ECONOMIC SITUATION IN RUSSIA

The Federal Reserve System, also known as the "Fed," is an inde­pendent U.S. government agency. Its most important function is to manage the country's supply of money and credit.

The Federal Reserve System includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank branches. All nationally char­tered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks. In general, a bank that is a member of the Federal Reserve System uses the Reserve Bank in its region in the same way that a person uses a bank in his or her community.

The Federal Reserve System is administered by the Federal Re­serve Board of Governors, a group of seven individuals who are ap­pointed by the president of the United States and serve overlapping 14-year terms. Although the Federal Reserve System is directly re­sponsible to Congress, the governors are, by law, independent of political pressure from either Congress or the president. The board is expected, however, to coordinate its policies with those of the admin­istration and Congress. Additionally, the Federal Reserve does not rely on Congress for funding; it raises all of its own operating expens­es from investment income and fees for its own services. When a conflict arises between making a profit or serving the public interest, however, the Fed is expected to choose the latter.

The Fed's operation has evolved over time in response to major events. Established by Congress in 1913, the Federal Reserve was created to strengthen the supervision of the banking system and stop the periodic bank panics that erupted in the previous century. As a result of the Great Depression in the 1930s, Congress gave the Fed the authority to vary reserve requirements and to regulate stock mar­ket margins. In time, additional laws made it easier for the Fed to expand credit when a financial disaster seemed likely.

During World War II, Federal Reserve operations were subordinat­ed to helping the Treasury borrow money at low interest rates. When the Korean conflict began and commercial banks sold large amounts of Treasury securities, the Fed bought heavily to keep security prices from falling. However, the Fed reasserted its independence in 1951, reaching an accord with the Treasury that Federal Reserve policy should not be subordinated to Treasury financing.

After 1951, the Fed focused more directly on domestic economic stabilization, aiming to keep interest rates low in recessionary peri­ods and allowing them to rise in periods of rapid economic expan­sion. In the late 1950s, the Fed's emphasis was on price stability and restriction of monetary growth, while in the 1960s its policy stressed full employment and growth of output.

During the 1970s, credit expansion was too rapid, and mounting inflation hurt the economy. In 1979, the Federal Reserve adopted a policy aimed at more directly controlling the money supply rather than interest rates. This policy was successful in slowing the growth of the money supply, limiting the expansion of credit, and contribut­ing to a lower rate of inflation. But it also contributed to recession in the early 1980s. In 1982, the Fed again deemphasized the controls on money supply growth and began working to bring about lower in­terest rates.

The Federal Reserve has three main tools for maintaining control over the total supply of money and credit in the economy. The first is the discount rate, or the interest rate that commercial banks pay to borrow funds from Reserve Banks. By raising or lowering the discount rate, the Fed can promote or discourage borrowing and, thus, alter the amount of revenue available to banks for making loans.

The second is the reserve requirement. These are percentages of deposits, set by the Federal Reserve, that commercial banks must set aside either as currency in their vaults or as deposits at their regional Reserve Banks. These percentages cannot be used for loans. In 1980 the Federal Reserve gained the authority to set reserve requirements for all deposit-taking institutions.

The third tool, which is probably the most important, is known as open market operations. It is the buying and selling of government securities. When the Federal Reserve buys government securities from banks, other businesses or individuals, it pays for them with a check (a new source of money that it prints) drawn on itself. When this check is deposited in a bank, it creates new reserves — a portion of which can be lent or invested — further increasing the money supply.

These tools allow the Federal Reserve to expand or contract the amount of money and credit in the U.S. economy. When there is more money to lend, credit is "loose" and interest rates tend to drop. In general, business and consumer spending tend to rise when interest rates fall. When there is less money to lend, credit is "tight" and inter­est rates tend to rise. Tight money is considered a particularly power­ful tool for fighting inflation.

Yet certain factors complicate the ability of the Federal Reserve to use monetary policy to promote specific goals. First, it is hard to use monetary policy precisely because changes in the money supply do not cause immediate changes in the economy. An increase or de­crease in the money supply may not affect the economy until other economic conditions have changed; the new conditions may interact with the change in the size of the money supply to create a totally unintended result. In fact, efforts to use monetary policy to achieve price stability sometimes have hampered efforts to achieve fuller employment, while efforts to use monetary policy to reduce unem­ployment sometimes have led to inflation. Additionally, the task of monetary policy is also complicated by the nation's balance of pay­ments difficulties. For these reasons, the Federal Reserve tends to move cautiously, making very gradual changes in the money supply.

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ECONOMIC SITUATION IN RUSSIA

The two most important results of the development of the Russian economy during the last two years were relatively high rates of economic growth and a rise in household incomes. GDP (gross domestic product) growth in Russia (4.3%) surpassed not only the expansion of the world economy as a whole (3%), but also the increase in the production of goods and services in the industrialized nations (1.8%) and economies in transition (4.1%).

Economic developments in Russia have been seriously affected by changes in the world economy. A favourable for the Russian exporters price situation in the world commodity markets have contributed to growth in output by export-oriented sectors. A steady inflow of foreign exchange from foreign trade operations has facilitated the maintenance of a strong balance of payments, growth in the country’s international reserves and a rise in federal budget revenues and allowed Russia to service its foreign debt on time.

Favourable macroeconomic developments have largely been the result of the monetary policy pursued, with the aim of reducing inflation to a level allowing conditions to emerge for the maintenance of sustained economic growth. Inflation has slowed down by more than 1.2 times.

The state of government finance has become a major factor of macroeconomic stability. For the first time Russian lawmakers approved a budget surplus for 2002 at 1.6% of GDP.

Russia services all its foreign and domestic obligations in full. Growth in the output of goods and services is accompanied by a rise in the efficiency of production. It is ensured by broadening consumer and investment demand.

Price dynamics in the Russian economy have been formed in conditions of a strong balance of payments. Thanks to the co-operative efforts of the Bank of Russia and the Russian Government, consumer price growth has slowed down significantly. The economic growth has led to some favourable trends, such as a rise in employed numbers and a fall in the unemployment level.

Russia has joined the group of countries with rapid GDP growth rates. All key branches of the economy have registered a rise in output. Production has increased in industry, construction, agriculture and transport. Retail and wholesale trade volumes have expanded significantly.

Continued economic growth and a rise in employment have brought about an increase in household money income. Nominal money income has risen 27.7% in recent years and amounted 6,790.7 billion rubles, which accounted for 62.5% of GDP.

Favourable trends predominated in the foreign trade situation during the last years. A global economic recovery after a major slow down in 2001, the resumption of growth in international trade, price situation in the world commodity markets quite favourable for the Russian exporters and the expansion of demand for Russian exports have had a beneficial effect on the country’s balance of payments. Russia has enjoyed a large current account surplus, net outflow of capital has decreased and international reserves have expanded.

Preparations continue for Russia’s accession to the World Trade Organization (WTO). Russia is not going to change its official position that it should be admitted to this organization under standard terms and conditions, without any discrimination. While preparing to join this international organization, Russia is implementing a set of comprehensive measures to improve its national legislation.

Date: 2014-12-21; view: 1358