THE SECURITIES MARKET WAS APPROVED BY THE DUMA IN FEBRUARY 1996. THE FEDERAL LAW "ON JOINT STOCK COMPANIES" TOOK EFFECT ON JANUARY 1, 1996, AND INTRODUCES A NUMBER OF REQUIREMENTS IN THE AREA OF SHAREHOLDER RIGHTS, CORPORATE GOVERNANCE, AND SHAREHOLDER REGISTRIES. IN JULY 1995, THE LEGAL BASIS FOR THE CREATION OF MUTUAL FUNDS WAS ESTABLISHED BY PRESIDENTIAL DECREE, AND THE FCSM HAS ALREADY ISSUED THE FIRST LICENSES TO FUND MANAGEMENT COMPANIES.
7. BANKING:
THE RUSSIAN BANKING SYSTEM SUFFERED A TEMPORARY LIQUIDITY CRISIS ON AUGUST 24, 1995. THE CENTRAL BANK MOVED QUICKLY TO PROVIDE LIQUIDITY, AND THE CRISIS PASSED WITHIN ONE DAY. THE LIQUIDITY PINCH CAN BE SEEN AS AN INEVITABLE REACTION TO THE SUCCESS OF THE RUSSIAN GOVERNMENT'S STABILIZATION EFFORTS, WHICH HAVE TENDED TO REDUCE OPPORTUNITIES FOR SPECULATIVE BEHAVIOR ON THE PART OF COMMERCIAL BANKS. OVER 300 OF RUSSIA'S 2,600 BANKS HAD THEIR LICENSES WITHDRAWN BY THE CENTRAL BANK IN 1995, AND ALMOST 150 MORE BY MID- YEAR 1996, INCLUDING A FEW OF THE TOP 50 BANKS. MANY ANALYSTS PREDICT A MUCH NEEDED CONSOLIDATION OF THE SECTOR IN THE LATTER PART OF THIS YEAR.
8. STATISTICAL ROUNDUP:
REAL GROSS DOMESTIC PRODUCT (GDP) FELL JUST 4 PERCENT IN 1995 OVER 1994, AFTER
A DROP OF 13 PERCENT IN 1994. IN THE FIRST HALF OF 1996, REAL GDP FELL 5 PERCEMT
OVER THE SAME PERIOD IN 1995. REAL INDUSTRIAL OUTPUT EFFECTIVELY STOPPED FALLING
IN AUGUST 1994, ALTHOUGH OUTPUT SLUMPED AGAIN IN THE FIRST HALF OF 1996, FALLING
8-9 PERCENT OVER THE SAME PERIOD IN 1995. INFLATION FELL SHARPLY IN 1995 IN
LINE WITH THE CENTRAL BANK'S AND GOVERNMENT'S COMMITMENT TO FISCAL DISCIPLINE.
MONTHLY INFLATION AVERAGED 7.3 PERCENT IN 1995, FALLING FROM A PEAK OF 18
PERCENT IN JANUARY TO 3.2 PERCENT IN DECEMBER. ON AN ANNUAL BASIS, INFLATION
IN 1995 TOTALED 131 PERCENT, DOWN FROM THE 215 PERCENT REGISTERED IN 1994.
BY THE END OF JULY 1996, AVERAGE MONTHLY INFLATION FOR THE YEAR HAD FALLEN
TO 2.2 PERCENT.
THE RUBLE HAS COME A LONG WAY SINCE ITS 22 PERCENT ONE-DAY DROP AGAINST THE DOLLAR IN OCTOBER 1994. IN 1995, THE RUBLE DEPRECIATED IN LINE WITH INFLATION UNTIL APRIL 29, WHEN IT HIT AN ALL-TIME LOW OF 5,130 RUBLES TO THE DOLLAR. THROUGH MAY AND JUNE, THE RUBLE REVERSED COURSE AND APPRECIATED 13 PERCENT AGAINST THE DOLLAR, WITH THE CENTRAL BANK INTERVENING TO SLOW THE APPRECIATION OF THE RUBLE. SINCE THE INTRODUCTION OF THE RUBLE CORRIDOR ON JULY 6, 1995, THE RUBLE HAS DEPRECIATED SLOWLY IN NOMINAL TERMS, REACHING R5189/$ BY THE END OF JULY 1996. THE RUBLE APPRECIATED 40 PERCENT IN REAL TERMS IN 1995 (YEAR-ON-YEAR), BUT THIS PACE SLOWED CONSIDERABLY IN 1996, WITH ONLY 2 PERCENT APPRECIATION RECORDED IN JULY 1996 OVER DECEMBER 1995.
THE DISCOUNT RATE AND THREE-MONTH INTERBANK RATES ENDED 1995 RESPECTIVELY
AT 160 AND 140 PERCENT (IN SIMPLE ANNUAL TERMS). THE CENTRAL BANK OF RUSSIA
LOWERED THE DISCOUNT RATE IN FEBRUARY TO 120 PERCENT, AND AGAIN IN JULY TO
110 PERCENT. THREE-MONTH INTERBANK MARKET RATES ROSE SHARPLY FOLLOWING THE
AUGUST 1995 INTERBANK LIQUIDITY CRISIS. RATES FELL IN THE FIRST TWO MONTHS
OF THIS YEAR, BUT HAVE RISEN SLIGHTLY SINCE, ENDING JULY AT 115 PERCENT IN
SIMPLE ANNUAL TERMS. YIELDS ON GOVERNMENT DOMESTIC SECURITIES ROSE SHARPLY
IN THE RUN UP TO THE JUNE PRESIDENTIAL ELECTION, WITH YIELDS AT PRIMARY AUCTION
FOR SIX-MONTH T-BILLS HITTING 215 PERCENT IN SIMPLE ANNUAL TERMS BY MID-JUNE.
YIELDS BEGAN TO FALL AFTER THE FIRST ROUND OF THE ELECTIONS, BUT HAVE REMAINED
AROUND 85 PERCENT SINCE MID-JULY.
AVERAGE WAGES REACHED 835,000 RUBLES PER MONTH IN JUNE 1996 (ABOUT $164 A
MONTH AT THE END-JUNE EXCHANGE RATE). REAL AVERAGE WAGES (ADJUSTED FOR INFLATION)
ROSE 16 PERCENT IN THE FIRST HALF OF 1996 OVER THE SAME PERIOD IN 1995. DOLLAR
AVERAGE WAGES ROSE OVER THE SAME PERIOD BY 81 PERCENT.
UNEMPLOYMENT INCREASED SLOWLY IN 1995, AND THE FIRST PART OF 1996, REACHING 8.9 PERCENT OF THE LABOR FORCE BY THE END OF JUNE (BY ILO STANDARDS), ALTHOUGH RATES VARY BY REGION. EXPERTS ESTIMATE THAT THE NUMBER OF UNEMPLOYED AND UNDEREMPLOYED, WHEN TAKEN TOGETHER, REMAIN AT 12-13 PERCENT OF THE LABOR FORCE, ALTHOUGH MANY UNDEREMPLOYED WORKERS KEEP THEIR WAGE POSITIONS IN ORDER TO RECEIVE SOCIAL BENEFITS AND PROVIDE "COVER" FOR TAX PURPOSES FOR INCOME EARNED WORKING IN THE INFORMAL ECONOMY.
RUSSIA HAS RUN A GROWING TRADE SURPLUS FOR THE LAST THREE YEARS, REACHING $28 BILLION IN 1995. IN 1995, RUSSIA RAN A BILATERAL TRADE SURPLUS WITH THE U.S. OF $1.2 BILLION, BASED ON U.S. EXPORTS OF $2.8 BILLION AND U.S. IMPORTS OF $4 BILLION.