Pekka Sutela

Insider privatisation in Russia: Speculations on systemic change

ACCORDING TO MOST TEXTBOOKS, an economic system is made up of structures of information, incentives and decision making. Property rights, the relationships between claims or rights and the persons or institutions entitled to exercise them, form the locus of decision making and are obviously at the heart of an economic system. For purposes of efficiency, they need to be well defined. With regard to equity, different property arrangements will have different implications. Furthermore, not all imaginable property arrangements are necessarily sustainable. Not much is known, however, about the exact outcome implications of most imaginable sets of property rights. Such mainstream views have pride of place in the prevailing orthodoxy on economic transition from centrally managed systems to market economies. Together with stabilisation, liberalisation and structural change, privatisation is seen as one of the core facets of transition. Though the widely accepted priority of privatisation in the transition process has occasionally been challenged, few would doubt that existing property arrangements have a crucial impact on the way in which an economy functions.

The Financial Crisis in Russia

In August 1998, Russia experienced a classical financial crisis, combining a currency crisis, a banking crisis, and a debt crisis. As the ruble collapsed from about 6 Russian rubles for 1 U.S. dollar to 20-25 rubles for each dollar, the aggregate capital of the banking system dropped very close to zero, if not below. Even the payment system temporarily ground almost completely to a halt, and the country declared a moratorium on much private foreign debt and defaulted on all ruble-denominated public debt. Since that time, Russia has defaulted on many currency debts, as well. The main macroeconomic achievements of Russia’s stabilization policies since 1995—low inflation and a stable exchange rate—were gone. It was obvious that the possibility of economic growth, first visible in 1997, again had to be postponed. The 1997 stabilization was seen not as the natural outcome of consistent policies, but as a windfall created by an exceptional net capital inflow of 15 billion U.S. dollars (BUSD) to the federal government and 6.2 BUSD of foreign direct investment, 2.2 BUSD of portfolio investment, and 7.4 BUSD of net loans to the private sector. The year 1997 was also one of exceptionally large capital flight. Russia’s crisis, in spite of the country’s marginal position in the international trading system, sent shock waves through global financial markets, largely because of two reasons: the country had become a major borrower of short-term capital and a full-scale sovereign default was deemed possible. The debate on whether the Washington consensus “lost Russia” started a general discussion on the future of the international financial system. In retrospect, the peculiarities of the Russian crisis become more visible.

Too Much or Too Little Russian Gas to Europe

Two Bank of Finland economists forecast Russias future gas exports to Europe on the basis of projections of Russian gas production, domestic consumption in Russia, gas demand in major European markets, and the further development of transport infrastructure linking the two regions. Due attention is devoted to uncertainties surrounding the timing of new field development in Russia and pipeline construction, the potential of increasing domestic energy efficiency to liberate additional Russian gas for export, and the effects of environmental regulations and energy conservation measures on European demand for imported gas; the veracity of characterizations of Europe as dangerously dependent on gas imported from Russia also is subjected to critical scrutiny. Journal of Economic Literature, Classification Numbers: F170, L950, O130, Q410. 2 figures, 3 tables, 30 references.

The Role of Banks in Financing Russian Economic Growth

A noted Western economist specializing in the transition economies of the former Soviet republics examines the role played by Russias banking system in stimulating economic growth through the investment process. An initial section surveys the applicability of growth theory to the Russian economy, followed by discussion of the role of the financial system in economic growth. The author then proceeds to analyze the existing potential for investment-based growth in Russia, and assesses the extent to which the countrys banking sector can serve as an effective intermediary in investment financing. The analysis of developments embraces 1997 and the early months of 1998. Journal of Economic Literature, Classification Numbers: E22, G20, O16. 2 tables, 75 references.

The economic future of Russia

The paper provides a scenario exercise for Russian economic development until 2017. Russia will continue to grow for several years at least, as an emerging middle class drives consumption growth and structural change, though not in exports. Import propensity grows fast, and the recent current account surplus is disappearing fast. Investment also seems to be surging. Two dimensions seem crucial for building scenarios. Will Russia be able to increase energy production and exports? Will there be a meaningful diversification of production and exports, needed for maintaining the current account and to provide jobs for a large if slowly decreasing labour force? Ensuing scenarios have clear political implications.

Book Reviews : Jon Elster, Claus Offe and Ulrich K. Preuss, with Frank Boenker, Ulrike Goetting and Friedbert W. Rueb: Institutional Design in Post-Communist Societies: Rebuilding the Ship at Sea. Cambridge: Cambridge University Press, 1998

are a key to how the Scandinavian states organize societal welfare. Overall, this is a book for the specialist rather than the generalist. It is and will prove in time to be an important source book on the social service elements of the Scandinavian welfare states, providing valuable historical and statistical material in a comparative context. Despite Abrahamson’s attempt to set the Scandinavian welfare states within the broader world of welfare states, the significance of social services for welfare state analysis in general remains underdeveloped in the collection as a whole. Are these a Scandinavian peculiarity? Indeed, how would one even go about answering such a question? The text provides relatively little assistance with the latter task, for it does not undertake as part of its conceptual enterprise the development of the relationship between social services and cash transfers. For this purpose, one misses a last chapter which would draw out the insights from the different chapters for an analytical framework around care services as they are revelatory of the (variations in the) most important characteristics of the welfare state. To be sure, there are some new things here. But the collection is only loosely held together, and too much is required of the reader to draw out the broader significance of the concept of social care services across national frontiers. Similarly, while the book helps us along the way, future scholars are left largely on their own to develop the analytical significance of social care services in the context of varying welfare state models.