2. Financial crises
A financial crisis is a situation in which the value
of financial institutions or assets drops rapidly.
Russian financial crises 1998
The Russian financial crisis (also
called Ruble crisis or the Russian Flu) hit Russia on 17
August 1998. It resulted in the Russian government and
the Bank devaluing the ruble and defaulting on its debt.
3. Reasons and impacts
Following were the reasons and impacts of these crises
Declining productivity
High fixed exchange rate between the ruble and foreign currencies
Declines in demand for (and thus price of) crude oil
On 17 August 1998, the Russian government devalued the ruble,
defaulted on domestic debt, and declared a moratorium on repayment
of foreign debt. On that day the Russian government and the Central
Bank of Russia issued a "Joint Statement" announcing, in essence,
that:
4. 1. the dollar/ruble trading band would
expand from 5.3–7.1 USD/RUB to 6.0–9.5
USD/RUB;
2. 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,
3. A temporary 90-day moratorium would be
imposed on the payment of some bank
obligations, including certain debts and
forward currency contracts.
5. Inflation
Russian inflation in 1998 reached 84 percent and welfare costs
grew considerably. Many banks, including Inkombank,
Oneximbank and Sokobank, closed as a result of the crisis.
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
6. Recovery or Remedies
Russia bounced back from the August 1998
financial crash with surprising speed.
Much of the reason for the recovery is that world
oil prices rapidly rose during 1999–2000 (just as
falling energy prices on the world market helped to
deepen Russia's financial troubles), so that 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, which caused a steep increase in the
prices of imported goods.
7. Also, since Russia's economy was operating to such a large
extent on barter and other non-monetary instruments of
exchange, the financial collapse had far less of an impact on
many producers than it would had the economy been
dependent on a banking system.
Finally, the economy had been helped by an infusion of cash.
As enterprises were able to pay off debts in back wages and
taxes, in turn consumer demand for goods and services
produced by the Russian industry began to rise.
