Comment on the Great Russian Depression

Abstract

S hinichiro Tabata (2000) emphasizes the role of the ruble exchange rate in explaining Russian economic performance in the 1990s. There is much to say for this view. Russia emerged from the Soviet period with an industrial economy that was unprepared for global competition. A sufficiently large depreciation of the ruble would have signaled the real (external) market value of Russian production. It would also have reduced real incomes and thus better reflected the actual inheritance from the Soviet period. But Russia is not just an inefficient manufacturer. It is also a major exporter of natural resources. The large demand for rubles generated by those exports kept the ruble from depreciating sufficiently to make the manufacturing sector competitive. At the same time, the economy was not one that was safe for investment. Hence, the rather large export earnings did not go into new capital. Rather, they flowed abroad. Indeed, capital flight from Russia is estimated at roughly $15-20 billion a year since 1994. This large capital flight no doubt prevented even further ruble appreciation, and thus masked how inefficient the economy really was. Tabata argues that the key to understanding the ruble's overvaluation prior to August 1998 is the microeconomics of the exchange market—specifically, compulsory sales of foreign currency by exporters. While this is an interesting point, it would be more appropriate to focus on the fiscal stance of the government. Massive borrowing, both internal and external, led to extraordinarily high interest rates. The government's fiscal policy guaranteed a high value of the ruble no matter how the currency auctions were organized. Of course, foreign investors' perception that Russia was "too big to fail" was a critical element. But the fact remains that Russia was living beyond its means during this period. The high ruble meant cheap imports, and it hid the true productivity of the economy. Since August 1998 the ruble has depreciated significantly in real terms, and Tabata is correct to point to this as the central fact of the recovery. Indeed, most of the improvement in tax payments and monetization of the economy can be traced directly to ruble depreciation— rather than behavioral change—a point we have repeatedly emphasized. If this is so, then as Tabata concludes, one has to wonder about the strength of the recovery, as the real depreciation is unlikely to continue indefinitely. Thinking about real depreciation yields insights into the virtual economy. The critical point is that ruble depreciation makes the export-oriented part of the economy (which is predominantly value-adding and cash-based) larger in ruble terms relative to the dinosaur part of