How did the Global Financial crisis impacted economy, businesses and commerce in Russia in 2008 ?
How did the Global Financial crisis impact the economy, businesses and commerce in Russia in 2008?
International economic crises often affect countries adversely. Countries are affected differently in relation to their economic and business perspectives. The global economic crises affected many economies and those that were unfortunate had a painful dimension of the results. Russia is one economy that was adversely affected by the international global crisis which made their economy, commerce and business plummet at a higher rate. During this period Russia’s earnings from metals and energy declined considerably. They also had a burst in their real estate bubble, failures in the banking sector and mortgage defaults among others. Russia’s condition during this period was disastrous as the level of commerce and business was down locally and international.
The nation’s stock market went down during this period at a high rate of 70% and this made the government to burn down more than 20% of its exchange reserves. Capital outflow was at its lowest at $50 billion and this made the policy makers to make projections of oil at an average of $95 per single barrel and they ended up making forecasts of $50 or low. During this period there were calls by most people in the government to ensure reduced spending to ensure slow build up of the economy.
After the crisis the Russian Stock Market went down by a high margin of 54%, and this made it one of the worst markets around the globe. By the year 2008 the Russian Stock Market was already suspended for days. Trading in the stock market was affected adversely and by October 6, the stock market fell down by a great margin of 18% in one day. Falling oil prices was also evident during this period. The price of oil by September 15 was down by $100, a rate that was seen for the first time in a period of seven months. In the month of October the prices of oil started regaining, but this time fell by $78 and ended up trading at a low of $33 a barrel by the end of the year. The countries major exports and metals had a decline similar to that of oil. The rich people from the nation started selling their jets and yachts due to the political instability that was experienced during this period.
The financial system of Russia was under control when the situation became normal. The country decided to rely on their reserves to save the image of their financial institutions. The financial system of the country managed to survive the financial crisis at the time and the level of unemployment was also controlled. This made it easy for the country to stick to most of their financial commitments without problems. The banking system was also secure during this time and most of the banks from the country were exposed in other markets leading to a severe downturn on them. The government ensured a major liquidity for purposes of securing the banks and most failures by the institutions were quickly administered in an orderly fashion.
Most private companies were not nationalized by the government as it is done by most nations in crisis. Nationalization is usually done to banks and companies when desiring to secure such organizations. This was possible despite the large amounts of money that were in foreign reserves. The foreign reserves became vital later during the recovery process as the nation used the amounts to ensure quick recovery of the financial and government system of the country.
The government made adjustments in the banking system and provided high interest loans to corporations and individual to ensure liquidity at a faster rate, and this was done instead of high equity buyouts. The largest bank which is owned by the government was given $50 billion to ensure all debts owed by other banks and corporations are cleared without delay. The government itself refinanced $11 billion to other corporations. Due to the high interest rates involved most banks declined to borrow money from VEB which was the state owned bank. Instead the government decided to postpone the activities of increasing the country’s social taxes which were planned for 2010 for purposes of increasing the pension level. The increase at the moment would have affected the employment level leading to high levels of unemployment in the region.
It is vital to note that while working to stop or limit the effects of the crisis, the government made varied mistakes which could have been avoided. The mistakes made the crisis become evident in most corporations and financial institutions a fact that was not supposed to become reality. The government was not able to depreciate the ruble early enough as anticipated. Many critics argued that a devaluation that was one-off was risky although a depreciation that is gradual could have saved the situation. In the last two months of the year, the central bank made a decision to allow the weakening of the ruble at a $1 per week rate. This later changed to 2 and 3 respectively, and during this period the central bank lost reserves profusely leading to the slow correction. Commercial banks from the region held tightly to their dollars waiting the ruble to decline further as it was early anticipated.
The decrease in reserves came to $200 billion and not this entire amount went to waste proportional to the amount that was sent to the banks and those that were in the exchange rate. The money went to individual corporations and the private sector which was made up of foreign investors and different other commercial banks. Under this scenario it was clear that slow depreciation was an implicit bailout of the investors and banks in overall, and the bailout led to damages. The collateral damage could have been stopped if the government had made use of direct methods rather than the use of depreciation that is inefficient.
During the crisis period the country markets went down and lost more than $1 trillion in shares, although this was to change in the year 2009. The stock market in the year 2009 rebounded and Russia became one of the best performers in the world. The Micex index doubled during this recovery period and most of the losses had been recovered without problems. This made it possible for the shares to come back to normal although at a relatively slow rate. There was a speculation during this period that Kremlin wanted to control most of the regions key areas to increase the level of ownership in most interest sharing regions. The state had also made provisions to sell most of its holding in the energy and transport sector to ensure a low level budget deficit and also to improve on the infrastructure sector which was seen as aging. More than 5000 business corporations were earmarked for sell by the government to ensure more liquidity under their possession.
The government also desired to sell different companies shares, and this was from those that were publicly traded. The fall in the exchange rate between these periods was high and this brought about mixed reactions on the future of the reserves. The central bank hurriedly adopted the gradual policy of devaluation for purposes of getting rid of the devaluation in the ruble. This saw a weakening of the rubble at a rate of 35% against the dollar during the crisis period. The ruble later stabilized in the year 2009 after quarters of stagnation and negative growth. By the end of 2009 the ruble had stabilized and reached a high mark of $452 billion, a mark that was not anticipated in the beginning. In the third quarter of the year 2009, Russia came out of the recession and this was after a bad record of two negative productions of the nation’s GDP. The GDP in the following quarter stood at 7.9% as opposed to the earlier predictions that were made of 8.5% after expert’s reviews. They however commended the growth and foresaw an optimistic future where the economy will grow to higher heights without problems.
The steel industry in the region is often dependent fully on other markets, the automobile industry in the nation and constructions in the country. The financial crisis affected the industry where more than 3000 workers were laid off and overall output reduced by a high margin of 15%. Before the end of the same year another 1300 workers were also laid off and another 25% output lost. The nation later decided to reduce the wages of the workers instead of layoffs to continue providing for the economy effectively. The automotive industry also plummeted and most of the cars were not sold within and outside the country.
The collapse was associated with auto loans and overall uncertainty among customers who knew that the auto loans had to be recovered before the market slid back to where it was in the 1990s. However, the government provided support for various auto makers locally and this was done through increasing tariffs and imports to a high level of up to 8% increase. Companies like KAMAZ and GAZ were the first to start cutting down on the productions because of the uncertainties that were prevalent from the economy.
The construction sector grew during this time and was seen as immune to the effects of the financial crisis around world. The sector grew rapidly at a rate of 22% and this was in nominal amount when compared to the previous year. The level of uncertain demand and increased interest rates made various corporations from the sector to desire freezing their projects and disposing all their ongoing projects. Such companies included ST Group and Mirax Group and many other real estate developers who had invested heavily in the first quarter of 2008. Their uncertainty became evident when most clients started panicking and withdrawing their proposals from the companies in question.
Most construction companies that were of a lesser scale were not able to survive and this made the giants to consider relinquishing their operations. The airline industry was also affected during this period of the international financial crisis. KrasAir for example was grounded for longer periods because the company could not afford to pay for fuel they had taken. This made different suppliers to resolve not to sell fuel to the state owned airline company. This led o massive fallout from the industry by many players leading to travelling problems for long periods. This saw the grounding of most airlines and this included Dalavia and Sky Express. Assets of all those airlines that were deemed bankrupt were later consolidated, and this made it possible for them to form other organizations to ensure continuity of business.
In the year 2008, the country recorded a high grain harvest and this brought the price of the commodity down. This led to an export subsidy that was provided by the government for purposes of supporting the trade in the region. The agriculture department did this to maintain high exports that would range from 20-25 tons. The industry was however locked down due to the high prices of different products and the tight interest rates provided by financial institutions. During this time local retail chains had some form of liquidity from the beginning of the year. They were able to continue business but not until May when Gross mart became bankrupt and closed down most of their stores in the region. This was closely followed by other retail stores which were supplying agricultural products leading to unprecedented prices in the market.
Paper export business improved during this period by a high margin of 40%. This was possible after a 30% decrease in prices; the prices were cut by the various organizations to ensure increased sales of their products without problems. Western Europe which was the biggest beneficiary to the exports maintained a high margin of 80% in imports. It later emerged that the industry was running on losses and this led to the closure of Segezh, which was the largest producer and supplier of paper bags in the region. The closure saw a swift change that led to zero paper export after the months of October and November. The president of Russia travelled to various regions in the US to consolidate research proposals that were to help the nation become better in producing the commodity at low rates.
The levels of unemployment in Russia were increasing by the day as most organization was lying off their workers. Most of this companies that lay off their workers wanted to reduce their labor costs and increase profitability in the long run. This was seen as the only measure to counter the effects of the financial crisis that had made the companies indicate losses in their books of accounts. Most companies indicated unpaid vacations and low pay as a means to keep the companies in operation. The financial services sector recorded the highest number of layoffs at a relatively short period of time. Poverty levels emerged during this period as most leaders warned that all the middle class individuals to be protected from poverty. Swift measures were later put in place to defend the rights of all the middle class people and this reduced the levels of poverty among them.
The state saw this period as a time set aside to protect those that were not able to fight for themselves. It is vital to note that most of the middle class individuals lost their jobs while others lost their property due to the massive interest rates that were served for all the citizens. The rates of unemployment went up after the third quarter and slowed down after few weeks. By December 2008, the levels of unemployment grew by a low margin of 1.6%, and 2.3% in the subsequent weeks. The number of unpaid vacations also increased during this period, and this led to slow shopping and business operations in the region. In the year 2009 first quarter the rates of unemployment were 9.4% and later declined slowly to 7.7% by the third quarter. The price inflation during this period was 14.8% and the inflation in the food industry grew steadily to 15.2%. All consumer and industrial prices were high during this period and were recorded at a high of 10%.
The adjustments made by the government were meant to safeguard it through the period. The level of spending, construction capabilities, exports and imports were some of the areas that were keenly considered by the leaders before implementing different policies that were to change the state of affairs in the region.
In conclusion, it is vital to note that between 1999 and 2008, Russia was seen as one of the improving economies in the region. It was recorded later that it was one of the worst affected economies after the financial crisis. The country’s GDP fell after 20008 by a big margin of 8%; this was the highest among the G-20, which are the largest economies in the world. The reign and success of Russia under the leadership of Putin Vladimir was not a coincidence, and Russia had prepared adequately for the crisis. All the benefits that the country enjoyed before the crisis had gone down to most of the societies. Even though the Russia had prepared for the crisis, their economic policies in the year 2009 were poor and this led to immediate changes to other subsequent years as can be seen today. Current perspective of the Russian economy is not optimistic and there are chances of it going down if not properly watched. In the event of high oil prices in the world, the country will continue to suffer from the resource curse, and this will lead to the 70-80 situations. Due to high oil prices among world leaders, the country may desire to delay their economic restructuring and concentrate on the building of pro-growth institutions that consider their economic and political interests. Such a move will lead to low growth of the economy, and make it lag behind other countries years to come.
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