The conjunction of oil and Russia's economic recovery in 1999–2004 links many themes. On 16 September 1998, the Central Bank of Russia mandated repatriation of 50 per cent of foreign exchange revenues. On 31 December 1998, it raised the mandated repatriation rate to 75 per cent. This rule affected primarily fuels and metals exports. In the next several years, world oil prices started to climb. The Central Bank of Russia subsequently reduced the mandated repatriation rate from 50 to 30 to 25 per cent of foreign exchange revenues. Rising oil prices both incited this reduction and compensated for it. Russia's economy shifted from the great contraction in 1992–98 to a partial recovery in 1999–2004. Tables 4.1 and 4.2 provide the background data.

This chapter explains these developments.1 It views Russia's economy as a new economic system that evolved from central planning after liberalization and privatization in 1992 and adapted to the policy shift in September–December 1998. We explore how, under this system, mandated repatriation of export revenues inadvertently became a quasi-fiscal policy, i.e., how it increased tax remittance and reduced subsidy extraction, which, in turn, shifted the economy from contraction to recovery. Oil and other tradeables, primarily natural resources, are important. Without their massive export, the issue of mandated repatriation of foreign exchange revenues would have been irrelevant. Oil on its own, however, was not the crucial factor.

Background

Russia's economy has made a clear and remarkably speedy recovery since the doldrums of 1998, having averaged growth of 6.8 per cent per year. As a result, in 1999–2005 the Russian economy grew by 57 per cent. In spite of the fact that the rate of growth slowed in mid-2004 and early 2005, largely due to a negative change in economic policy, growth numbers remained relatively strong (if not as high as they could be).

So, Russia continues to demonstrate a healthier macroeconomic performance than many other countries. Equally important, is the fact that Russia financed this growth mainly from its own sources, i.e., without any massive inflow of FDI or external borrowing (albeit the latter did increase substantially in 2003 and has kept growing since then). Russia for decades was a country that exported capital. Capital flight was not a phenomenon only of the 1990s. It also took place in earlier decades, although for different reasons and through different channels. From the macroeconomic point of view, continuous support of communist regimes all over the world can be treated as capital flight legitimized by the government. It also means that once Russia starts attracting more FDI, which will finance particular projects, growth rates may be high even in the absence of domestic financing. That said, the well-known task of doubling the GDP in 10 years, as was suggested by the Russian president in 2003, in principle looks achievable.

Earlier versions of most of the chapters in this book were presented at the VIIth World Congress of ICCEES (International Council for Central and East European Studies) in Berlin in July 2005. They have been revised and updated for this publication. It was decided to produce a book on this issue in view of its importance and topicality, the variety of opinions expressed by the authors, and the quality of their contribution to the debate. There are some minor discrepancies between the data cited by various contributors, e.g., for the value of oil and gas exports in particular years. This results from such factors as revision of official statistics as more data becomes available, differences between customs and balance of payments statistics, and the inclusion or otherwise of Belarus as an export destination. The official Russian statistical organization was known as Gosudarstvennii komitet po statistike (State Committee for Statistics – usually abbreviated to Goskomstat) until April 2004, when it was transformed into the Federal'naya sluzhba gosudarstvennoi statistike (Federal State Statistics Services – usually abbreviated to Rosstat). In this book it is generally referred to as Rosstat.

The Hypothesis of ‘Subsidies’ Caused by Price Differences

This chapter analyses some financial aspects of the Russian oil and gas industries under circumstances of a rapid increase in oil and gas export revenues (Table 3.1). It begins by considering the following hypothesis: domestic users of oil are receiving ‘subsidies’, because domestic oil prices have not risen sharply in comparison with world prices. Hence domestic non-energy producers are receiving assistance from the oil and gas industries which helps their international competitiveness and restricts the spread of the Dutch disease in contrast to the depression of the 1990s (Tabata, 2000).

The difference between world market prices and domestic purchasers' prices of crude oil increased from USD 5.2 per barrel in 1998 to USD17.2 per barrel in 2004 (Figure 3.1). We can therefore deduce that domestic users of crude oil received huge subsidies. Since domestic users of crude oil are limited to consumers in the oil-refining industry, prices of petroleum products are examined in the next section.

The Case of Petroleum Products

Curiously, we can see in Figures 3.2 and 3.3 that domestic purchasers' prices are higher than export prices in the case of gasoline and diesel fuel, while in the case of heavy fuel oil, export prices have been higher than purchasers' prices since 1998 (Figure 3.4). This is due to the domestic taxation on petroleum products. Value-added taxes (VAT) and excises have been levied on domestic purchases of petroleum products, while exports to non-CIS countries have been exempted from these taxes.

Abstract:

The IMF has a generally well-thought out governance structure and has been a relatively effective organization able to adopt and implement complex decisions in a cooperative and timely fashion. The constituency system allows reconciling the legitimacy of an almost universal membership with efficient decision-making and collegiality of a not-too-large Executive Board. Weighted voting based on relative economic strength gives confidence to creditor countries to commit financial resources to the IMF, while consensus decision-making confers some protection to the interests of minority groups, making weighted voting acceptable to debtor countries and may lead to better decisions that are easier to implement.

However, a number of important governance deficiencies need improvements. The influence of developing countries in decision-making is less than desirable, given the major role played by the IMF in these countries and the growing importance of such countries in the world economy. Conversely, there is excessive influence of a small group of large industrial countries and a large part of the membership does not actually participate in a meaningful way in the choice of the main officer of the institution.

The topics discussed in this paper to improve the governance of the IMF centre around increasing the independence and accountability of the Executive Board; moderately improving the aggregate voting share of developing countries; making the selection process of the Managing Director more open and transparent; nurturing the consensus decisionmaking approach; improving the efficacy and representation of the constituency system; and upgrading the IMF's role as the main forum for international economic policy cooperation.

Abstract:

The current realities of the global economy are far from being reflected in the Fund's quota structure, with EM economies accounting for the bulk of the under- representation. This paper explores the characteristics of the representation distortions using cross-section regression analysis and the results indicate that economic growth, population, credit rating and dummies for the United States and China explain most of them. To the extent that the faster growing countries are not recognized as such in their IMF quotas, the distortions will continue to increase. Eliminating such distortions requires adjusting the quota structure in line with the relative participation in global economic activity, but to the extent that individual quotas cannot be reduced, a large increase in total IMF quotas would be required. Simulations performed under the assumption that all over-represented advanced economies would accept to reduce their quotas indicate that only about one-half of the rate of increase in total quotas would be required. As an initial step towards the elimination of distortions in representation, rules for a professional IMF board are proposed, including that all Executive Directors (EDs) should be elected and be independent from the influence of a permanent employer, that all countries with a common currency be represented by the same ED and that each chair should represent at least three member countries and at most fifteen. In a scenario using these rules and attempting to preserve the existing regional representation, advanced economies would lose three chairs, emerging markets would gain two and developing countries would gain the remaining one.

In the Monterrey Consensus, agreed at the 2002 International Conference on Financing for Development, held in Monterrey, Mexico, world leaders committed to broaden and strengthen the voice and participation of developing countries in international economic decision-making and norm-setting. This commitment reflected the perceived need to increase the representativeness of the Bretton Woods institutions, which operate within a governance structure largely defined six decades ago. It also reflected the need to adjust other multilateral financial institutions, such as the Bank for International Settlements, to a global environment characterized by the growing importance in the world economy of a dynamic group of developing countries and to give developing countries in general, some representation in policy-making and norm-setting bodies where they have no formal participation, such as the Basle Committee on Banking Supervision and the Financial Stability Forum.

This commitment has translated thus far into some actions and an ongoing discussion on the Bretton Woods institutions. The International Monetary Fund (IMF) and the World Bank have strengthened the offices of African Directors and some European countries have created an Analytical Trust Fund to support the African Chairs. These changes have been motivated by the evident concern to maintain the legitimacy of these institutions as representative global entities. The International Monetary and Financial Committee aptly summarized the major issue at stake in its communiqué of April 2005:

Abstract:

Accused of being secretive, unaccountable and ineffective, both the IMF and the World Bank are seeking to become more transparent, participatory and accountable. Yet, few attempts have been made to dissect the existing structure of accountability within the International Financial Institutions (IFIs). This paper critically examines the existing accountability of the institutions and offers some recommendations for making them more accountable. It also warns that the limits of their accountability should limit the legitimacy of their activities.

Introduction

During the 1990s, the International Monetary Fund (IMF) and the World Bank (the Bank) found themselves accused of being secretive, unaccountable and ineffective. Not only radical non-governmental organizations (NGOs) but equally, their major shareholders are demanding that the institutions become more transparent, accountable and participatory. Accountability became the catch cry of officials, scholars and activists in discussing the reform of the institutions. However, few attempts have been made to dissect the existing structure of accountability within the International Financial Institutions (IFIs), to explain its flaws and to propose solutions and is the aim of this paper.

The first section examines the structure of accountability planned by the founders of the IMF and the Bank. The second section discusses the defects in this structure. Section three analyses the recent attempts to make the institutions more accountable. The conclusion offers some recommendations for improving the institutions and a warning about the limits of accountability at the international level.

Abstract:

This paper discusses a proposal to include capital flows volatility as an additional variable in the quota formula. The motivation is to capture macroeconomic volatility associated with capital accounts shocks as well as countries' vulnerabilities to balance of payment crisis. A proposal to this effect was requested by the G-24 Ministers in the communiqué of October 2004 and also introduced in recent quota reviews at the IMF.

However, the methodology put forward by IMF staff papers measures capital flows volatility in dollar terms. This measure does not fully capture the vulnerabilities of balance of payment crises because it does not take into account the differential macroeconomic impact of volatility among developing and industrial countries. In particular, fluctuation in capital flows implies a bigger adjustment for developing countries since capital flows to these countries represent a larger share of their economies and tend to be more volatile.

We propose an alternative measurement of capital flow volatility based on the volatility of net capital flows as a proportion of GDP and argue that it is a more appropriate measure to capture the economic effects of capital flow volatility. We also measure volatility in exports and capital flows altogether as a share of GDP to capture countries' total vulnerabilities to balance of payment crisis arising not only from capital account shocks but also from current account shocks, i.e. commodity shocks.

Abstract:

Increasing IMF quotas (or changing their distribution) requires the approval of the United States, which maintains enough votes at the IMF to block such decisions. Any change in the US quota, in turn, must be approved by the US Congress—a feature of US law which gives Congress a central role in quota determination. In this paper, I analyse congressional votes on legislation to increase the US quota subscription to the IMF. I argue that legislators are more likely to support a quota increase (1) the more ‘liberal’ their ideology, (2) the larger the share of high-skilled ‘pro-globalization’ voters residing in their districts and (3) the larger the share of campaign contributions they get from banks that specialize in international lending. Statistical tests of congressional voting on requests for quota increases in 1983 and 1998 support these arguments.

Introduction

The United States is positioned at the International Monetary Fund (IMF or Fund) to unilaterally veto changes in the size or distribution of ‘quotas’. This is because altering quotas requires an 85 per cent majority in the IMF's Board of Governors, and the United States has never held less than 17 per cent of the votes. No matter how intensely other members feel about the need for increasing or redistributing quotas, opposition by the United States alone can block any quota adjustment. On quotas, the United States is predominant.

Abstract:

In this chapter, we simulate the effect that a double majority decision rule would have on the relative influence of members of the IMF's Executive Board. We first discuss the logic of double-majority decision methods and discuss several alternative ways to implement them. We then explain the importance of relative voting power and define two ways to estimate it. We then turn to simulations of how voting power would be redistributed were the IMF to adopt a double majority decision rule. The results, as expected, indicate that the voting power of developing countries would be increased if a double majority decision rule was implemented. We conclude that the chief virtue of double majority voting in the IMF would be to compel the developed countries to take into consideration more seriously the views and preferences of the developing countries which are, after all, most consequentially affected by the decisions and policies of the organization.

Introduction

One of the most fundamental governance issues facing international organizations concerns the methods by which members' preferences are aggregated for purposes of deciding upon and implementing collective action. From a slightly different perspective, what is at issue is how to reconcile the principle of sovereign equality with the reality of a hierarchical international system marked by large power disparities across member states.

Abstract:

The governance of the IMF and the distribution of IMF quotas have come under much scrutiny in recent years, with a focus on the voting rights of member countries consistent with their relative size in, or contribution to, the world economy. Quota increases resulting from general quota reviews since the IMF came into being in 1945 have fallen far short of the amounts needed to maintain the relationship of total quotas to world GDP. At the same time, the distribution of quotas between the industrial and developing countries has been broadly maintained despite the enormous and disparate growth of the world economy over this period. On the basis of the formula that guides the IMF in deciding members' quotas in these reviews, giving prominence to GDP as the primary variable, the share of developing countries would be appreciably greater if GDP were to be converted by Purchasing Power Parities (PPPs), rather than at market exchange rates. For many purposes, inter-country comparisons of GDP converted by PPP are seen as the preferred approach, a view which has received increased support in light of the expected strengthening of the quality of PPP data compiled under the International Comparison Program. Market exchange rates, which continue to serve as the conversion factor for GDP in IMF quota calculations, are regarded by statisticians and analysts alike as unsuitable for many applications because of their short-term volatility.

Abstract:

We discuss the nature of bloc voting and show that there is a fundamental distinction between voting weight and voting power. We analyse voting power, assuming that the G-7 countries form a bloc and find that it would disenfranchise all other countries while greatly enhancing the power of the United States, already more powerful than supposed. We consider some of the implications of a proposed reform of the voting system of the IMF in which EU countries cease to be separately represented and are replaced by a single combined European representative. The voting weight of the EU bloc is reduced accordingly. We analyse two cases—the Eurozone of 12 countries and the European Union of 25. We show that the reform could be very beneficial for the governance of the IMF, enhancing the voting power of individual member countries as a consequence of two large countervailing voting blocs. Specifically, we analyse a range of EU voting weights and find the following for ordinary decisions requiring a simple majority: (1) All countries other than those of the EU and the United States unambiguously gain power (measured absolutely or relatively); (2) The sum of powers of the EU bloc and the United States is minimized when they have voting parity; (3) The power of every other non-EU member is maximized when the EU and the United States have parity; (4) Each EU member could gain power—despite losing its seat and the reduction in EU voting weight—depending on the EU voting system that is adopted;

The United Nations Monetary and Financial Conference held at Bretton Woods sixty years ago led to the establishment of the IMF and World Bank. This was a foundational moment. As the most powerful financial institutions of our times were created, hopes ran high of a better world, in which international cooperation through the IMF would sustain economic activity and prevent the adoption of measures destructive of national and international prosperity. The Bank was to assist reconstruction of war ravaged countries and finance the development of the less developed world. For a number of decades, the institutions created in Bretton Woods and the system based on them seemed to work well.

Today, the Bretton Woods Institutions (BWIs) play a diminished role and suffer from a loss of legitimacy and credibility. Several factors account for this diminished role. Among them the expansion of financial markets, the rapid growth of emerging market economies and the rigidity of a governance structure which reflects the political accommodation reached at the end of World War II; an outcome that has become increasingly obsolete and dysfunctional. The current governance structure of the IMF and World Bank fails to take into account the fact that today, the developing countries and economies in transition account for half of the world's output in real terms, for most of the world's population, encompass the most dynamic economies and hold about two-thirds of all international reserves.

Abstract:

The following article outlines reforms for the IMF so as to enhance financial crisis prevention and management through better surveillance and transparency. With the present quota regime, creditor countries command excessive voting power, resulting in skewed crisis analysis and resource distribution. Consequently, exploring the democratic deficit within the governance structure of the Fund reveals much needed changes in the quota regime and voting system of significant import. Expressly, the democratic deficit results from three factors, namely, (1) the decline of basic votes in the Fund's quota regime has reduced the voice of smaller countries in the governance of the Fund; (2) biases in the calculation of economic strength have caused the IMF to neglect the strength of emerging market economies; and (3) the needless complexity and opacity involved in the calculation of quotas. As the governance structure of the Fund is a product of the political and economic agreements embodied in the quota regime, addressing the quota bias, the variable measurement and specification problems will provide the route towards a Fund that is in tune with the growing contiguous democratic consensus. Quota adjustments alone prove insufficient towards this democratic end and therefore we will explore reassessing the Fund size, given the pressing need for a larger Fund as the present size is too small when compared to the global GDP; readjusting access to the resources of the Fund in accordance with the gross financing need of the concerned country; re-examining the voting system and the veto market; restructuring the Executive Board so that every member of the Board is an elected member and; the Fund as an Economic Security Council (ESC), promoting stability in the global economy.