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The Russian financial crisis (also called the ruble crisis or the Russian flu) began in
Russia Russia (, , ), or the Russian Federation, is a transcontinental country spanning Eastern Europe and Northern Asia. It is the largest country in the world, with its internationally recognised territory covering , and encompassing one-eight ...
on 17 August 1998. It resulted in the
Russian government The Government of Russia exercises executive power in the Russian Federation. The members of the government are the prime minister, the deputy prime ministers, and the federal ministers. It has its legal basis in the Constitution of the Russi ...
and the
Russian Central Bank The Central Bank of the Russian Federation (CBR; ), doing business as the Bank of Russia (russian: Банк России}), is the central bank of the Russian Federation. The bank was established on July 13, 1990. The predecessor of the bank can ...
devaluing the
ruble The ruble (American English) or rouble ( Commonwealth English) (; rus, рубль, p=rublʲ) is the currency unit of Belarus and Russia. Historically, it was the currency of the Russian Empire and of the Soviet Union. , currencies named ''r ...
and defaulting on its debt. The crisis had severe impacts on the economies of many neighboring countries.


Background and course of events

The Russian economy had set up a path for improvement after the Soviet Union had split into different countries. Russia was supposed to provide assistance to the former Soviet states and, as a result, imported heavily from them. In Russia, foreign loans financed domestic investments. When it was unable to pay back those foreign borrowings, the ruble devalued. In mid-1997 Russia had finally found a way out of inflation. The economic supervisors were happy about inflation coming to a standstill. Then the crisis hit and supervisors had to implement a new policy. Both Russia and the countries that exported to it experienced fiscal deficits. The countries that exported to it used their resources for production but did not get paid for all their production. In essence, their national income could not cover their national expenses (for
Kazakhstan Kazakhstan, officially the Republic of Kazakhstan, is a transcontinental country located mainly in Central Asia and partly in Eastern Europe. It borders Russia to the north and west, China to the east, Kyrgyzstan to the southeast, Uzbekis ...
and
Kyrgyzstan Kyrgyzstan,, pronounced or the Kyrgyz Republic, is a landlocked country in Central Asia. Kyrgyzstan is bordered by Kazakhstan to the north, Uzbekistan to the west, Tajikistan to the south, and the People's Republic of China to the east ...
). Russia’s unemployment rate was not sharply impacted since it was only 13 percent. The employment policy in Kazakhstan was checked on November 9, 1998 to give freely chosen employment. The employment in
Tajikistan Tajikistan (, ; tg, Тоҷикистон, Tojikiston; russian: Таджикистан, Tadzhikistan), officially the Republic of Tajikistan ( tg, Ҷумҳурии Тоҷикистон, Jumhurii Tojikiston), is a landlocked country in Centr ...
has not improved much since the 1990s, so exactly how the crisis effected employment in 1998 remains a question. The
GDP per capita Lists of countries by GDP per capita list the countries in the world by their gross domestic product (GDP) per capita. The lists may be based on nominal or purchasing power parity GDP. Gross national income (GNI) per capita accounts for inflow ...
was one of the lowest after 1996 for Tajikistan. Russia's vast amount of mineral and natural resources allowed it to export those, pay back its debt, and then increase foreign reserves to revalue its currency.


Reasons for the crisis

The crisis happened because Russia was not able to pay back its debt. If one ruble could value in more units of foreign currency of the countries to which it owes, then paying back would be easier. Since Russia had to provide assistance to other countries it had parted with after the dissolution of the USSR, it did so by importing heavily from these countries. It continued to import without any check on whether it had enough revenues to pay back. In 1995, the
IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
tried to help Russia stabilize unsuccessfully.


Organization of thought for the crisis and organizational structure of Russia

There are two major schools of thought that have explanatory value for the crisis:
Keynesian Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
and free market economics. In Keynesian economics, the government intervenes fiscally to boost aggregate demand. Russia was closer to Keynesian economics than free trade since it was the government that handled the majority of trade. In 1999 the organization structure was about to change with presidential election coming up. Declining productivity, a high
fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another ...
between the ruble and foreign currencies to avoid public turmoil, fatal financial imprudence, and a chronic
fiscal deficit The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
led to the crisis. The economic cost of the first war in Chechnya took a significant toll on the Russian economy. In early 1995, it was estimated that the war was costing Russia close to $30 million per day. Following the cessation of hostilities in 1996, it was estimated that the war in Chechnya cost Russia $5.5 billion, causing budget deficits close to 10% of their
GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
. 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 The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...
that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, severely impacted Russian
foreign exchange reserves Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...
. A political crisis came to a head in March when
Russian president The president of the Russian Federation ( rus, Президент Российской Федерации, Prezident Rossiyskoy Federatsii) is the head of state of the Russian Federation. The president leads the executive branch of the federal ...
Boris Yeltsin Boris Nikolayevich Yeltsin ( rus, Борис Николаевич Ельцин, p=bɐˈrʲis nʲɪkɐˈla(j)ɪvʲɪtɕ ˈjelʲtsɨn, a=Ru-Boris Nikolayevich Yeltsin.ogg; 1 February 1931 – 23 April 2007) was a Soviet and Russian politician wh ...
suddenly dismissed Prime Minister
Viktor Chernomyrdin Viktor Stepanovich Chernomyrdin (russian: Ви́ктор Степа́нович Черномы́рдин, ; 9 April 19383 November 2010) was a Soviet and Russian politician and businessman. He was the Minister of Gas Industry of the Soviet Unio ...
and his entire cabinet on 23 March 1998. Yeltsin named Energy Minister
Sergei Kiriyenko Sergey Vladilenovich Kiriyenko ('' né'' ''Izraitel''; russian: Серге́й Владиле́нович Кирие́нко; born 26 July 1962) is a Russian politician who has served as First Deputy Chief of Staff of the Presidential Administr ...
, then 35 years old, as acting prime minister. On 29 May 1998, Yeltsin appointed
Boris Fyodorov Boris Grigoryevich Fyodorov (russian: Борис Григорьевич Фёдоров) (13 February 1958 in Moscow – 20 November 2008 in London) was a Russian economist, politician, and reformer. Early life He was awarded a doctor of economi ...
as Head of the State Tax Service. In an effort to prop up the currency and stem the capital flight, in June, Kiriyenko hiked GKO interest rates to 150%. A $22.6 billion
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
and
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
financial package was approved on 13 July 1998 to support reforms and stabilize the Russian market by swapping out an enormous volume of the quickly maturing GKO short-term bills into long-term Eurobonds. The Russian government decided to keep the exchange rate of the ruble within a narrow band, although many economists, including
Andrei Illarionov Andrey Nikolayevich Illarionov (russian: Андре́й Никола́евич Илларио́нов, born 16 September 1961) is a Russian economist and former senior policy advisor to Vladimir Putin, the President of Russia, from April 2000 ...
, urged the government to abandon its support of the ruble. On 12 May 1998, coal miners went on strike over unpaid wages, blocking the
Trans-Siberian Railway The Trans-Siberian Railway (TSR; , , ) connects European Russia to the Russian Far East. Spanning a length of over , it is the longest railway line in the world. It runs from the city of Moscow in the west to the city of Vladivostok in the eas ...
. By 1 August 1998, there was approximately $12.5 billion in debt owed to Russian workers. On 14 August, the exchange rate of the Russian ruble to the US dollar was still 6.29. In June 1998, despite the bailout, monthly interest payments on Russia's debt rose to a figure 40 percent higher than its monthly tax collections. Additionally, on 15 July 1998, the
State Duma The State Duma (russian: Госуда́рственная ду́ма, r=Gosudárstvennaja dúma), commonly abbreviated in Russian as Gosduma ( rus, Госду́ма), is the lower house of the Federal Assembly of Russia, while the upper house ...
, which was at the time dominated by left-wing parties, refused to adopt most of the government's anti-crisis plan, so the government was forced to rely on presidential decrees. On 29 July, Yeltsin interrupted his vacation in
Valdai Hills The Valdai Hills (russian: Валда́йская возвы́шенность, Valdáyskaya vozvýshennost'), sometimes referred to as just Valdai (russian: Валда́й, Valdáy), are an upland region in the north-west of central European Ru ...
region and flew to Moscow, prompting fears of a Cabinet reshuffle, but he only replaced
Federal Security Service The Federal Security Service of the Russian Federation (FSB) RF; rus, Федеральная служба безопасности Российской Федерации (ФСБ России), Federal'naya sluzhba bezopasnosti Rossiyskoy Feder ...
Chief Nikolay Kovalyov with
Vladimir Putin Vladimir Vladimirovich Putin; (born 7 October 1952) is a Russian politician and former intelligence officer who holds the office of president of Russia. Putin has served continuously as president or prime minister since 1999: as prime min ...
. At the time, Russia employed a "floating peg" policy toward the ruble, meaning that the Central Bank decided that at any given time the ruble-to-dollar (or RUB/USD) exchange rate would stay within a particular range. If the ruble threatened to devalue outside of that range (or "band"), the Central Bank would intervene by spending foreign reserves to buy rubles. For instance, during the year before the crisis, the Central Bank aimed to maintain a band of 5.3 to 7.1 RUB/USD, meaning that it would buy rubles if the market exchange rate threatened to exceed 7.1 rubles/dollar. Similarly, it would sell rubles if the market exchange rate threatened to drop below 5.3. The inability of the Russian government to implement a coherent set of economic reforms led to a severe erosion in investor confidence and a chain reaction that can be likened to a run on the Central Bank. Investors fled the market by selling rubles and Russian assets (such as securities), which also put downward pressure on the ruble. This forced the Central Bank to spend its foreign reserves to defend Russia's currency, which in turn further eroded investor confidence and undermined the ruble. It is estimated that between 1 October 1997 and 17 August 1998, the Central Bank expended approximately $27 billion of its U.S. dollar reserves to maintain the floating peg. It was later revealed that about $5 billion of the international loans provided by the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
and
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
were stolen upon the funds' arrival in Russia on the eve of the meltdown.


Crisis and effects

On 17 August 1998, the Russian government devalued the ruble, defaulted on
domestic debt In public finance, internal debt or domestic debt is the component of the total government debt in a country that is owed to lenders within the country. Internal government debt is complement is external government debt. The main sources of fu ...
, and declared a moratorium on repayment of
foreign debt A country's gross external debt (or foreign debt) is the liabilities that are owed to nonresidents by residents. The debtors can be governments, corporations or citizens. External debt may be denominated in domestic or foreign currency. It inclu ...
. On that day the Russian government and the Central Bank of Russia issued a "Joint Statement" announcing, in essence, that: # the ruble/dollar trading band would expand from 5.3–7.1 RUB/USD to 6.0–9.5 RUB/USD; # Russia's ruble-denominated debt would be restructured in a manner to be announced at a later date; and, to prevent mass Russian bank default, # a temporary 90-day moratorium would be imposed on the payment of some bank obligations, including certain debts and forward currency contracts. On 17 August, the government declared that certain state securities, such as GKOs and OFZs, would be transformed into new securities. At the same time, in addition to widening the currency band, authorities also announced that they intended to allow the RUB/USD rate to move more freely within the wider band. At the time, the Moscow Interbank Currency Exchange (or "MICEX") set a daily "official" exchange rate through a series of interactive auctions based on written bids submitted by buyers and sellers. When the buy and sell prices matched, this "fixed" or "settled" the official MICEX exchange rate, which would then be published by Reuters. The MICEX rate was (and is) commonly used by banks and currency dealers worldwide as the reference exchange rate for transactions involving the Russian ruble and foreign currencies. From 17 to 25 August 1998, the ruble steadily depreciated on the MICEX, moving from 6.43 to 7.86 RUB/USD. On 26 August 1998, the Central Bank terminated dollar-ruble trading on the MICEX, and the MICEX did not fix a ruble-dollar rate that day. On 2 September 1998, the
Central Bank of the Russian Federation The Central Bank of the Russian Federation (CBR; ), doing business as the Bank of Russia (russian: Банк России}), is the central bank of the Russian Federation. The bank was established on July 13, 1990. The predecessor of the bank can ...
decided to abandon the "floating peg" policy and float the ruble freely. By 21 September, the exchange rate reached 21 rubles for one US dollar, meaning it lost two-thirds of its value of less than a month earlier. On 28 September,
Boris Fyodorov Boris Grigoryevich Fyodorov (russian: Борис Григорьевич Фёдоров) (13 February 1958 in Moscow – 20 November 2008 in London) was a Russian economist, politician, and reformer. Early life He was awarded a doctor of economi ...
was discharged from the position of the Head of the State Tax Service. The moratorium imposed by the Joint Statement expired on 15 November 1998, and the Russian government and Central Bank did not renew it.


Inflation

Russian inflation in 1998 reached 84 percent and welfare costs grew considerably. Many banks, including
Inkombank Vladimir Viktorovich Vinogradov ( Russian Владимир Викторович Виноградов) (19 September 1955 in Ufa — 29 June 2008 in Moscow) was the owner and president of Inkombank, one of the largest banks in 90s' Russia. Consid ...
, Oneximbank, and Tokobank, closed as a result of the crisis.


Banking

Bankers Trust Bankers Trust was a historic American banking organization. The bank merged with Alex. Brown & Sons in 1997 before being acquired by Deutsche Bank in 1999. Deutsche Bank sold the Trust and Custody division of Bankers Trust to State Street Corpo ...
suffered major losses in the summer of 1998 due to the bank having a large position in Russian government bonds, but avoided financial collapse by being acquired by
Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Stoc ...
for $10 billion in November 1998. This made Deutsche Bank the fourth-largest money management firm in the world after
UBS UBS Group AG is a multinational investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres as the largest Sw ...
,
Fidelity Investments Fidelity Investments, commonly referred to as Fidelity, earlier as Fidelity Management & Research or FMR, is an American multinational financial services corporation based in Boston, Massachusetts. The company was established in 1946 and is on ...
, and the Japanese post office's life insurance fund.


Agriculture

The main effect of the crisis on Russian agricultural policy has been a dramatic drop in federal subsidies to the sector, about 80 percent in real terms compared with 1997, though subsidies from regional budgets fell less.


Political fallout

The financial collapse resulted in a political crisis as Yeltsin, with his domestic support evaporating, had to contend with an emboldened opposition in the parliament. A week later, on 23 August 1998, Yeltsin fired Kiriyenko and declared his intention of returning Chernomyrdin to office as the country slipped deeper into economic turmoil. Powerful business interests, fearing another round of reforms that might cause leading enterprises to fail, welcomed Kiriyenko's fall, as did the
Communists Communism (from Latin la, communis, lit=common, universal, label=none) is a far-left sociopolitical, philosophical, and economic ideology and current within the socialist movement whose goal is the establishment of a communist society, a so ...
. Yeltsin, who began to lose his hold on power as his health deteriorated, wanted Chernomyrdin back, but the legislature refused to give its approval. After the Duma rejected Chernomyrdin's candidacy twice, Yeltsin, his power clearly on the wane, backed down. Instead, he nominated
Foreign Minister A foreign affairs minister or minister of foreign affairs (less commonly minister for foreign affairs) is generally a cabinet minister in charge of a state's foreign policy and relations. The formal title of the top official varies between cou ...
Yevgeny Primakov Yevgeny Maksimovich Primakov (29 October 1929 – 26 June 2015) was a Russian politician and diplomat who served as Prime Minister of Russia from 1998 to 1999. During his long career, he also served as Foreign Minister, Speaker of the Supreme ...
, who was approved by the State Duma by an overwhelming majority on 11 September 1998. Primakov's appointment restored political stability because he was seen as a compromise candidate able to heal the rifts between Russia's quarreling interest groups. There was popular enthusiasm for Primakov as well. Primakov promised to make payment of wages and pensions his government's first priority and invited members of the leading parliamentary factions into his Cabinet. Communists and the
Federation of Independent Trade Unions of Russia The Federation of Independent Trade Unions of Russia (russian: Федерация Независимых Профсоюзов России, ФНПР, Federatsiya Nezavisimykh Profsoyuzov Rossii, FNPR) is the largest post-Soviet national trade un ...
staged a nationwide strike on 7 October 1998 and called on President Yeltsin to resign. On 9 October 1998, Russia, which was also suffering from a poor harvest, appealed for international humanitarian aid, including food.


Recovery

Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices increased rapidly during 1999–2000 and Russia ran a large trade surplus in 1999 and 2000. Another reason is that domestic industries, such as food processing, had benefited from the
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
, which caused a steep increase in the prices of imported goods. Also, since Russia's economy was operating to such a large extent on
barter In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...
and other non-monetary instruments of exchange, the financial collapse had far less of an impact on many producers than it would have had the economy been dependent on a banking system. Finally, the economy was helped by an infusion of cash. As enterprises were able to pay off debts in back wages and taxes, consumer demand for goods and services produced by Russian industry began to rise.


Positive effect

The crisis was praised by
James Cook James Cook (7 November 1728 Old Style date: 27 October – 14 February 1779) was a British explorer, navigator, cartographer, and captain in the British Royal Navy, famous for his three voyages between 1768 and 1779 in the Pacific Ocean and ...
, the senior vice president of
The U.S. Russia Investment Fund The U.S. Russia Investment Fund (TUSRIF) was an investment fund from 1995 to 2008. It was established by the United States government to make private investments in the Russian economy. By 2005, it had invested $300 million in 44 Russian companies, ...
, on the basis that it taught Russian bankers to diversify their assets.


See also

*
GKO-OFZ GKO (abbreviation for russian: Государственное Краткосрочное Обязательство, Gosudarstvennoye Kratkosrochnoye Obyazatyelstvo, Government Short-Term Commitments) are short-term zero-coupon government bonds i ...
, Russian government bonds * Great Recession in Russia *
Long-Term Capital Management Long-Term Capital Management L.P. (LTCM) was a highly-leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York. LTCM was founded in 1 ...
, hedge fund sunk in the wake of the Russian crisis * Russian financial crisis (2014–2017) * 2022 Russian financial crisis


Contemporaneous financial crises

*
1997 Asian financial crisis The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...
*
1998–2002 Argentine great depression The Argentine Great Depression was an economic depression in Argentina, which began in the third quarter of 1998 and lasted until the second quarter of 2002. It followed the fifteen years stagnation and a brief period of free-market reforms. ...
, which then led to the 2002 Uruguay banking crisis * Lost Decade, Japan's economic crisis * Samba effect


General

* Flight-to-liquidity *
Sovereign default A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
*
Vulture fund A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a ...


References


Further reading

* * * * * * * * * * * * * * * * * * *
Chronology of the Russian Financial Crisis 1998
by Clifford Chance.
Overview of Structural Reforms in Russia after 1998 Financial Crisis
by S.A. Vasiliev, International Monetary Fund, 16 February 2000. * 1999 IMF World Economic Outlook, Interim Assessment
Ch. II: The Crisis in Emerging Markets
,
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glob ...
, December 1999.
Russia's Silent Middle Class
, by Carol Clark,
CNN CNN (Cable News Network) is a multinational cable news channel headquartered in Atlanta, Georgia, U.S. Founded in 1980 by American media proprietor Ted Turner and Reese Schonfeld as a 24-hour cable news channel, and presently owned by t ...
, September 1998 {{DEFAULTSORT:1998 Russian Financial Crisis Economic history of Russia Russian financial crisis Stock market crashes Debt Political history of Russia Russian Financial Crisis, 1998 1998 disasters in Russia Boris Yeltsin