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Russian Crisis 1998

Russian Crisis 1998. By: Michael Rattray , Sam Russell, and Qianqian Shi. Background. Also called Ruble crisis Reasons cause crisis: An artificially high fixed change rate between the ruble and foreign currencies to avoid public turmoil Chronic fiscal deficit External shock:

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Russian Crisis 1998

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  1. Russian Crisis 1998 By: Michael Rattray, Sam Russell, and Qianqian Shi

  2. Background • Also called Ruble crisis • Reasons cause crisis: • An artificially high fixed change rate between the ruble and foreign currencies to avoid public turmoil • Chronic fiscal deficit • External shock: • Asian financial crisis that had begun in 1997 and the following declines in demand for crude oil and nonferrous metals impacted Russian foreign exchange reserves.

  3. Government • President Boris Yeltsin serving as president 1991-1999 • He led economic reforms to help transition former Soviet Union planned economy to a free market economy. • Transition was extremely difficult, after the implementation of the reforms due to lack of institutional law, large parts of economy came under control of oligarchs. • Federal Constitutional Republic

  4. Central Bank • Sergei Dubinin 1995-1998 Chairman of State Bank. • Central Bank of Russian Federation • Founded July 13th 1990 • Independent from government structures • Issues Currency

  5. Underlying Issues • Driving forces of the crisis: • Monetary crisis? • Devaluation of the ruble • Pegged Exchange rate • Fiscal problems? • Large government debt • Erosion of federal government revenues • Weak policies made limited resources to effect the economy

  6. Fiscal revenue Erosion • Russian Debt amounted to 55% of GDP in 1998 • Stagnating Production • Gov’t revenues dependent of Exports of Hydrocarbons • Due to structural change in production • Led to depletion of foreign reserves

  7. Russian Produciton • Stagnation of Production levels • Agriculture • 80% of farms collective/state/joint-stock/cooperative ownership • Only 6% of total land is private • Industry • Soviet industry dominated by Defense and hydrocarbons • Energy requirements of producing addititonal hydrocarbons exceeded the energy equivalent in hydrocarbons. Lead to Structural sclerosis • Investment stagnated • Main structural shift to exports of metals and precious stones

  8. Banking system • Under Soviet rule- monobank system • By 1994 there were 2500 commercial banks • Poor mobilizers of savings • Total capital flight was estimated at $130 billion 1991-1997 • Stock of savings estimated at 30-50billion • Inflation kept “zero banks” afloat • Reduced inflation after 1995 created pressure to look for real investments.

  9. Effects on the economy • Exchange rate Depreciation • 6.2 rubles to 20/rubles per dollar from August to December 1998 • GDP and industrial Production • Fell 5-6% • Inflation • Rose to 84.4% in 1998 • Capital investment • Decreased by 10% • Stock Exchange • RTS-1 fell by 56% in August and 33% in September

  10. Aftermath • In 1999 severe sovereign debt restructuring took place to try help reign in the mounting debt. • Also in 1999 the IMF reaches an agreement with Russian government officials for a loan of 4.5 billion US dollars to try and help Russia gain access back into international financial markets. • The Russian economic crisis had a trickle down effect on surrounding countries from the old soviet union. Those that were affected, Ukraine, Baltic states, Belarus. Also caused a decrease in the US. Stock market which wasn’t able to recover till October of 1998.

  11. Energy Boom • Russia was able to recover from the economic crisis in a relatively quick period. (world oil prices rose greatly in 1999 & 2000) • Due to the increasing demand for oil, Russia was able to run a large surplus in 1999 and 2000. • This coupled with devaluation of therublehelped allow the economy grow at a rate of 6.4% in 1999. 10% rate in 2000, and a 5.7% growth rate in 2001.

  12. Inflation and Unemployment after the crisis • After the inflation rate had hit a historic high of 84.4% in 1998 it decreased rather rapidly to 20.7% in 2000. • Unemployment which was at 13% towards the end of 1998 fell to just 9% at the end of 2000. • With unemployment declining the middle class which made up 35% of Russia’s overall population began to spend again with disposable income • The depreciation of the Russian ruble helped make imports costly and therefore causing investment within domestic industries creating jobs and lowering unemployment.

  13. Structural Reforms after the crisis • Sizeable reduction to the sovereign debt level along with the generation of a sustainable positive balance of the state budget. • Reducing tax burden on companies; establishing a more business friendly tax system thus encouraging business development. • Establish a sustainable bank system i.e. banking reform. • Development of bankruptcy procedures, shareholder and investor right protection.

  14. Structural Reform continued. • The limitations on the amount of government securities were removed following the 1998 crisis, promoting foreign investment in Russia. • Increases in consumer spending led to the construction of new shopping centers and commercial areas further helping Russia’s economy continue to grow. • Attempt to further privatize large Russian corporations. • Russian government attempted to create a competitive environment in sectors where natural monopolies’ had developed.

  15. Bibliography • Authors, Other . "The Russian Crisis 1998." Rabobank. N.p., 16 Sept. 2013. Web. 22 Apr. 2014. <https://economics.rabobank.com/publications/2013/september/the-russian-crisis-1998/>. • Basdevant, Olivier and Stephen G Hall. "The 1998 Russian Crisis: Exchange Rate Volatility." Journal Of Policy Modeling (2002): 151-168. • Butorina, Olga. "Implications of the Russian crisis." Post-Communist Economies 12.4 (2000): 178-195. • Chiodo, Abbigail and Michael T. Owyang. "A Case Study: A currency Crisis." St Lewis Federal Reserve 13 November 2002: 7-17. • D, Aksenov. "StrategiyaChistoiEnergii." EkonomicheskayaGazeta 16 (1989): 5. • Dyker, David A. "The Structual Origins of the Russian Economic Crisis." Post-Communist Economies 12.1 (2000): 102-123. • Rossiikii. StatisticheskiiEzhegodnik. Moscow: Goskomstat, 2000. • secretariats, UNCTAD. "The Russian Crisis of 1998." The Russian Crisis of 1998. N.p., 30 Oct. 1998. Web. 22 Apr. 2014. <http://www.twnside.org.sg/title/1998-cn.htm>. • Vasiliev, S.A.. "Overview Of Structural Reforms In Russia after 1998 Financial Crisis." www.imf.org. N.p., 16 Feb. 2000. Web. 22 Apr. 2014. <http://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/vasil.pdf>.

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