Vavilov the russian public debt and financial meltdown (2010)

The Russian Public Debt and Financial Meltdowns Andrey Vavilov The Russian Public Debt and Financial Meltdowns This page intentionally left blank The Russian Public Debt and Financial Meltdowns Andrey Vavilov © Andrey Vavilov 2010 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978–0–230–24893–9 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library A catalog record for this book is available from the Library of Congress 10 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne Contents List of Figures, Tables, and Boxes vii Acknowledgements xi Introduction 1 The External Debt Crisis of the 1990s 11 Introduction 11 1.1 The Soviet debt 12 1.2 The Russian debt: beginning of management 25 1.3 External debt and macroeconomic policy 40 The Domestic Financial System and Inflation 50 Introduction 50 2.1 The origination of financial markets 51 2.2 Macroeconomic stabilization and public debt 69 2.3 The fragile banking system 78 Virtual Economy and Fiscal Crisis 87 Introduction 87 3.1 Virtual economy 88 3.2 Fiscal crisis 100 The Risks of Domestic Debt Expansion 121 Introduction 121 4.1 Dynamics of public debt in 1995–98 122 4.2 Domination of short-term debt 128 4.3 Opening the domestic debt market 132 Appendix A4.1 140 Appendix A4.2 142 The Causes of the Russian Financial Crisis of 1998 Introduction 144 144 v vi Contents 5.1 A brief history of the Russian crisis 145 5.2 The fundamental factors of the crisis 151 5.3 The Central Bank policy 157 The Debt Crisis and Default 164 Introduction 164 6.1 Failure to normalize the state budget 164 6.2 Belated debt management 167 6.3 17 August – the debt default 171 6.4 A post-crisis inflation trade-off 178 Appendix A6.1: A model of banks supporting devaluation 182 Recovery After the Crisis 187 Introduction 187 7.1 The results of the ruble devaluation 187 7.2 Fiscal discipline, consolidation and the end of financial chaos 194 7.3 The debt burden easing after the default 203 7.4 Conclusion 207 Appendix A7.1: Restructuring of obligations to the London Club 209 Yet Another Crisis, 2008–2009 213 Introduction 213 8.1 Two crises: how much in common? 214 8.2 Anti-crisis policy 226 8.3 Impact of the crisis 233 8.4 What is next? 235 Notes 237 References 256 Index 262 List of Figures, Tables and Boxes Figures I.1 The real oil price, 1979–2008 ($/barrel) 1.1 The Soviet external debt and the oil price, 1970–93 14 1.2 Russia’s external debt payments and debt increase in the 1990s ($ billion) 38 Inflation rate and the consolidated budget deficits in the 1990s 43 IMF credits to the Russian government in 1992–98 ($ billion) 44 2.1 The CPI inflation and the nominal exchange rate in 1992 52 2.2 Refinance rate and inflation in 1992–94 (per cent per month) 57 2.3 Inflation and the ruble-to-dollar exchange rate in 1993–95 59 2.4 Foreign currency exchange regimes and inflation, 1995–97 73 3.1 Dynamics of arrears in 1992–98 (per cent of GDP) 89 3.2 One-dimensional model of transition 94 3.3 Two-dimensional model of transition 96 3.4 Federal tax arrears and tax revenue in cash (percentage of GDP) 104 4.1 Domestic debt in 1994–97 in GKO-OFZ (trillion rubles) 124 4.2 Dynamic of real debt in market instruments (trillion rubles, base December 1993) 125 4.3 Real annual GKO-OFZ yields (per cent) 127 4.4 The ratio of gross debt expenditure to budget revenue 127 5.1 The timeline of main crisis events 146 5.2 Real GKO yields and real ruble effective exchange rate in 1995–98 152 Oil price and RTS index 156 1.3 1.4 5.3 vii viii List of Figures, Tables and Boxes 5.4 Fundamental causes of the Russian crisis 157 5.5 The refinancing rate and the average GKO-OFZ yield in 1997–98 (per cent per year) 161 Official foreign currency reserves and net domestic assets ($ billion) 162 6.1 The nominal ruble exchange rate in 1998–99 (rubles/$) 179 6.2 Monthly inflation and the ruble devaluation in 1998–99 180 5.6 A6.1 Zero-devaluation equilibrium 185 A6.2 Two equilibria under dollarization 185 7.1 The dynamics of exports and imports of Russian goods ($ billion) 189 7.2 The price of oil ($/barrel) 189 7.3 Trends in GDP and industrial production (billion rubles) 192 7.4 The dynamics of compensation and productivity, 1997 = 100 193 7.5 UES OF RUSSIA income structure (per cent) 195 7.6 Money supply and reserve requirement movements 201 7.7 Banking assets and equity movements (percentage of GDP) 202 7.8 Corporate loans and government bonds (percentage of assets) 202 The dynamics of returns of government bonds in 1996–2001 (per cent per annum) 204 8.1 Russian Stock Market vs MCSI World, 2000–2009 (in logs) 221 8.2 Budget surplus/deficit in Russia, 2005–2009 (per cent of GDP) 228 7.9 Tables 1.1 Oil production by the USSR in 1988–91 (million tonnes) 16 1.2 Nominal wage growth and consolidated state budget deficit in the USSR in the period of Perestroika, 1985–91 17 The number of banks in the USSR in 1988–90 (end of period) 18 Russian external debt ($ billion, end of period) 36 1.3 1.4 List of Figures, Tables and Boxes ix 1.5 Dynamic and structure of new Russian debt in the 1990s ($ billion, end of period) 37 1.6 Sovereign debts owed to the Russian Federation by the end of 1991 ($ billion) 38 1.7 Russian Eurobond issues in the 1990s 48 2.1 Annual growth rates of nominal and real macroeconomic indicators in 1992–97 (per cent) 53 Russian domestic debt in securities in 1993–96 (end of year, percentage of GDP) 68 2.2 2.3 Characteristics of domestic public debt in securities in 1994–98 75 2.4 Federal budget of Russia in 1995–98 (percentage of GDP) 77 2.5 Russian banking system under market transformations 80 3.1 Size and structure of arrears in the first quarter of 1998 90 3.2 Tax revenues of consolidated budget in 1992–98 (per cent of GDP) 103 3.3 Federal budget 1993–97 as approved and executed, three items: total spending, total income, budget deficit (IMF definition) all as a percentage of GDP 107 3.4 Results of the ‘loans-for-shares’ deal 115 4.1 Russian public debt in the 1990s 123 4.2 Russian external debt in the middle of 1990s ($ billion) 124 4.3 Domestic debt of the federal government (end of period, percentage of GDP) 125 Share of foreign currency bank credits (per cent, beginning of period) 137 5.1 Indicators of monetary policy in 1996–1998 (end of period) 159 6.1 Federal budget performance in the first half year in 1997 and 1998 (percentage of GDP) 165 6.2 Value of maturing GKO and OFZs, June–December 1998 168 6.3 Growth rates of monetary policy indicators after August 1998 (per cent) 180 7.1 The rate of growth of industrial production (per cent) 192 7.2 Cash and non-cash payment transactions between large companies 194 4.4 Notes 255 32 Manufacturing was the worst-performing sector 33 The total effect of public works and hidden unemployment could be estimated as three million workers, more than half of the number of unemployed (5.8 million, ILO methodology), see Zubarevich (2009) 34 Ironically, Roland Nash of Renaissance Capital finds that weak enforcement may lead to short-run benefits as banks roll-over loans instead of claiming collateral, thus preventing domino effect This ‘spare-thy-neighbour’ policy is certainly bad for long-run productivity (Hat tip for Barry W Ickes for pointing out to this issue) 35 For instance, RUSAL obtained a US$4.5 billion emergency credit from VEB at least until 2010 ‘Over-leveraged tycoon’ Oleg Deripaska pledged 25 per cent stake in Norilsk Nickel as a collateral 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Voprosy ekonomiki, no 5, pp 28–35 References 261 World Bank ( June 2009) World Bank Russian Economic Report No 19, Washington, DC: World Bank World Bank (November 2009) World Bank Russian Economic Report No 20, Washington, DC: World Bank Wright, Robert (2008) One Nation under Debt Hamilton, Jefferson, and the History of What We Owe, New York: McGraw-Hill Yasin, Evgeny (2002) Rossiiskaya Economica Istoki I Panorama Rynochnyh Reform (The Russian Economy Sources and Panorama of Market Reforms), Moscow: HSE Yasin, Eugene, and Eugene Gavrilenkov (1999) ‘O Probleme Uregulirovaniya Vneshnego Dolga Rossii’ (On the Problem of Russian Foreign Debt Adjustment), Voprosy Ekonomiki, no 5, pp 71–7 Zubarevich Natalya (2009) ‘Potemkinskie derevni’, Vedomosti newspaper, 18 November Index Agency for Restructuring of Credit Organizations 200 Agroprombank 79 Albanian financial pyramid 63 Alexashenko, Sergey 150, 153, 174, 249 anti-crisis policy 226–33 Argentina, debt default/swaps 175–7 arrears 89–91 failure to fight 91–3 inter-enterprise 89, 242 size and structure 90 tax 89, 103, 104 Asian crisis 49, 129, 144, 147, 214 commencement of 145 Åslund, Anders 16, 238 asset–liability mismatch assets 155 banks 202 illiquid 131 net domestic 162 AvtoVAZ 235 number of 18 vulnerability of 138 Barro, Robert 240 barter exchange 99–100, 113 decline in 195, 196 Berezovsky, Boris 117, 118, 119, 245 beznalichnyye 17 Black Tuesday 70, 71, 163, 241, 250 Bolshevik Revolution 65 BRIC countries 222, 229 bridge-banks 181 budget deficit 5, 17, 228, 240 finance sources 198 and inflation 43 monetization of budget donors 111 budget process 108–9 budget recipients 244 budget revenue, and debt servicing costs 127 budget surplus 228 ‘Bush legs’ 239 bailouts 231 balance of payments 148, 155–6, 215, 218 Bank of Russia 201 banking system first crisis 82–3 fragility of 78–86, 154–5 growth of 51 inflationary growth 78–82 market transformations 80 and public debt 83–6 restoration of 200–3 restructuring 236 weakness of 8, 51, 177 banks 238 assets 202 liquid 180 bridge-banks 181 equity movements 202 foreign liabilities 137–8 Camdessus, Michel 12 capital adequacy 83, 220 capital controls 138–40 effectiveness of 139–40 prices 140 quantities 140 capital inflow regulation of 140 use of 158–9 value of 158 capitalism capitalist revolution 8–9 cash equivalents 196 cash payments 17, 194 cash settlement centres 54 cash shortages 55 cash-based accounting 103 Central Bank 8, 42, 52 asset shifts 161–2 C accounts 133 262 Index 263 monetary policy 157–63 prudential regulation 83 Central Economic-Mathematical Institute of the Russian Academy of Sciences 42 Central Planning Committee (Gosplan) 13 centralized planned economy 20 Chernobyl 15 Chernomyrdin, Viktor 39, 58, 70, 111, 148, 178, 240, 248 ‘Chernomyrdin’s epoch’ 58 Chilean system of inflow regulation 140 China 19 Chubais, Anatoly 63, 114, 115, 116, 150, 248 CIS (Commonwealth of Independent States) countries 26 classical socialism 12 Comecon countries 19 commercial loans, short-term 35 commodity export taxation 47 compensation 193 consumer price index 52 corporate loans 202 cost inflation 112 Council for Mutual Economic Assistance 238 credit crunch 215–16, 233 credit expansion 54 social consequences 55 creditor nation status 132 creditors of last resort 20 crony capitalism 116 Cuba, sovereign debt 38 currency corridor 72–5 currency unification 46 Czech Republic debt 12–20 constraints of duration 128–30 default 171–8 dynamic and structure 37 external see foreign debt foreign 13–14 forgiveness 27–31 government see public debt internal see domestic debt public see public debt quasi-sovereign 215 real 125–6, 141 debt accumulation 15 debt addiction 15–20 debt burden easing of 203–7 foreign debt 206–7 internal debt 203–5 negotiations 205–6 post-crisis 204 pre-crisis 204 debt contagion 151, 176, 220 debt crisis management of 25–40 onset of 20–5 debt forgiveness 105 debt management belated 167–71 institutions 40 market-based 47–9 debt rescheduling 130 debt restructuring 3, 27, 41 London Club 41, 171, 209–12 Paris Club 36, 41, 205 debt rollover 149 debt servicing 12 and budget revenue 127 costs 121–2, 132, 142–3, 165, 166 debt stabilization 122–6 debt structure mismanagement 134–6 debt-based reserves 158–60 decoupling 216 demonetization 55 Deposit Insurance Agency 231 Desai, Padma 134 Deutsche Bank 32 devaluation 70, 74–5, 123, 163, 179, 207, 226–8 banks supporting 182–6 consequences of 187–93 domestic import substitutes 190–1 export revenue growth 188–90 growth in industrial production 187–8 and inflation 180 managed 181 264 Index devaluation equilibrium 185, 186 Diamond–Dybvig bank run model 246 distance to market 94, 95–6 dollar-pegged short-term yields 134–5 dollar–ruble exchange rate 59, 70, 150–1 dollarization 185–6 domestic debt 7, 8, 124 easing of 203–5 expansion 75–8, 121–43, 154 exponential 140–2 logistic 140–2 federal government 125 government pyramids 126–8 as percentage of GDP 77 real 125–6 restructuring 175 securities 68, 75 see also GKO domestic debt market, opening of 132–40 liberalization of investment inflows 133–4 non-resident investors 133–4 risk mismanagement 134–8 domestic financial system 50–86 Dubinin, Sergey 150, 241, 248 Dvorkovitch, Arkadiy 42, 227 Dzerzhinsky, Felix 249 Eastern Europe 5, 34 Economic Expert Group 42 economic reform economic restructuring 94–5 economic structure, distortion of 93–4 economic transition see transition economy acceleration 15 emerging markets 218 Emmanuel, Rahm 236 energy prices 97, 99 post-crisis increase 191 Ericson, Richard 93, 243 Eurobonds 6, 8, 32, 76 first issue 47–8 GKO–Eurobond swap 168–72 Russian issues 39, 48, 123, 125–6, 131–2, 167–8 European Bank for Reconstruction and Development 37 Evraz 230 exchange rate 52, 179, 218 abolition of 171 consequences of ruble defence 162 effects of monetary tightening 152 floating 151, 159 ruble–dollar 59, 70, 150–1 excise duties 101, 103 accrual accounting 165 increase in 199 export revenue growth 188–90 Extended Fund Facilities 45, 87, 107 external debt see foreign debt external finance channels 37–8 external shocks 155–6, 213, 216 federal budget 77, 107 failure to normalize 164–7 performance of 165 federal debt obligations 68 Federal Property Management Committee 63 financial crises 100–20 Asian 49, 129, 144, 145, 147, 214 Latin-American 129 Russian see Russian financial crisis and short-term debt 130–2 financial liberalization 1, 6, risks of 137 financial markets, origins of 51–69 financial policy weakness 219–25 financial pyramids see pyramidbuilding firms inefficiency of 94–5 quasi-market enclave 98 fiscal crisis 153 fiscal deficit 107 fiscal policy 197–8 fiscal stimulus 228–30 Fischer, stanley 12, 45, 153 food supply problems 21–2 foreign currency control 18 exchange inflation 73 Index 265 reserves 162 speculation 60, 81 see also exchange rate foreign debt 13–14, 25, 38, 124 default 21 as disciplinary device 40–7 extent of 36 and macroeconomic policy 40 rescheduling 36–7, 205–7 servicing 42–3 foreign debt crisis 6–7, 9, 10, 11–49 foreign loans 137–8 collateralization of 137 refinancing problems 150 foreign trade 13 duties on 103 liberalization 19, 59 forgiveness of debt 27–31 fragility banking system 78–86, 154–5 internal 217–19 Freeland, Crystia 119 G7 group 12, 31 Gaddy, Clifford 88, 94, 245 Gaidar, Yegor 2, 51, 58, 150, 207 Gaon, Nessim 23 Gazprom 58, 111, 113, 166, 215, 230 cash/non-cash payment transactions 194 GDP 41, 54 domestic debt as percentage of 77 fiscal deficit as percentage of 107 government debt as percentage of 122–3 and industrial production 192 and inflation 56 Gerashchenko, Viktor 53, 71, 241, 248, 249 Germany 35 GKO annual rate 148 maturity values 168 as ‘money vacuum cleaner’ 76, 154 trade 66–9, 74 cancellation of 149–50 yields 152, 160–1, 166 GKO–Eurobond swap 168–72 objections to 170–1 rejection of 169–70 GKO-OFZ holdings 159 trade 150 yields 127, 131, 134–5, 150 dollar-pegged 134–5 global creditor nations 39 Globex 231 Goldman Sachs 168 Gonchar, Nikolay 173 Gorbachev, Mikhail 1, 3, 12, 15, 20, 249 Gosbank 17, 20, 42, 53 Gosudarstvennye Kaznacheiskie Obligatzii see GKO government bonds 202 bank holdings 84 declining yields 126–7 returns 204 government debt see public debt Green, Edward 250 Gresham’s law 110 ‘grey’ money 55, 221–5 gross domestic product see GDP Gusinsky, Vladimir 118 Hamilton, Alexander 28–30, 119 Hungary 5, 35 hyperinflation 92 hysteresis effect 74 IANs 37 Ickes, Barry 88, 91, 94, 156, 242, 245, 250 illiquid assets 131 import duties 101 import substitution 190–1 imports 189 income tax 101, 103 flat rate 199 independent producers 191 India, sovereign debt 38 industrial production fall in 21 and GDP 192 post-recovery growth 187–8, 191–2 266 Index inflation 6, 43, 50–86 failure to combat 56–60 falling 74 foreign currency exchange 73 and GDP 56 high 90 and refinance rate 57 and ruble devaluation 180 and ruble–dollar exchange rate 59 trade-off 178–82 inflation spiral 52–6 inflow see capital inflow Inkombank 151, 247 insider privatization 96 inter-enterprise arrears 89, 242 interest rates falling 126 increasing 152 peak 128 internal debt see domestic debt International Monetary Fund 7, 12, 32, 37, 41–2, 44, 139 assistance package 149 influence on domestic policy 45–6 investment growth 188–90 investment inflows, liberalization of 133–4 Kaznacheiskie Nalogovye Osvobojdeniya 244 Kaznacheiskie Obligatsii 109 Kheifetz, Boris 14 Khodorkovsky, Mikhail 114 Kiriyenko, Sergei 148, 149, 166, 178 Kit-finance 231 Klepach, Andrey 217 Kovalishin, Eugeney 203 Kozlov, Andrei 250 krugovaya poruka 243 Laffer curve 104, 199 Latin-American crisis 129 lender of last resort 215 liquidity crisis 82 liquidity injection 181 loans commercial short-term 35 corporate 202 foreign 137–8, 150 non-commercial 22 non-performing 220 loans-for-shares deal 113–20 results of 115 London Club 12, 26, 31 debt restructuring 41, 171, 209–12 negotiations 32, 205–6 long-term securities, yields on 130 Lukoil 114, 115, 215–16 macroeconomic indicators 53 macroeconomic policy, and foreign debt 40 macroeconomic stabilization 7, 69–78 and banking crisis 82 failure of 121 and financial crisis 151–3 Madoff, Bernie 63 manual governance 229 market economy 5, 191 market reform 2, 88 market-based debt management 47–9 mature socialism 13, 16 Mavrodi, Sergey 61–2 MMM pyramid 61–2 Stock Generation pyramid 62 Medvedev, Dmitriy 42, 228 MENATEP 247 Metalloinvest 230 MICEX 53, 67, 182 Minfin 105, 149, 169 MMM pyramid 61–2, 124 monetarist arithmetic 77 monetary expansion 56 monetary policy 157–63 choice of 160–3 debt-based reserves 158–60 indicators of 159 growth rates 180 response to crisis 230–3 monetary tightening 70–2, 82 effects on exchange rate 152 failure of 121 money auctions 120 money supply 201 money surrogates 100, 109–10, 121 Index 267 money surrogates – continued cash payments 17, 194 disappearance of 194–6 non-cash payments 17, 194 Mongolia, sovereign debt 38 monopolies 111–12, 166 Moscow Interbank Market for Currency Exchange see MICEX mutual debts evaluation 34–5 mutual survivor behaviours 98 nalichnyye 17 Nash, Roland 255 National Welfare Fund 224 necessary pact 119–20 negotiations 31–5 net domestic assets 162 netting 196 New Economic School 42 new payments system 54 no-devaluation equilibrium 184–5 Noga 23–4 non-cash payments 17, 194 non-commercial loans 22 non-payment problem 89–91 non-performing loans 220 non-pocket banks 84 non-resident investors 133–4 forward contracts 170 hedging of 136 non-transparency 98 Norilsk Nickel 114, 115, 120, 230 Novolipetzky Metal Company 115, 230 Obligatsii Federalnogo Sberegatelnogo Zaima (OGSZ) 68 Obligatsii Federalnogo Zaima see OFZ OFZ 68 maturity value 168 oil exports 15–16 oil prices 3–4, 9, 14 and economic recovery 189 and Russian Trading System 155–6 oil production 16 oligarchs bankruptcies among 234–5 financial contribution of 113–20 ONEXIM-bank 114, 247 OPERU-2 83 optimal dynamic taxation 49 Paramonova, Tatyana 71 Pareto-inferior equilibrium 99, 112 Paris Club 12, 22, 26, 31, 33 debt restructuring 36, 41, 205 negotiations 32, 46, 205 Russian membership 38–9 payment ofsetting 196 payroll taxes 101 Perestroika 15 wage growth and budget deficit 17 petrodollars 13–14 Pikalevo complex 229–30 pocket banks 79 Poland 5, 35 financial reform 40 Poletayev, Yuri 33 policy cycle 153–4 Pomansky, Alexey 250 Ponzi games 61 Potanin, Vladimir 114, 177, 245 Potemkin, Alexander 150 pre-payment requirement 92 price control 140 price liberalization 51, 54, 56, 90, 93 price shocks 97 Primakov, Yevgeniy 151, 178, 179, 228 PRINs 37 privatization by/for insiders 96 relational capital 96 voucher 63–5, 99 productivity 193 profit tax 101, 103 profiteering 22 promissory notes 99–100 decline in 196 Promstroibank 79 public debt 69–78, 123, 214–15 accumulation of 154 and banking system 83–6 dynamics of 122–8 short-term 122, 128–32 public debt–currency reserve ratio 131 Putin, Vladimir 228, 229–30 268 Index pyramid-building 60, 61–2, 124 Albanian 63 government 126–8, 129 MMM 61–2 Stock Generation 62 quasi-market enclave 97–100, 112 quasi-sovereign debt 215 Railway Ministry 111, 166 re-monetization 195 real debt 125–6, 141 recession 213 recovery 187–212 debt burden easing 203–7 fiscal discipline 194–203 restoration of banking system 200–3 red directors 45, 65, 106, 116 refinancing failure of 149 increase in 147 and inflation 57 rate 161 relational capital 95 privatization of 96 rent-seeking behaviour 57 rescue of enterprises 54 reserve requirements 161, 201 Rhyzhkov, Nikolai 15 risk mismanagement 134–8 Rodrik–Velasco model 246 Rogers, Jim 224 Rosagroleasing 232 Rosneft 230 Rosselhozbank 232 Rossiyskiy Credit 247 Rubin, Robert 12 ruble devaluation see devaluation floating of 151 fluctuation band 171 overvaluation of 152 re-denomination 147 speculation 147 see also exchange rate ruble zone 46–7, 55 ruble–dollar exchange rate 70, 150–1 and inflation 59 Rusal 230 Russia forgiveness of debt 27–31 takeover of Soviet debt 26–7 Russian Central Bank see Central Bank Russian financial crisis ‘calendar effect’ 172–4 causes of 144–63 Central Bank policy 157–63 debt and default 164–86 factors contributing to 151–7 external shocks 155–7 financial fragility 154–5 fiscal crisis 153 macroeconomic stabilization 151–3 policy cycle 153–4 public debt accumulation 154 history of 145–51 impact of 233–5 inevitability of 225–6 inflation trade-off 178–82 present situation 213–36 recovery 187–212 Russian stock market 221–5 Russian Trading System, and oil prices 155–6 Ryterman, Randi 91, 242 sales tax 199 Sargent, Thomas 77, 241 Sberbank 66, 79, 131, 169, 219, 241 SBS-Agro 151, 170, 247 self-herding 226 semibankirshina 118 semiboyarshina 245 shadow economy 98 shock therapy 50, 51 failure of 58–9 short-term debt 128–32 constraints on debt duration 128–30 and financial crises 130–2 short-term federal loan bonds 203 Sibneft 115 Sidanko 114, 115 Smolensky, Alexander 114 Sobolev, Boris 27 Soros, George 248 Index 269 sovereign borrower status 31, 178, 246 sovereign credit 11 sovereign credit rating 39, 144 sovereign debt 32, 38, 239 Stabilization Programme 166–7 Stock Generation pyramid 62 stock market crash 145, 148 Stolypin, Peter strategic choices 26–31 strategic consumers 111 structural distortion 93–4 structural reforms 87 Summers, Lawrence 12, 153 Surgutneftegaz 115 surrogate instruments see money surrogates Svyaz bank 231 Svyazinvest 114, 120 Syria, sovereign debt 38 system shaping banks 84, 85, 118 system transformation 44 tax arrears 89, 103, 104 tax avoidance 98 tax burden 101 Tax Code 197 tax credits 104 tax offsets 104 tax optimization 102 tax reform 105–6, 165, 198–9, 208 tax revenues 103 post-crisis 197 tax system 101–6 Tesobonds 247 three fat boys 111 Tompson, William 163, 249, 250 transferable rubles 19 transition 94–5 one-dimensional model 94 two-dimensional model 96 treasury obligations 109 Trichet, Jean-Claude 46 triple shock 216 Trofimov, Georgy 250 Tulin, Dmitry 254 unemployment 233–4 Unified Electric Systems 111, 114, 166, 196 cash/non-cash payment transactions 194 income structure 195 USA Jones’s Act 22, 33 post-Revolution debt restructuring 28–30 ‘vacation effect’ 172–4 value-added tax 101, 102, 103 reduction in 198 Vavilov, Andrei 173 veksels 99–100 viability constraint 95 Vietnam, sovereign debt 38 virtual economy 88–100, 103, 243–4 emergence of 93–7 failure to fight arrears 91–3 incentive games 113 network externality 99 non-payment problem 89–91 quasi-market enclave 97–100 role of state in 106–13 virtual political system 118 Vneshekonombank 20, 23, 25, 33, 35, 79, 224, 231, 232 Vneshtorgbank 33, 79, 219, 232 voucher privatization 63–5, 99 Vyugin, Oleg 150 wages 243 arrears 89, 166 cash 17 growth in 17, 193 Wallace, Neil 77, 241 World Bank 37 Yasin, Evgeniy 153 Yeltsin, Boris 2, 39, 45, 58, 71, 87, 106, 107, 110, 116, 153, 178, 226, 241 young reformers 45, 110, 112, 118, 245 Yugoslavia 19 Yukos 114, 115 Zadornov, Mikhail 150 zero-coupon bonds 181 Zhirinovsky, Vladimir 69 .. .The Russian Public Debt and Financial Meltdowns This page intentionally left blank The Russian Public Debt and Financial Meltdowns Andrey Vavilov © Andrey Vavilov 2010 All rights... this book, the public debt policy of Russia in the 1990s is the main theme of our analysis I try to understand the dualistic features of the debt in the Russian transition Even though the external... support them implicitly As a result, the government The Russian Public Debt and Financial Meltdowns was heavily involved in the economy-wide non-payment crisis, and a significant part of the state’s