Global Economics

Background and Setup

Since 2004, Russia’s economy has seen steady and stable development on both the economic and political fronts. Energy sector’s giants have consolidated and matured through mergers and acquisitions, and a constitutional change extending the presidential term ensures the continuation of the Putin-Medvedev status quo. In 2008, however, a serious erosion of the ruble tested the market. As the ruble depreciated against the US dollar, foreign investors stopped buying bonds, and with an expensive military campaign in Georgia, the Russian economy began to stall. With inflation rates rising from 9% in 2007 to 14% at the beginning of 2009 and Real GDP growth steadily weakening from 8.1% in 2007 to an estimated 3% in 2009, the Russian economy was moving quickly into stagflation. The implication of the ruble’s 22% depreciation against the US dollar meant rising import costs, which pushed local prices up and resulted in serious inflation rates. Fortunately, Russia had amassed a large trade surplus estimated at $152 billion, but due to the weak ruble to US dollar exchange, it was increasingly difficult for Russia to service its $527 bn external debt. Therefore at the beginning of 2009, Russia implemented a foreign exchange range of 26- 41 rubles to US dollar/euro, and cut corporate and small business tax rates in order to stabilize the economy.

Current Situation & Analysis

The following rigidities and assumptions have been established:

➢ Managed exchange rate

➢ Managed interest rate

➢ Managed price

➢ No applicable information from the case about rents or profits

➢ Wages are assumed not to change

Domestically, the strong increase in inflation, the IMF data of M2 supply, and the decrease in Real GDP growth has pushed the economy outside of the target zone (Exhibit 1). Then the strong international depreciation in currency with the decrease in balance of payments as a percent of GDP (Exhibit 2),...