After four years of large annual declines in Gross Domestic Product (GDP) and industrial production, the Russian economy is showing signs of stabilizing in 1995. Real GDP dropped 15 percent in 1994 over 1993, but has slowed its decline considerably in the early part of 1995. Real industrial output, while continuing to decline in annual average terms (down 21 percent in 1994 over 1993), stopped falling from the summer of 1994, and certain sectors show signs of recovery for the first time since the beginning of market reforms. Official statistics indicate steady growth in trade and services, sectors that were admittedly underdeveloped under the centrally planned economy of the former Soviet Union. By mid-year 1995, services grew to comprise 50 percent of GDP, while manufacturing shrunk in GDP terms to less than 44 percent.
Unemployment has risen steadily over the past few years, from nearly zero to 7.5 percent of the workforce in June 1995. In certain depressed regions and sectors, unemployment is much higher, in contrast to the very low unemployment rate in Moscow. Experts estimate that another 7 percent of the workforce is currently underemployed -- on unlimited unpaid furlough or working only part time. Studies indicate that many of the underemployed are content to keep their wage positions in order to receive the social benefits provided by the enterprise, while supplementing their income by growing food at home or working in the informal economy. Because most of Russia's large industrial enterprises continue to employ too many workers, experts expect unemployment to continue to increase steadily. Average wages reached 385,000 rubles per month in April 1995 (about $75 a month at the end-April exchange rate). Real average wages (adjusted for inflation) continued their general decline in 1994 and early 1995. (In the first four months of 1995 real average wages posted a 29 percent decline over the same period in 1994.) In contrast, real average income increased significantly in 1994 -- another indication that many Russians earned extra income outside of their regular jobs -- before falling off somewhat in early 1995. (In the first four months of 1995, real average income declined 8 percent over the same period in 1994.)
Inflation has been falling since the beginning of 1995, in line with the government's commitment to non-inflationary financing of the federal deficit. Annual inflation (CPI) ran at 303 percent in 1994, down substantially from the almost 900 percent annual inflation registered in 1993. Average monthly inflation in 1995 has fallen from a peak of 18 percent in January to just under 8 percent in May, and experts expect the trend to continue through the end of the year.
The ruble abruptly broke the predictable but slow decline which marked the first eight months of 1994 with a 22 percent one-day drop against the dollar on October 11, also called "Black Tuesday". Within 48 hours the ruble regained its pre-fall level of approximately 3,000 rubles to the dollar. Repercussions from Black Tuesday were harsh and Central Bank Chairman Gerashchenko, Deputy Prime Minister Shokhin, Acting Finance Minister Dubinin and the head of the Federal Service for Currency and Export Control were all eventually removed from their posts. Official inquiries found that lax credit policy, combined with poor management of currency intervention by the Central Bank, contributed to the ruble's fall. In 1995, after three months of steady decline in line with inflation, the ruble stabilized in mid-April in a narrow band around 5,000 rubles to the dollar and appreciated 10 percent as of the print date of this publication in mid-June 1995.
Interest rates, both the Central Bank's official discount rate and 3-month interbank market rates, fell for the first nine months of 1994, but rose abruptly in response to the ruble's fall on Black Tuesday. Respectively, these rates ended 1994 at 200 and 174 percent (in simple annual terms). In April 1995, the Central Bank lowered the discount rate five percentage points to 195 percent, while 3-month interbank market rates have fallen dramatically, and as of mid-June they were just under 95 percent.
By far the largest growth area in 1994 came in the chemical/petrochemical and non-ferrous metals industries, each of which have benefitted from strong global demand and relative price advantage. Soda ash output grew by nearly 19 percent, mineral fertilizer output by 16 percent, sulfuric acid output by 12 percent, and synthetic ammonia output by 2 percent in the fourth quarter of 1994 over 1993. Among non-ferrous metals, magnesium and magnesium alloys posted modest gains in 1994, and nickel skyrocketed - up 46 percent in the fourth quarter of 1994 over the same period in 1993.
Between the big winners and big losers are a group of industries that show some tentative signs of strengthening. The timber and wood processing industry was hit hard by the transition to a market economy, registering an initial drop (from January 1990 to June 1994) of 70 percent - but is showing signs of limited recovery, with commercial pulp posting a 10 percent increase in output in the fourth quarter of 1994 over fourth quarter 1993. (The timber industry as a whole still suffers from the high transportation costs associated with bringing product from forest to market.) While the food processing industry as a whole is still in decline, vegetable oil production posted a slight increase in the fourth quarter of 1994 over the same period of 1993, mostly due to strong domestic demand. It is possible as well that growth in the food processing industry is taking place in smaller privatized businesses (local bakeries, etc.,) which are more difficult for the official statistics agency to capture. Ferrous metal production is still in decline overall, but losses in the domestic market have been nearly balanced by strong world demand. This is noticeable in pig iron, which posted a 1.6 percent gain in the fourth quarter 1994 output over fourth quarter 1993, and rolled metal, output of which largely stabilized in the latter half of 1994 relative to 1993. Likewise, the machine building sector showed early signs of recovery in the second half of 1994, with tractor production up slightly in the fourth quarter of 1994 over the same period in 1993.
However, trends in the industrial sector tell only part of the story in Russia. The retail/wholesale trade and service sectors, which together made up more than half of GDP in 1994 are thriving. Small independent trading establishments have emerged (usually in the form of kiosks) all over Russia's major cities, selling a variety of domestically produced and imported goods. Likewise, the service sector, long underdeveloped under the Soviet system, is burgeoning, especially in the major metropolitan areas. Along with the introduction of major western accounting and legal firms to Russia's corporate make up are small service providers, who with informal traders make up the bulk of the cash or "gray" economy.
In addition, the Federal Bankruptcy Agency (FBA) has begun to implement President Yeltsin's decision of May 1994 to declare insolvent state firms bankrupt. The FBA completed the first reorganization and sale of an insolvent state firm in November 1994. The FBA is processing perhaps 300 administrative actions against insolvent state firms as well as having initiated another 300 actions in Russia's commercial courts. Although it is too soon to judge how sweeping the FBA's actions against the over 2,000 state firms it has found to be insolvent, this process is clearly gaining momentum.
Roughly 85 percent of wholesale and retail prices were liberalized by the end of 1992. Together with a virtually unrestricted import regime, price liberalization ended shortages of consumer goods through much of Russia. A few prices remain regulated by the government, among them rail transport and housing. Energy prices remained controlled at the wholesale level, with domestic prices substantially below international levels.
Capital flight continues to plague the Russian economy, although official data suggest that the rate of capital flight has slowed somewhat since its peak in 1992. Opinions vary greatly, but a realistic assessment would place capital flight at close to USD 17 billion in 1994, and would note that little of this is related to criminal activity, but represents a legitimate desire for safe havens abroad for foreign exchange earnings.
The U.S. and Russia signed a $900 million bilateral debt rescheduling agreement on October 25, 1994, formally putting into effect the Paris Club rescheduling accord reached the previous June with Russia's official creditors. In it, the Paris Club agreed to reschedule 7 billion dollars in official debt owed by Russia in 1994, thus easing its repayment burden. In June 1995, the Paris Club reached agreement with the Russian government to reschedule 6.3 billion dollars in Russian debt payments due this year and to hold talks with Moscow on rescheduling Russian debts inherited from the former Soviet Union. The London Club of commercial bank creditors is expected to reach agreement with the Russian government in mid-1995, and $500 million in payments have been already put into trust.