Russian Crisis

Topics: Russia, Central bank, Russian ruble Pages: 13 (4870 words) Published: September 18, 2011
Russian Crisis 1988

The Russian Financial crisis(also called “RUBLE” crisis) hit Russia on 17 August 1998. It was triggered by the Asian Financial crisis, which started in July 1997. During the ensuing decline in world commodity prices, countries heavily dependent on the export of raw material where among those most severely hit. Petroleum, natural gas, metals and timber accounted for more than 80% of Russian exports, leaving the country vulnerable to swings in world’s prices. Oil was also a major source of government tax revenue. The countries involved in the Russian Financial crisis involved: Baltic States

The Russian crisis affected Baltic countries more than was expected. Estonia, Latvia and Lithuania sank into recession.

Overall, economic activity slowed down substantially in the immediate aftermath of the Russian crisis, with output growth falling from about 8.5 percent in 1998 to 3.4 percent in 1999. Both exports and imports contracted substantially, resulting in a drop in the current account deficit from 6.1 percent of GDP in 1998 to 2.2 percent of GDP in 1999.

The Russian crisis was a hard hitting blow to the Kazakh economy. Kazakhstan lost its price competitiveness and its exports were in shambles.

Moldova received an IMF special mission advising the government on how to cope with the effects of the Russian crisis. Russia bought at that time 85% of Moldova's wine and brandy and most of its canned goods and tobacco. After the rouble crashed, most Russian importers put deals with Moldova on hold.

The crisis cost a lot for Ukraine: the Hryvnia devaluated by 60%, domestic prices increased by 20%, the National Bank of Ukraine lost 40% of its gross reserves.

In the central Asian state, the government banned the free unlicensed sales of food, most of which is imported from Russia, as a preventative measure against price rises and panic.


In 1993, the Russian government came up with inflation- free short- term treasury bills, known as GKOs, to finance the country’s deficit. GKOs were traded on currency exchanges. Though mostly state- owned, roughly 1/3 of funding came from foreign speculators, which they attracted through high interest rates. The government used proceeds from sales of new GKOs to pay off interest on matured bills- a classic Ponzi scheme. In June 1997, looking to raise capital, the government increased GKOs interest rate to 150%. By the beginning of 1998, GKO interest payment comprised more than half the federal government’s revenue. They became large domestic bank’s main source of revenue. Meanwhile, the government owed workers roughly $12.5 billion in unpaid wages. It was also making more money from GKOs than from taxes. Investors lost confidence in the Russian government when they put all the pieces together, selling Russian securities and RUBLES. The central bank tried unsuccessfully to stabilize the RUBLE by spending an estimated $27 billion of its US dollar reserves. In august 1988 Russia’s market collapsed. Investors fearing a devaluation of the RUBLE and a debt default, panicked, leaving the market with a 65% drop in one day. As a result several major banks closed and inflation increased. It also eradicated the nascent middle class by eating through people’s bank savings. Course of Events

Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal were the background to the meltdown. The economic cost of the first war in Chechnya that is estimated at $5.5 billion (not including the rebuilding of the ruined Chechen economy) was also a cause of the crisis. In the first half of 1997, the Russian economy showed some signs of improvement. However, soon after this, the problems began to gradually intensify. Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand...
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