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Bernstam, Michael S.
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TIGER Working Paper Series 85
The conjunction of oil and Russia's economic recovery in 1999-2004 links many themes. On September 16, 1998, the Central Bank of Russia mandated repatriation of 50 percent of foreign exchange revenues. On December 31, 1998, it raised the mandated repatriation rate to 75 percent. This rule affected primarily fuels and metals exports. In the next several years, world oil prices started to climb. The Central Bank of Russia subsequently reduced the mandated repatriation rate from 50 to 30 to 25 percent of foreign exchange revenues. Rising oil prices both incited this reduction and compensated for it. Russia's economy shifted from the great contraction in 1992-98 to a partial recovery in 1999-2004. Tables 1 and 2 provide the background data. This chapter explains these developments1. It views Russia's economy as a new economic system which evolved from central planning after liberalization and privatization in 1992 and adapted to the policy shift in September-December 1998. We explore how, under this system, mandated repatriation of export revenues inadvertently became a quasi-fiscal policy, i.e. how it increased tax remittance and reduced subsidy extraction, which, in turn, shifted the economy from contraction to recovery. Oil and other tradeables, primarily natural resources, are important. Without their massive export, the issue of mandated repatriation of foreign exchange revenues would have been irrelevant. Oil on its own, however, was not the crucial factor. Many observers, including the IMF, attribute Russia's recovery to rising world oil prices. Figure 1 documents the heterogeneous economic performance of the six major petroleum-exporting countries around the world in 1992-2004. In Russia and across countries, it is uncorrelated with oil price fluctuations. Figure 2 illustrates how economic recovery synchronized in Russia, Ukraine, Kazakhstan, and other former Soviet states, both net oil exporters (Russia, Kazakhstan, Azerbaijan) and importers (Ukraine, Belarus, Moldova). The oil factor was neither necessary (viz., Ukraine) nor sufficient (viz., Venezuela) for economic recovery and growth in the early 2000s. The oil connection abstracted from the economic system and policy shifts is specious. Russia's economic recovery raises a more fundamental, and incendiary, issue than oil. Figure 3 illustrates it. In Russia and similar post-central plan economies, liberalization and privatization coincided with the great economic contraction in 1992-98. Partial deliberalization and de-privatization in Russia, starting with mandated repatriation of export revenues, coincided with economic recovery in 1999-2004. The principal idea of this chapter is that the impact of economic freedom is ambivalent. It depends on the economic system. The freedom to create new wealth it is eminently productive. However, the freedom for firms and some individuals to redistribute to themselves income from the government, other firms, and other households, suppresses productive incentives and economic growth. Government restriction of such freedom, e.g., in China or in Russia after 1998, fosters economic performance.
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