Chapter

III. Balance of Payments Developments

Author(s):
Benedicte Christensen
Published Date:
December 1994
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External developments in recent years can be illustrated by the net savings balance with regard to the rest of the world (Table 1). The balance on goods and nonfactor services reflects, by definition, the difference between gross national savings and investment. Although there are estimates of this balance in relation to the rest of the world, the estimate for states of the former U.S.S.R. is incomplete since there is no information on services. Moreover, the conversion from rubles to U.S. dollars is subject to great uncertainties because of the changes in the exchange system during the period 1990–92.16 Two alternative methods are presented for converting transactions in rubles into dollars: (i) actual exchange rates during 1990–92 and (ii) purchasing power parity exchange rates with 1991–92 as the base period.17 Because the two conversion methods give widely different results, the figures should be interpreted with great caution.

Table 1.Net Savings Balance(In billions of U.S. dollars)
199019911992
(At actual exchange rates)
Balance on goods and nonfactor services19173
Former U.S.S.R.13112
Rest of world661
(At purchasing power parity exchange rates)
Balance on goods and nonfactor services983
Former U.S.S.R.222
Rest of world761
Memorandum item:
Implicit price subsidies:1581112
Former CMEA countries18
Former U.S.S.R.401112
Sources: Russian authorities; and IMF staff estimates.

Converted at actual exchange rates. For a description of the calculation, see Appendix III.

Sources: Russian authorities; and IMF staff estimates.

Converted at actual exchange rates. For a description of the calculation, see Appendix III.

Russia’s Savings Balance

The external balance shows that during 1990–92 Russia had a surplus on the balance of goods and nonfactor services, indicating that Russia had excess savings that it used to finance the rest of the world. Because the Government had negative savings, the household and enterprise sectors had large positive savings. Before price liberalization in 1992, this partly represents “forced” savings (in the form of bank deposits) resulting from shortages of goods at officially fixed prices. The positive savings balance, however, declined substantially from 1990 to 1992. The decline amounted to $5 billion between 1990 and 1992 for the rest of the world and $11 billion, or virtually no change, for the rest of the former U.S.S.R., depending on the conversion method used. The decline in savings mirrored the increase in government dissavings because fiscal imbalances rose substantially during this period.

The change in the savings balance substantially understates the decline in real transfers (on a net basis) that has taken place from Russia to the rest of the world. Russia also has benefited from an improvement in the terms of trade because of the decline in Russia’s implicit price subsidies to former members of the CMEA and the former Soviet republics (Appendix III). The measurement of these price subsidies is subject to great uncertainty because the goods were often tailored to particular specifications with no equivalence in the world market. According to rough IMF staff estimates, if world market prices had been applied to 1990 trade flows, the terms of trade would have been 35 to 40 percent higher with respect to the other union republics and 40 to 45 percent higher relative to the CMEA states. Price subsidies are estimated at $18 billion for the CMEA countries and $40 billion for the other republics. Such calculations ignore the price elasticity of the demand for goods and therefore overstate what would have been the actual trade surplus if world market prices had applied. The price subsidies were generally abolished in 1991 with respect to the other former CMEA countries. However, Russia continued to provide implicit, albeit declining, price subsidies to the other states of the former U.S.S.R.

Although Russia had a net positive savings balance with the rest of the world during 1990–92, it had a large external financing requirement, primarily because of very large debt-service obligations. During 1990–91, this led to a depletion of reserves and an accumulation of external payments arrears. In 1992, the financing requirement rose further as the trade and services balance deteriorated and capital outflows increased. In addition, official reserves needed replenishment. The reasons for the deterioration in the net savings balance and the external debt are described in greater detail below.

Balance of Payments Before Reform

Outside the Former U.S.S.R.

The increasing macroeconomic imbalances and structural problems (Chart 3) during the second half of the 1980s, as described above, left the U.S.S.R. with a rising external debt. During the second half of the 1980s, the U.S.S.R. had borrowed $2–3 billion annually in medium- and long-term loans including international bond issues from all creditor groups (that is, official creditors, commercial banks, and uninsured suppliers). As the financing requirement rose and lack of credit-worthiness constrained the possibilities for raising additional medium-term and long-term financing, the Soviet Government stepped up its short-term borrowing. About half of the debt owed to commercial banks and one-third of total external debt in convertible currencies was short-term debt at the end of 1989 ($18 billion). With an increase in the economic and political risk, commercial banks and suppliers became less inclined to extend loans that were not insured by creditor governments or official export credit agencies to the U.S.S.R., and a rollover of the short-term debt became increasingly difficult. This created a bunching of debt service obligations from 1990 (Tables 2 and A11).

Chart 3.Russia’s Production and Exports of Energy to Countries Outside the Former U.S.S.R.

Sources: Goskomstat; IMF, International Financial Statistics; and IMF staff estimates.

1 World market price.

Table 2.Balance of Payments (Excluding Transactions with Countries of the Former U.S.S.R.)(In billions of U.S. dollars)
Russia
U.S.S.R.1992
199019911990119911March proj.Estimate
Current account−21.2−7.34.24.1−7.9−4.3
Trade balance−17.1−2.96.76.4−0.63.1
Exports103.960.478.750.949.440.0
Oil(27.1)(11.8)(27.1)(11.8)(10.4)(12.7)
Natural gas(11.1)(12.6)(9.6)(10.3)(8.8)(7.5)
Other(65.7)(36.0)(42.0)(28.8)(30.1)(19.8)
Imports121.0−63.3−72.02−44.5−50.0−36.9
Gold2.53.41.62.31.01.1
Services, net−6.6−7.8-4.6-8.3-8.5
Transportation and insurance-0.20.2-0.30.10.1-0.2
Travel-0.5-0.5-0.3-0.3-0.3-0.4
Interest, net-3.5-3.8-2.1-2.2-5.6-4.5
Receipts(1.2)(0.6)(0.7)(0.5)(0.2)(0.9)
Payments(-4.7)(-4.4)(-2.9)(-2.7)(-5.9)(-5.4)
Other-2.4-3.7-1.4-2.2-2.5-3.4
Capital account2.65.81.63.6-9.0
Grants2.61.63.0
Medium- and long-term capital3.34.62.02.83.3
Disbursements(10.9)(12.5)(6.6)(7.8)(…)(12.8)
Amortization(-8.1)(-8.2)(-4.9)(-5.0)(-9.2)(-8.9)
Other(0.5)(0.3)(0.3)(-)(0.3)(-0.6)
Commercial banks-1.2-0.7-0.35.7
Other short-term-1.4
Foreign direct investment-0.7-0.2-0.4-0.10.20.7
Monetization of gold0.2
Errors and omissions-0.4-0.3-0.2-0.2-8.4
Overall balance-18.2-1.85.67.5-16.9-12.7
Financing18.21.8-5.6-7.516.912.7
Net international reserves14.21.28.70.7-3.0-1.3
Arrears4.00.32.40.2−4.36.9
1992 deferral0.30.27.27.1
Interrepublican residual-16.7-8.6
Other17.0
Memorandum item:
Russia’s debt share (in percent)6161100100
Sources: CIS Goskomstat and Goskomstat of the Russian Federation; Central Bank of Russia; Vneshekonombank; and IMF staff estimates.

The balance of payments for Russia for 1990–91 is derived from that for the U.S.S.R. The trade data are based on statistics of the Goskomstat (all military exports of the U.S.S.R. have been allocated to Russia, which accounted for perhaps only four-fifths of the total of such exports). Russia’s share in total trade has been used to derive its share in transportation. For debt-service obligations, 61 percent has been used. The allocation of grants and credits by republics is not economically meaningful but the 61 percent has been used. Any balance is allocated to the interrepublican residual. 2 includes imports of $2.9 billion that, according to the CIS Goskomstat, could not be allocated among the 15 republics.

Sources: CIS Goskomstat and Goskomstat of the Russian Federation; Central Bank of Russia; Vneshekonombank; and IMF staff estimates.

The balance of payments for Russia for 1990–91 is derived from that for the U.S.S.R. The trade data are based on statistics of the Goskomstat (all military exports of the U.S.S.R. have been allocated to Russia, which accounted for perhaps only four-fifths of the total of such exports). Russia’s share in total trade has been used to derive its share in transportation. For debt-service obligations, 61 percent has been used. The allocation of grants and credits by republics is not economically meaningful but the 61 percent has been used. Any balance is allocated to the interrepublican residual. 2 includes imports of $2.9 billion that, according to the CIS Goskomstat, could not be allocated among the 15 republics.

The Government mobilized several sources of exceptional financing. In 1990, to refinance emerging arrears to foreign suppliers, the U.S.S.R. obtained a large credit (DM 5 billion) from German banks (most of which was guaranteed by the German Government) and several bilateral credits from other governments. Further foreign exchange was raised through the collateral of future diamond exports ($1 billion). The Government also stepped up gold sales and swaps from both current production and reserves. However, the renewal of gold swaps became increasingly difficult as commercial banks became concerned about the ownership of the gold reserves, and foreign banking supervisory agencies tightened the provisioning requirements. In 1990, the U.S.S.R. ran up a sizable debt in transferable rubles with Eastern European CMEA partners. Foreign exchange reserves were used to finance the balance of payments and they declined sharply from August 1989. Despite the exceptional efforts by the Soviet Government to finance the balance of payments, external arrears on import payments rose to $4–5 billion by the end of 1991 on obligations other than those of, or guaranteed by, the VEB. The VEB, however, remained current on debt-service obligations on its own debt or debt it had guaranteed until October 1991.

The size of debt-service obligations and the large share of short-term debt were the key factors behind the liquidity crisis in 1990–91; actual debt-service payments were nevertheless sizable in both 1990 and 1991 (Table 3).

Table 3.External Debt-Service Obligation
1990199119921993
(In billions of U.S. dollars)
Scheduled debt-service obligations22.917.015.621.2
Repayment of shortterm debt(10.1)(4.6)(1.4)(0.6)
Actual debt-service payments22.916.71.8
(In percent of U.S.S.R. exports)
Scheduled debt-service obligations
In percent of total exports22.028.1
In percent of convertible currency exports68.245.1
(In percent of Russia’s exports outside the former U.S.S.R.)
Scheduled debt-service obligations29.133.439.049.6
Actual debt-service payments29.132.84.5
Sources: Vneshekonombank; and IMF staff estimates.
Sources: Vneshekonombank; and IMF staff estimates.

Gold and foreign exchange reserves were virtually exhausted (Chart 4) because most of the short-term debt to commercial banks was repaid. External debt was serviced at the expense of a severe compression of imports, which created shortages of essential inputs for the oil and agricultural sectors and several branches of light industry.

Chart 4.Official Reserves1

(In billions of U.S. dollars)

Sources: Wolf (1992); and Hernández-Catá (1993).

1 For 1986–91, the reserves figures apply to the U.S.S.R.

2Valued at market prices.

The immediate financing needs for 1991 were not known to the outside world, in part because of the reluctance of the former Soviet authorities to reveal the balance of payments and reserves data. The appropriate form of assistance depended, in part, on the extent to which the U.S.S.R. was suffering from a short-term liquidity crisis or a longer-term balance of payments problem. The outlook for the balance of payments was clouded with uncertainty because the economic policies had yet to be defined. During 1990–91, uncertainties also prevailed concerning the future of the U.S.S.R., the size of its economic space, the distribution of inter- national reserves among the union republics, foreign exchange flows, and external debt-service obligations. The seriousness of the balance of payments situation might have been underestimated because of a lack of understanding of the forces and economic consequences of the breakup of the U.S.S.R.

The Soviet Government did not request a rescheduling of its debt-service obligations from external creditors during 1990 and the first half of 1991, but instead sought untied financial assistance to overcome what was considered a liquidity crisis. Such assistance, apart from the above-mentioned refinancing operations, did not materialize from the industrial countries (Appendix IV).18

Those against debt rescheduling argued that the U.S.S.R. had an excellent payment record; external debt-service obligations in 1990 were not sizable in relation to total Soviet export earnings; the experience of other countries, including those in Latin America, had shown the difficulties of emerging from repeated rescheduling; and rescheduling also has implications for private inflows. At the same time, however, there were also compelling arguments for rescheduling: dealing with the debt-service problem through new private inflows without creditor government guarantees was unrealistic in the short term because of the high political and economic risks; also, if debt rescheduling was generally anticipated by creditors, it should come sooner rather than later to avoid a negative impact on new official inflows.19 However, it was not until October 1991 that the Soviet Government requested debt relief. By that time, a serious balance of payments crisis had developed. Thus, when Russia became an independent country in December 1991, and subsequently embarked on the reform program, it was already in a critical balance of payments situation.

The Former U.S.S.R.

During 1990–91, trade and financial relations between the union republics became increasingly complex because of the growing ethnic, social, and political tensions. Despite declining oil production, Russia only slightly decreased its energy exports to the other union republics (Table 4). Increasingly, however, trade was hampered by barriers between the individual states, which limited Russia’s imports of food and other consumer goods. Trade is estimated to have fallen by about 15 percent in volume terms during 1991, roughly in line with the estimated decline in output in the U.S.S.R. The specialization of the different republics, including the high degree of monopolization, made output highly vulnerable to interruption in traditional trade links.

Table 4.Energy Balance
199019911992
Estimates
(In millions of metric tons)
Oil
Production516.2461.1393.0
Consumption217.4236.8220.4
Exports to countries outside the former U.S.S.R.155.898.191.4
Of which:
Crude oil106.856.566.2
Oil products49.041.625.2
Exports to states of the former U.S.S.R.163.3143.093.1
Of which:
Crude oil123.3117.175.5
Oil products40.025.917.6
Imports from outside the former U.S.S.R.
Imports from states of the former U.S.S.R.20.016.811.9
Of which:
Crude oil9.012.310.7
Oil products11.04.51.2
(In billions of cubic meters)
Natural gas
Production640.6643.0640.4
Consumption1477.8474.6449.0
Exports to countries outside the former U.S.S.R.95.090.088.9
Exports to states of the former U.S.S.R.288.992.2106.4
Imports from countries outside the former U.S.S.R.
Imports from states of the former U.S.S.R.21.113.83.9
Sources: Goskomstat; Ministry of Fuel and Energy; and IMF staff estimates.

Consumption has been derived as a residual of domestic production plus imports minus exports, thus implicitly assuming no change in stocks.

There is some uncertainty in relation to the values for 1990 and 1991; in particular some official data show larger export numbers.

Sources: Goskomstat; Ministry of Fuel and Energy; and IMF staff estimates.

Consumption has been derived as a residual of domestic production plus imports minus exports, thus implicitly assuming no change in stocks.

There is some uncertainty in relation to the values for 1990 and 1991; in particular some official data show larger export numbers.

There is no information on the flow of funds through the commercial banks and enterprises. Such flows, in any case, would provide only an incomplete picture of the financial relations within the U.S.S.R., which also encompassed resource transfers and income redistribution among the republics through taxation and budgetary expenditure. During 1990–91, almost all trade was settled in rubles, and barter transactions were of minor importance although they were already on the rise.

Balance of Payments Developments

Outside the Former U.S.S.R.

In early 1992, at the beginning of the Russian reform program, an important question for the Russian Government and the international community was the outlook for the balance of payments and the need for external financial assistance. There were several uncertainties. First, although the reform policies of the Russian Government were described in general terms in a Memorandum of Economic Policies of the Russian Government presented to the IMF in March 1992, much of the quantification of the macroeconomic framework was missing. In particular, monetary targets and relations with the other ruble area states remained unclear. Second, external relations with the other states of the former U.S.S.R., in terms of both the volume of trade, the terms of trade, and the financial relations were uncertain, which influenced the financing requirement in convertible currencies. For example, it was unclear whether Russia would charge domestic or higher prices on its exports to the other states. It was also possible that exports of oil and other raw materials and imports (including food) could be substituted between the former Soviet Union and the rest of the world, thus the balance of payments with the two areas had to be projected together.

In light of the preceding sharp import decline, discussions between IMF staff and the Russian authorities gave particular attention to projecting the import level that would promote a resumption of economic growth. Imports of food and medicine were also emphasized for humanitarian reasons and to ensure social support for the economic reforms. A microeconomic approach to determining the needs of individual sectors based on the import coefficients of 1990 (that is, before the import collapse), however, could not be used if market forces were to determine imports. In addition, there was no historical experience of price and income elasticities. The breakup of the U.S.S.R. also had unpredictable effects on Russia’s need for imports from outside the former Soviet Union. A sharp decline in imports from the former U.S.S.R., for example, might result in higher import demand from the rest of the world. In the end, imports were projected to increase by 10 percent in U.S. dollar terms compared with 1991, which was believed to allow for adequate food and medical supplies in addition to critical imports for restructuring purposes. Based on balance of payments projections agreed between the Russian authorities and IMF staff, the major creditor countries announced a financing package of $24 billion in April 1992 (see Appendix IV for details).

The 1992 balance of payments outcome differed significantly from projections: exports and imports were lower; the total net financing available was broadly the same as originally assumed but the composition was different; capital outflows and the negative errors and omissions were much higher than projected (Table 2). The outturn in each of these areas illustrates the close correlation between economic policies and external developments and the importance of the appropriate form and terms of financial assistance.

Exports outside the former U.S.S.R. amounted to $40 billion, some $9 billion lower than projected (Table 2).20 Energy exports were slightly higher than initially projected despite lower domestic production, because exports were diverted from other former republics. However, nonenergy exports had been substantially overestimated. There were several reasons. Russia’s quantitative restrictions on nonenergy exports were not removed by mid-1992 as initially envisaged. Therefore, exporters could not take advantage of the real effective depreciation that took place between 1991 and 1992. The continued decline in arms exports—for which no official information was made available—might also have been underestimated. Another important factor was the underrecording of trade. Quantitative restrictions on exports, heavy export taxation,21 and the existence of large price differentials between domestic and world market prices for raw materials are likely to have encouraged illegal export transactions. Such exports are likely to have been primarily nonenergy products, which the authorities found more difficult to control than energy products that were transported mainly through pipelines that could be monitored. Another loophole was exports to third countries through states of the former U.S.S.R., some of which have reported large exports of raw materials that were not available in those states. It is generally believed that these reflect transit trade originating from Russia that might not have been captured in Russian statistics.

Box 1.Balance of Payments Statistics

After the breakup of the former U.S.S.R. into 15 independent states, it became necessary to compile a balance of payments for Russia for transactions with all foreign countries, including the other states of the former U.S.S.R. The statistical difficulties associated with the discontinuity in data cannot be overestimated. It has proved difficult to separate the external transactions of the former U.S.S.R. with the outside world by the individual 15 states. Statistics for transactions between the former states often did not exist except for trade. These difficulties were compounded by the necessity to establish new statistics following the transition from a centrally planned to a market economy. For instance, it became necessary to establish statistics for banking flows and services transactions. Moreover, the reporting discipline of enterprises deteriorated drastically so that even the value of the existing statistics declined.

Estimates of the balance of payments of Russia with the outside world before 1992 should be interpreted as a broad approximation because the U.S.S.R. was an integrated economy until the end of 1991, and a meaningful separation of transactions by region is not possible. Although there are estimates for Russia’s share of the total merchandise trade of the U.S.S.R., there is no information on its share of ser-vices. Moreover, the calculation of its share in capital, debt service, and reserves is arbitrary. As an approximation, Russia’s share has been estimated on the basis of its share of external debt-service obligations established in the context of dividing up these obligations. Using a formula based on exports and imports in convertible currencies, national income, and population, Russia’s share was 61 percent of the total for the U.S.S.R. Although new reporting systems were established after 1992 that served to fill existing gaps in information (e.g., of services and bank flows), the trade statistics have become increasingly unreliable, as may be confirmed by a comparison with partner country data. This has made it difficult to analyze past external developments and also to establish a reliable basis for balance of payments projections for the future.

The recording of transactions between Russia and the other states of the former U.S.S.R. in 1992 and 1993 was even more handicapped than transactions with the rest of the world. A new reporting system for merchandise trade had been established that produced data that were incomplete in terms of coverage and suffered from enterprises failing to adhere to the reporting requirement. Moreover, for imports of industrial and intermediate goods, the Goskomstat relied on information provided by the other states, which was partly different in coverage and partly available with only a long delay, if at all. Transit trade was not recorded. There was no recording of services transactions. The banks were required only in late 1992 to report separately their assets and liabilities with regard to the other states of the former Soviet Union. The balances of each of the states with the CBR were the closest approximation to the overall balance of Russia, but they were only reliable if no net payments in convertible currencies took place or barter transactions were in balance.

In 1992, imports dropped by 18 percent in U.S. dollar terms compared with the year before or by slightly more in real terms than real GDP (Chart 5). At $36 billion they were some $13 billion lower than initially projected. The recorded decline might have overstated the actual decrease because of unofficial imports. The ability of a declining economy to absorb an increasing amount of imports might have been overestimated, particularly since domestic investment continued to fall. The decline in export receipts and capital outflows also diminished the supply of foreign exchange for imports. In addition, the sharp real effective depreciation of the ruble compared to the year before probably dampened import demand. Large exporters, mainly of oil and gas, chose to accumulate large foreign exchange deposits instead of selling foreign exchange to the interbank market or using them for imports. The composition of imports is also likely to have reflected the grant element of government imports rather than an efficient allocation. Although agricultural imports stabilized the food situation, they might also have slowed down the pace of domestic agricultural reform. The import of certain investment goods was so heavily subsidized that domestic substitutes became noncompetitive. Other goods, such as railway cars, might not have been imported at all in the absence of heavy subsidies.

Chart 5.Imports and NMP (GDP)1

Sources: Goskomstat; and IMF staff estimates.

1 For 1986–89, the chart refers to the U.S.S.R. and for 1990–92, to Russia. The chart presents imports from countries outside the former U.S.S.R.

2Net material product (NMP) until 1990 and gross domestic product from 1991.

Although the $31 billion financing available in 1992 (as described in Appendix IV), was close to the amount initially promised—$24 billion plus deferral of principal payments of $7 billion—the composition was rather different (Table 5). Bilateral creditors extended increased assistance that was not conditional on policy performance whereas assistance from multilateral organizations was lower because it was linked to the implementation of policy reforms. While arrears on external debtservice payments might not have significantly slowed down bilateral disbursements in 1992 (although they did in early 1993), bilateral official creditors began securitized lending through escrow accounts tied to future export receipts to guarantee debt-service payments. The new commitments made to Russia in 1992 had average maturities of only three years, which partly reflected the heavy reliance on external financing for imports of food and other consumer goods.

Table 5.Financial Assistance to Russia in 1992(in billions of U.S. dollars)
$24 billion PackageEstimated Actual
Bilateral creditors and the EC111.015.8
Multilateral creditors4.51.02
Debt relief (interest)2.53
Subtotal18.016.8
Stabilization fund6.0
Total24.016.8
Principal deferral7.27.1
Arrears6.93
Total, including principal deferral and arrears31.230.8
Sources: Press release of U.S. administration of April 2, 1992; Russian authorities; and IMF staff estimates.

Grants and loans. Since the details of the $24 billion package were never announced, the composition of the actual disbursements might differ from the original package. For example, the package apparently excluded housing grants from Germany, which were part of the actual disbursements ($1.1 billion).

External assistance, excluding technical assistance, amounted to $1 billion from the IMF, $1 million from the World Bank, and $8 million from the EBRD.

The $24 billion package assumed rescheduling or deferral of interest on pre-cutoff medium- and long-term debt. Although this was not granted in 1992, the corresponding interest obligations were not paid, which is reflected in arrears accumulation. Official bilateral creditors agreed in April 1993 to a more comprehensive rescheduling of interest falling due in 1992.

Sources: Press release of U.S. administration of April 2, 1992; Russian authorities; and IMF staff estimates.

Grants and loans. Since the details of the $24 billion package were never announced, the composition of the actual disbursements might differ from the original package. For example, the package apparently excluded housing grants from Germany, which were part of the actual disbursements ($1.1 billion).

External assistance, excluding technical assistance, amounted to $1 billion from the IMF, $1 million from the World Bank, and $8 million from the EBRD.

The $24 billion package assumed rescheduling or deferral of interest on pre-cutoff medium- and long-term debt. Although this was not granted in 1992, the corresponding interest obligations were not paid, which is reflected in arrears accumulation. Official bilateral creditors agreed in April 1993 to a more comprehensive rescheduling of interest falling due in 1992.

Foreign direct investment contributed only to a small extent to the financing—net inflows are estimated at only $0.7 billion—because the legal framework was still unclear and the economic and political risks remained high (Section III).

Capital outflows through Russian commercial banks amounted to nearly $6 billion because Russian banks placed abroad the counterpart to Russian enterprises’ foreign exchange deposits with them (Chart 6).22 Foreign exchange deposits have increased from a relatively insignificant share to more than half of the total money supply in Russia in early 1993. The return on ruble-denominated assets relative to the market terms offered on the foreign exchange deposits promoted ruble substitution, and the valuation effect resulting from the rapid depreciation of the exchange rate also raised the share of foreign exchange deposits in the money supply. Foreign exchange deposits of enterprises that were held with the VEB were frozen at the end of 1991 and enterprises needed to build up new working balances of foreign exchange.

Chart 6.Foreign Assets and Foreign Exchange Deposits

Sources: Central Bank of the Russian Federation; Goskomstat; IMF, International Financial Statistics; and IMF staff calculations.

1 Foreign currency deposits of residents with commercial banks in Russia, excluding official foreign exchange holdings of the Russian Government and CBR with domestic banks.

2 Three-month LIBOR deposit rates deflated by the monthly change in consumer prices in the United States.

3 Interbank auction rate deflated by the monthly change in consumer prices.

Large negative errors and omissions were recorded ($8 billion). By nature, it is impossible to know the source of these outflows, which might represent both current and capital transactions and might also reflect transactions with states of the former U.S.S.R.23 It would therefore be incorrect to interpret the total of $8 billion, in addition to the already identified $6 billion, as capital outflows. One possible explanation for the errors and omissions is that imports have been underrecorded, possibly to avoid import tariffs. Another possibility is that export proceeds were not repatriated to the Russian banking system but kept in banks abroad. To the extent that both export and import transactions were not recorded, this would not show up in errors and omissions.

The Former U.S.S.R.

Russia’s trade with the rest of the former U.S.S.R. is estimated to have contracted by nearly 30 percent in volume terms, greatly exceeding the decline in domestic output. In 1991, the countries outside the former U.S.S.R. bore the burden of the decline in exports of oil and oil products (38 percent compared to 12 percent for the former U.S.S.R.), but in 1992—after the breakup of the U.S.S.R.—exports dropped by 35 percent to states of the former U.S.S.R. compared with only 7 percent to other states (Table 4). Lack of imported raw materials, including cotton, and specific inputs are reported to have aggravated the output decline in Russia. The recorded trade surplus of Russia amounted to about Rub 0.3 trillion, or $1.5 billion (converted at the interbank market rate) (Table A5). Russian enterprises are also estimated to have accumulated liabilities of a similar magnitude in the form of overdue payments (i.e., capital inflow). The overall balance of payments is estimated at around Rub 1 trillion ($5 billion), which is the financing provided by the CBR to the central banks of the other former Soviet states.24 An unexplained positive item of Rub 0.4 trillion ($2 billion) might partly indicate capital inflows to Russia to obtain access to the foreign exchange market or take advantage of the higher interest rates prevailing in Russia.25 The risk caused by the introduction of national currencies in certain states of the former U.S.S.R. and uncertainties about the future of the foreign exchange regime, including restrictions on capital movements, might also have led to capital inflows to Russia. Other explanations include services transactions, for which information is missing, as well as transit trade with the rest of the world.26

Although no interest or repayment terms were established on CBR lending to the other former Soviet states in 1992 or the first quarter of 1993, agreements have been concluded subsequently on the terms of the outstanding loans. The loans have been converted into government loans denominated in U.S. dollars with market-related interest rates in most cases (LIBOR plus a spread) and repayment terms averaging about five years. By mid-1993, agreements had been reached with nine former republics for a total of $4.7 billion. If these agreements are honored, the related debt-service obligations could contribute to a strengthening of the balance of payments position of Russia.

Trends in Trade

The trends in Russia’s trade and the reasons for its recent collapse provide some insight into the macroeconomic and structural problems of adjustment. In particular, an increase in energy exports will require substantial investment in new fields, pipeline repairs, and progress in domestic energy conservation, which will depend, in part, on appropriate pricing policies, a clear legal framework, and taxation policies. Arms exports have plunged to a record low and although some recovery cannot be precluded, it seems unlikely that previous levels, which were tied to the provision of substantial export financing, will be reached. Nonenergy raw materials might have major export potential if quantitative restrictions on exports are lifted. However, foreign countries’ willingness to open their markets is uncertain.

Exports

From 1990, Russia suffered declines in all its major exports, including oil, gold, arms, and machinery and equipment. In 1990, oil and oil products accounted for one-third of Russia’s total exports outside the former U.S.S.R.; in terms of volume, they were slightly smaller than Russia’s oil exports to the other republics. Energy exports, particularly natural gas, accounted for nearly half of Russia’s export proceeds. After peaking in 1988 at 569 million tons (Chart 3), oil production has declined steadily, to only 393 million tons in 1992, or 69 percent of its previous peak level. This decline was attributed partly to a lack of oil field equipment and spare parts, and to pipelines in disrepair. However, for years current production had been maintained through the exploitation of new large fields using water flooding, which boosts short-term production at the expense of longer-term production.27

Since both the former U.S.S.R. and Russian Governments followed the policy of protecting the domestic supply, exports were adjusted in line with the decline in production. Exports dropped by more than 40 percent between 1990 to 1992 and by 55 percent from the 1988 peak level, thereby exceeding the decline in domestic output. Domestic consumption—which is apparent consumption calculated as the residual between production plus imports minus exports—did not decline in tandem with general demand in the economy, partly because of declining relative energy prices and partly because environmental measures to reduce the use of nuclear power led to the substitution of oil (and natural gas). Consumption might also include some element of stockbuilding in the expectation of future price increases. Exports of natural gas were broadly maintained from 1990, but domestic production stagnated. Although there is great potential for foreign direct investment in the energy sector, so far it has been limited, partly because of problems in clarifying the legal framework.

Gold production peaked in 1989 before declining by a cumulative one-fourth through 1991, according to the Russian authorities. An increase in illegal transactions might also have played a role in the recorded decline. In 1991, Russia produced 156 tons and in 1992, 146 tons. Production has been adversely affected by the lack of investment in the gold mines, partly reflecting low gold prices to domestic producers. Since May 1992, in an effort to boost gold production, first the Government and subsequently the CBR began to purchase gold at world market prices converted at the interbank market exchange rate. More recently, gold production has reportedly suffered from shortages of fuel and an exodus of workers because of low salaries.

Traditionally, gold exports took place when the country needed foreign exchange. Thus, in the mid-1980s when the U.S.S.R. suffered a decline in the terms of trade following the drop in oil prices, gold sales were boosted. Similarly, from 1989 to 1991, heavy gold sales took place from both current production and reserves, largely exhausting the official reserves of the U.S.S.R. As a consequence, the scope for further gold sales diminished and sales declined significantly in 1992.

Arms exports are estimated to have accounted for a significant share of the U.S.S.R.’s total exports during the 1980s, although no official figures have been released.28 Based on the U.S. Congressional Research Service (CRS) Report for Congress, the U.S.S.R.’s arms deliveries amounted to nearly $13 billion in 1990;29 the Stockholm International Peace Research Institute (SIPRI) estimated them at $10 billion.30 Both sources report that arms exports were much higher during the late 1980s. Such exports were mainly supported by export credits (Chart 2). However, as many of the importing countries experienced payment difficulties and failed to honor their debt-service obligations to the U.S.S.R., arms exports were cut. Deliveries of conventional weapons to other CMEA partners and certain developing countries (including Ethiopia, Iraq, and Syria) declined sharply in 1989 and arms supplies were eliminated to Afghanistan, Angola, and the Democratic People’s Republic of Korea from 1991. In 1992, arms exports were estimated by Russian sources31 at about $3 billion and by the CRS Report for Congress at only $2.3 billion.32 Russia has suffered, in part, from arms embargoes on Libya, Iraq, and states of the former Yugoslavia—countries that previously were able to pay for arms deliveries. Russia’s share of the international arms market is reported to have fallen from 39 percent in 1989 to 17 percent in 1992,33 because of fierce competition, including in the aircraft market.

Imports

Recorded imports declined sharply in 1991 and 1992. The cumulative decline amounted to 49 percent in U.S. dollar terms. The decline was particularly sharp for imports from the former CMEA countries (84 percent), partly reflecting price declines during the transition to world market prices. For instance, for some goods the prices declined by 40 to 50 percent.34 There are major uncertainties as to the volume decline in imports, but it is estimated at 30 to 35 percent during 1990–92, thereby exceeding the decline in real GDP during the same period (26 percent). There are indications that the lack of some essential imports was a contributing factor to the decline in real GDP in 1991, when imports dropped significantly. The lack of inputs adversely affected production in the oil sector, lack of imported fertilizer reduced agricultural output, and shortages of key inputs had an important impact on several branches of light industry, including the tire and furniture industries. Moreover, the breakup of the U.S.S.R. meant that certain supplies that had previously been available from other republics—e.g., food from Ukraine, cotton from Uzbekistan, and oil pipes from Azerbaijan—dropped in volume terms, in part because of trade restrictions but also because of restructuring and, in some cases, domestic unrest in the newly independent states.

Although Russia has a rich agricultural endowment, it is heavily dependent on food imports (Table A7)35 and was the largest food importer of the union republics. Food imports rose as a share of total imports from about 15 percent of imports in 1990 to 27 percent in 1992 (Table A8). Low domestic prices, a poor distribution network, slow progress in land reform, and domestic price subsidies have slowed the restructuring of agricultural production and raised import demand. Centralized (government) imports of agricultural products and substantial import subsidies have also been a major impediment to restructuring and output growth in the agro-industrial sector. Many of these imports are sold in domestic markets at prices well below those charged by domestic producers, thus discouraging domestic production of grain while supporting an artificially high level of livestock. This is an area where there is a major potential for import substitution.

Foreign Direct Investment

Foreign direct investment in Russia has been relatively small so far. Although 6,000 joint ventures were registered at the end of 1992, the number actually in operation was much smaller. Moreover, most of the joint ventures are very small, and they are mainly concentrated in trade, services, and counseling. In addition, there is also some investment in the energy sector, ferrous metals, timber, and chemicals.

Despite its vast potential, foreign direct investment has so far made only a small contribution to both foreign financing and technology transfer. There are several reasons: the unstable macroeconomic and political situation; the lack of clarity with regard to laws; regulations and investment procedure, including those that relate to the competence of central versus regional bodies; the distortions in the tax system; and the restrictions on the ownership and use of land. Foreign investment is guided by a foreign investment law introduced by the Russian Government in July 1991. However, there have been continuous proposals for changes in the law.

The considerable risks associated with investment in Russia have raised the demand for insurance for foreign investors. Russia is a member of the Multilateral Investment Guarantee Agency (MIGA)—part of the World Bank Group—which offers investment insurance to mitigate political risk and provides promotional and advisory services to assist member countries to attract and retain foreign direct investment. Several foreign governments have also offered insurance coverage for investors of their respective countries operating in Russia.

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