Posted: March 23rd, 2023

The 1998 Financial Crisis in Russia

The history of financial crisis dates back to the 17th century during the Tulip Bubble in Holland. However, the most popular crisis was the Great Depression experienced in the USA in the 1930s. Similarly, Russia experienced the crisis referred to as the 1998 financial crisis. For the first time since 1991 when the Russian Federation was formed, the country had reported a progressive economic growth until 1997 (Zonis, 2011). The fixed exchange rate and fragile fiscal policy exposed the country to spillover effects from other nations, a situation that made the crisis experienced in 1998 inevitable.

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According to Wiel (2013), the economic crisis took place in four key stages. The first stage started on August 13, 1998, when fear of the devaluation of the ruble and default on the local debt led to the collapse of the stock, bond, and currency. The capital outflow from the emerging market and the rising interest rates in the previous months led to the panic (Zonis, 2011). The stock lost up to 75% of its value compared to the percentage at the beginning of the year. The government announced measures to mitigate the crisis, including the devaluation of the ruble, short-term default on ruble-denominated bonds, and a 90-day moratorium (Wiel, 2013). On September 2, 1998, the central government decided to apply floating exchange regime. The decision led to a sharp devaluation of the currency, which increased the rate of inflation by 27.6%. Consequently, the increase in food prices led to social unrest among the citizens due to increased cost of living. On November 20, 1998, the Minister of Finance made it public that out of USD 17bn in foreign debt, the economy would only afford USD 10bn. The announcement led to further panic in the economy resulting in a 15 % decline in deposits compared to the amount in August.

The aftermath of the crisis was the contraction of the economy by 5.3% during the year. The GPD per capita reached the lowest point since 1991. The government embarked on sovereign debt restructuring. In fact, IMF-assisted the country to raise about USD 4.5 bn as a bailout to assist Russia to regain its access to international funding (Wiel, 2013). Indeed, the irregularities, ineffective banking sector, and the high government bond dragged the recovery of the economy in 1999. However, with the rising international oil prices and the depreciation of the ruble, the economy grew by 10 % in 2000, which signified growth and recovery from the crisis.

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