1/ In 1988, the U.S.S.R. for the first time published data on Soviet economic growth using the Western concept of GNP. Its estimate for 1987 in current rubles is best compared with the CIA's estimate of 796 billion rubles in 1982 "established" prices. The implicit U.S.S.R GNP deflator of 0.8 percent during 1983-87 probably grossly understates the rate of inflation in the Soviet economy. The U.S.S.R.'s initial published GNP estimates were for growth only, and for the years 1986 and 1987 (4.6 percent and 3.3 percent, respectively). These growth rates were subsequently revised downward (to 4.1 percent and 3.1 percent). 2/ The ruble estimate for GNP was converted to 1982 geometric-mean (GM) U.S. dollars by multiplying the ruble value of estimated GNP by the geometric mean of two dollar-ruble ratios--one weighted with U.S. price weights and the other with Soviet weights. The U.S. GNP deflator was then applied to convert 1982 GM dollars to 1989 GM dollars. 3/ Based on estimates in 1982 rubles at factor cost. 5/ Errors and omissions include Soviet hard-currency aid to and trade with other communist countries, trade credits extended to finance Soviet exports to developed countries, and other nonspecified hard-currency expenditures, as well as errors and omissions in other line items of the balance-of-payments accounts. The U.S.S.R. ceased to exist on December 25, 1991. The three Baltic states, Latvia, Lithuania, and Estonia, declared their independence earlier in the year, and are presented elsewhere in this volume. Of the twelve new independent states, eleven formed the Commonwealth of Independent States, with only Georgia not joining. These twelve states are presented below, jointly, as they made up a single nation for most of 1991. Comprehensive, individual reports for each State will be presented in the Country Reports on Economic Policy and Trade Practices to be presented to Congress in February, 1993. A year of spectacular and unprecedented change, 1991 began under the threat of a conservative crackdown in the Baltics and elsewhere in the Soviet Union, and ended with the dissolution of the Soviet Union itself into three Baltic and FORMER SOVIET UNION 12 other independent states. The turning point came in August, when an attempted coup by conservative forces ended in the discrediting of the Communist regime, and the banning of the Communist Party. The collapse of the economy, an important factor in the Government's loss of authority and control, accelerated during the year. By year-end, Russia and the other new countries of the region (Ukraine, Byelarus, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, Turkmenistan, Azerbaijan, Armenia, Moldova and Georgia) were facing hyperinflation, falling production from superannuated plant and equipment, rising unemployment, a collapsing internal market and widespread shortages, dwindling foreign currency holdings, and daunting health and ecological problems. Moreover, fundamental market economic reforms had not been implemented; during 1991, as in previous years, piecemeal reforms helped to dismantle the central administrative system but put no effective market mechanisms in its place. The relationship of Russia and the other new countries with the West underwent a fundamental change. Diplomatic relations with the Baltic states were restored. In relations with the Soviet Union, and then its former republics, arms control and other security issues were overshadowed by urgent appeals for economic and financial assistance from former Cold War opponents. Key Western countries, including the United States, responded by pledging support for democratic forces and reformers, and by providing debt relief and humanitarian food and medical assistance during the winter of 1991-92. The Soviets continued their multiple, fixed exchange rate system throughout 1991. The commercial rate remained at roughly 1.8 rubles/dollar, as compared with rates at commercial market auctions that soared from around 20 to over 100 rubles/dollar by year-end. The tourist rate remained at 6 rubles/dollar during most of the year, and then was adjusted upwards to 37 rubles/dollar and above. Convertibility for current account transactions was set for January 1, 1992, but appears to have been postponed. The central government's attempts to liberalize its exchange rate policy were constrained by the growing shortage of foreign exchange. Some of the policies it instituted in an attempt to increase the supply appeared only to make the situation worse. The decree in late 1990 that established an all-union currency fund and required state enterprises (but not joint ventures) to surrender significant percentages of their hard currency earnings to fund debt service and other hard currency costs caused exporters to seek new ways to disguise their hard currency earnings, perhaps keeping them abroad or converting them into imported goods. The Russian government, which by early 1992 appeared to have assumed de facto many of the central government's currency functions, has like its predecessor made current account convertibility a goal. The Russians may move to simplify the multiple exchange rate system that they FORMER SOVIET UNION inherited. As of January 1992, it appeared as though they would continue to require exporters to surrender some portion of their foreign currency earnings to the Central Bank. 3. Structural Policies Although the abrupt drop in the economy was one of the most dramatic events in 1991, it received relatively little attention either from the Soviet central government or from any of the newly-independent state governments in 1991, who instead were preoccupied with the year's momentous political changes and the struggle for political control. At year-end, fundamental market reform remained as elusive as it had at the start, despite the precipitous fall of the Communist Party. The central government's demise was accelerated by several powerful economic factors. Inflation, estimated for the year at 250-300 percent, undercut confidence in the government, and further disrupted traditional ties between suppliers and consumers, exacerbating widespread shortages and encouraging widespread barter deals. Prime Minister Pavlov's ill-conceived attempt early in the year to confiscate part of the "ruble overhang" by recalling large denomination ruble notes withdrew only a small fraction of rubles in circulation while further alienating the public. Inflation was increasing sharply as 1991 began, as governmental budget deficits had to be fully monetized, and monetary creation continued uncontrolled. Some inflationary pressure stemmed from earlier decisions to raise wages and pensions substantially without identifying additional revenues. The central government, however, received even less overall revenue than it had anticipated, as the collapse of its authority undermined fiscal discipline, and as republic governments failed to contribute tax revenues to the center. In part, this was because they themselves had received less money, since GNP was falling at an annual rate above 12 percent. The shortfalls also reflected republic reluctance to fund the central government. By the end of 1991, Gorbachev found himself without funding for the month of December, and no one offered to provide it. Faced with this monetary disarray, many republics began to talk openly about introducing their own currencies, despite pressure from the central government and then Russia. By the end of 1991, there still was no currency other than the ruble, but it appeared likely that Ukraine and perhaps others would introduce either their own currencies or coupon systems that might function like currencies. Successful introduction of separate currencies will require painful fiscal measures, however; the republic governments in 1991 also resorted to widespread deficit spending, covered by the Soviet state bank, and this contributed to inflationary pressures. Similarly, the governments of the region, including those of Russia and Ukraine, moved beyond the temporary barriers to internal trade that had sprung up in prior years to develop their own customs services and to regulate trade by means of export licenses, and other restrictions, within the territory of the former Soviet Union. For example, several food-surplus |