Moscow in early 1999 faced seemingly intractable economic problems. In the aftermath of the August 1998 financial crisis the government and Central Bank of Russia (CBR) were unable to prevent sharp declines in output, accelerating inflation, or the collapse of the exchange rate. The federal budget was mired in intractable deficits, and the government’s finances seemed in hopeless shape. By contrast, as of March 2000 Russia’s economic circumstances have changed substantially. The federal government reported large budget surpluses in January and February, and inflation rates are down sharply. The ruble is appreciating against the dollar, and the economy is poised for its second consecutive quarter of rapid GDP growth. What a difference a year makes.
According to preliminary official data, industrial output during January-February grew by 13 percent over the same period in 1999. This largely guarantees that Russia during January-March will experience its third consecutive quarter of double-digit growth in industrial output. In contrast to the first half of 1999, when industrial growth was largely offset by shrinking activity in other sectors, strong growth has been reported all across the economy ever since October. Even household spending, which shrank sharply last year, has staged a strong recovery since late last year. Retail trade turnover, which dropped nearly 8 percent in 1999, grew by 7 percent during the first two months of this year (Sotsial’no-Ekonomicheskoye Polozhenie Rossii, January; Reuters, March 24). These trends strengthen the likelihood that Russian GDP this year will grow even faster than the 3.2 percent reported for 1999.
Consumer price inflation, which was running at an annual rate of 125 percent in July 1999, had by February dropped to a 25 percent annual clip. And the exchange rate, which slid from US$1 = 6 rubles in August 1998 to US$1 = 27 rubles by the end of last year, has stabilized at around US$1 = 28 rubles. The ruble has actually strengthened slightly in nominal terms against the dollar, rising from US$1 = 28.7 rubles on March 1 to US$1 = 28.4 rubles on March 23. In contrast to the weeks leading up to the August 1998 financial crash, the ruble is not being propped up by CBR dollar sales on the foreign exchange market. Instead, the Central Bank has been buying dollars, in order to keep the ruble from strengthening further. The CBR on March 21 announced that its foreign exchange reserves had risen to US$15.0 billion–their highest since the August 1998 financial crisis (Reuters, March 21).
Moscow is also full of good fiscal news. After posting its smallest budget deficit since independence in 1999, the federal government in January reported a 13.1 billion ruble surplus, which the Finance Ministry estimates at 3.4 percent of GDP. The good news continued in February, when the federal budget posted a 12.8 billion ruble monthly surplus. This was on par with the 17.6 billion ruble monthly surplus recorded in November 1999. Although the Finance Ministry announced in mid-March that it expects to record a slight deficit for the month, there can be little doubt that Russia’s finances at the moment look as strong as the rest of the economy.
RUSSIA’S PROBLEM: TOO MANY DOLLARS?