Session of the standing committee of the Advisory council on foreign investments to Russia (KSII)
Photo: Alexey Kudenko
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President and CEO
One of the main economic (and ideological) goals of the Putin era was to overcome the financial dependency on Western creditors that had characterized Russian economic policy in the previous decade.
The IMF gave the Russian government advice in the 1990s on how to maintain a strict financial policy and fight inflation. Sometimes that advice was followed, other times not, and the IMF sometimes gave Russia credits, and sometimes not, depending on its satisfaction with conditions in the country. The Paris and London Clubs had to be asked to restructure the gargantuan foreign debt that was inherited from Soviet times. It was clear that Russian financial policy was determined fully by the West's willingness to provide crediting., because Russian authorities needed hard currency, and there was a severe shortage of it. Therefore, from the very beginning of his presidency, Vladimir Putin had to ensure the growth of the gold and currency reserves to show the West that Russia had as much currency as it needed.
That task was helped along by the fact that oil prices were already on a fine level in 2000, twice what they were in 1998, when Russia experienced its financial crisis. After 2000, prices remained stably high for several years and began to break records at some point. A powerful wave of petrodollars swept into the country, and a significant part of it ended up in the Central Bank reserves, one way or another. No less helpful was a completely change of attitude by Russian banks and Russian citizens. Since 2003, the ruble has grown steadily and the dollar fallen. Everyone decided that they had to get rid of their dollars fast, before they got any cheaper. The Central Bank was glad to encourage the idea by making dedollarization official Russian economic policy, and buying up the currency as part of the process. Thus it was exceptionally easy for it to fill its coffers, since it paid for those dollars with rubles it printed itself, and the dollar-buying operation could be presented as intervention to support the American currency and prevent it from falling even faster. As a result, by the end of 2007, when world oil prices were hitting $100 per barrel, Russia's gold and currency reserves were already in third place after China and Japan. Russia paid most of its debts early. No Western country has reserves anywhere near the size of Russia's and there is no more talk about the dependence of Russia's economic policy on Western creditors.
To show off the success of Russian independent economic policy, Putin advanced the idea of doubling the Russian GDP in 2003. The authorities mixed up their time limit for it – either in ten year, by 2013, or by 2010. The Russian idea is reminiscent of Japanese experience in the 1950s. The Japanese were able to double their GDP in a short time. Russia has also shown a brisk pace. With high inflation and a continually shrinking dollar, Russians got the firm impression that all money, Russian or foreign, was losing its value and it had to be invested in goods as soon as possible. In spite of the growth of imports, Russian production also increased – people were buying any goods.
Faster growth of domestic demand held inflation at a stably high level that was unthinkable in Western countries. In spite of all of Putin's demands that decisive measures be taken to lower inflation, consumer prices in Russia did not heed him, and in 2007, inflation's pace was even greater than in the preceding years. Russian authorities had to make constant reference to forces beyond the country's borders to explain their lack of success fighting inflation. Mainly they mentioned rising oil prices, which had not only proved for the recent jump in Russian creditworthiness, but had flooded the country with petrodollars.
To compensate of the growth of prices and demonstrate the growth of the public's prosperity, the authorities turned to a massive operation to raise the average wages. Along with the campaign to double the GDP, there was an unofficial campaign to double the average salary and bring it up to 25,000 rubles per month. Raising salaries made a big contribution to the failure of plans to hold down inflation.
The increase in domestic demand coupled with the steady rise in incomes was reflected in the completely fantastic pace with which real estate prices rose throughout Russia, most of all in Moscow. Because of that price growth, acceptable housing became far out of reach for the public (also far out of step with the Living in Dignity national project).
The rapid increase in domestic demand, leading to higher profits for enterprises, rapid economic growth and simply grandiose growth of world oil prices made the Russian stock market extraordinarily attractive for foreign investors. The RTS index grew steadily, to the great pride of Russian authorities. In its turn, the steady rise of the ruble made the Russian financial market very attractive for foreign speculators. The influx of their capital helped strengthened the ruble even more. With the dollar sinking, the authorities were able to note with satisfaction that their promised 25,000-ruble average salaries were growing as they spoke, when expressed in dollars.
Sergey Minaev
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