The Causes and Consequences of the Russian Crisis of 1998

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The causes and consequences of the Russian crisis of 1998 The period 1995 to mid-1997 was boom time for Russia’s financial markets. The value of the Russian bonds and stocks soared, with the participation of foreigners in these asset markets increasing rapidly. International investors’ optimism about the country’s future was lifted by stabilization policy that followed the advice of Western institutions. Russian crisis of 1998 were caused due to a number of factors, the investor risk aversion by foreign players, fall in oil prices put the ruble under a drastic downward trend. Russia at that point in time was heavily dependent on capital inflows which was eroded due to the external shocks e.g Asian financial crisis etc country stabilization program crumbled immediately due such triggers. The government at that time protected the exchange rate mechanism and the ruble, they took measures by reducing the supply of money which lead to drastic change in the interest rates.Turbulent change in the government where administration tried to stabilize the economy through drastic fiscal tightening and fresh foreign borrowings. These were drastically desperate measures they had taken which lead to volatility and instability in financial markets. The initial surge in bond and stock prices in 1995–97 owed to a highly ambitious monetary stabilization program, which compressed inflation much faster than other transition economies. Due to high dollarization, disinflation was based on the exchange rate. The program produced rapid real appreciation and a persistent need for capital inflows, while weak economic structures and lack of domestic political support prevented accompanying fiscal consolidation and foreign direct investment. The ga... ... middle of paper ... ...tzer, and Brian Pinto. 2005. “Sargent–Wallace Meets Krugman–Flood–Garber, Or: Why Sovereign Debt Swaps Don't Avert Macroeconomic Crises.” Economic Journal 115:343–67 • Gaddy, Clifford G., and Barry W. Ickes. 1998. “Russia's Virtual Economy.” Foreign Affairs 77(5):53–67 • Government of the Russian Federation (2001a), Federal Government 2001 Borrowing Plan, Available http://www.akm.ru • Astapovich, A., E. Gavrilenkov, L. Grigoryev, T. Maleva, A. Poletaev and S. Vasiliev (2000), ‘Overview of Economic Policy in Russia in 1999’, Bureau of Economic Analysis • IMF (International Monetary Fund). 2000b. Debt- and Reserve-Related Indicators of External Vulnerability. March 23, 2000. Available at http://www.imf.org/external/np/pdr/debtres/debtres.pdf • Government of The Russian Federation. 1998b. “Stabilization of the Economy and Finance Program.” June 19, 1998

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