Russian financial cris of 1998

Russian financial cris of 1998

Abstract

Since May of 1998, Russia has been caught in the latest, and likely the most serious, in a series of economic crises. The crisis came to a head on August 17, 1998, when the government of then-Premier Sergei Kiriyenko abandoned its defense of a strong ruble exchange rate against the dollar, defaulted on government domestic debt forcing its restructuring, and placed a 90-day moratorium on commercial external debt payments. Those actions led to Yeltsin's dismissal of Kiriyenko on August 23, replaced, after a political standoff with the Duma, by a more leftward-leaning government led by Premier Yevgennij Primakov. The August crisis also lowered Russians' standard of living and set back Russia's efforts toward establishing a market economy, perhaps for years to come.

The direct cause of crisis has been the Russian government's failure to address fiscal imbalances. Less direct but more fundamental causes have been structural problems. The government has an inefficient tax regime that fails to generate sufficient revenues to meet fiscal obligations. More fundamentally, incomplete economic restructuring has left an economy, much of which is run on barter, that masks inefficient and even "value-subtracting" economic activities, and that makes attaining fiscal balances even more arduous. But Russia has faced difficult setbacks along the way, this current crisis being the most serious. The effects of this crisis and how Russian policymakers manage seems likely to determine the future of Russian economic reform, and, consequently, prospects for long-term Russian economic growth and development.

Crisis in October 1997 as a seed of crisis in August 1998

What the world financial crisis was, Russians knew basically from the books. It was so before October 23, 1997, when after unprecedented collapse of the world's major stock exchanges it became clear that this could happen in Russia as well. Because Russian stock market became a part of the world financial system.

The major cause of the stock exchange collapse was common crisis of the exchange markets in South Asian countries, which were characterized by rapid economic growth and by extremely easy accessibility to the western credits. Financial market was developing correspondently. Cash inflow had been accompanied by skyrocketing growth of the securities ...

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...re. Short-term political ambitions and partisan hopes that the failure of "Yeltsin's reforms" will lead to greater political advantage for the opposition in the Duma must yield to the reality that international lenders will not keep lending to Russia forever.

· And most importantly, take immediate, positive steps to encourage long-term foreign direct investment ("FDI") in Russia.

Why to focus on FDI?

Unlike portfolio investment in equities and debt, FDI directly creates jobs and cannot be withdrawn by a computer keystroke. The comparatively miniscule amount of FDI in Russia should be a source of acute embarrassment to the Duma and a stimulus to prompt, decisive action. Foreign investors do not expect guarantees of profit or protection from market forces. They do require some hope of tax stability and reasonable support, rather than interference, from the Government. To date Russia has attracted a meager amount of FDI even without offering such conditions.

Appendix

Exchange rate of Russian ruble comparatively to US dollar (the denomination in the 1998 is not considered)

Percentage of changing of Exchange rate of Russian ruble comparatively to US dollar