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1998 Russian Economic Crisis: Group 3

The 1998 Russian financial crisis was triggered in May 1998 and resulted in a devaluation of the ruble and a default on Russian sovereign debt. High interest rates contributed to declining GDP and living standards. While privatization had largely been completed, structural issues in transitioning to a market economy and government fiscal imbalances left Russia vulnerable to global financial market forces. When capital inflows declined, the country defaulted on its debt and was forced to devalue its currency.

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Chirantan Banik
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42 views

1998 Russian Economic Crisis: Group 3

The 1998 Russian financial crisis was triggered in May 1998 and resulted in a devaluation of the ruble and a default on Russian sovereign debt. High interest rates contributed to declining GDP and living standards. While privatization had largely been completed, structural issues in transitioning to a market economy and government fiscal imbalances left Russia vulnerable to global financial market forces. When capital inflows declined, the country defaulted on its debt and was forced to devalue its currency.

Uploaded by

Chirantan Banik
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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1998 Russian Economic Crisis

Group 3
Ashish Tiwari Avishek Nayak Harjot Singh Kalpesh Sharma Rishabh Gupta Shivam Arora 11P187 11P188 11P191 11P196 11P217 11P228

21/3/2012

Introduction
End of 1997: Russia had more or less completed the

privatization of its manufacturing and natural resources

February 1998: Inflation dipped into single digits

Inspite of this Russia experienced meltdown just six

months later

Group 3 1998 Russian Financial Crisis

21/3/2012

Introduction
Russian Financial crisis also known as ruble crisis hit

Russia on 17 Aug 1998.


It resulted in forced devaluation of ruble vis--vis dollar

and default on Sovereign debt.


The total debt was $ 40-42 billion, the government had to

default on its domestic debt which was approx. 2/3 of the

total amount.
The triggered period for the crisis was May 1998.
Group 3 1998 Russian Financial Crisis

21/3/2012

Declining Growth
Since April 92 Russia witnessed declining GDP,

increasing inflation, high unemployment, staggering interest rates.


Official Russian statistics estimated 4.6% GDP

contraction in 1998 after modest growth of 0.8% in 1997. The GDP had declined close to 25% since 1991.
A contracting economy led to deterioration of living

standards.
Group 3 1998 Russian Financial Crisis

21/3/2012

High Interest rate


Russian interest rates steep rise indicated huge loss of

investor confidence.

In May98, interest rates on GKO (Treasury bills) which

was used to finance govt. budget deficit rose from 27.8% to 54.8% & in Aug it rose to 135%.

Also, the Russian central bank refinancing rate spiked to

157% during the period May98 to July98.

High interest rates stifled investment in non-government

sector & cripple Russian ability to finance its Budget

Group 3 1998 Russian Financial Crisis

21/3/2012

Cause - Summary

The most immediate cause was the Government financial

The less direct but deeper cause can be traced to the structural &

imbalances & the fiscal policies &


monetary policy which made Russia vulnerable to the vagaries of the global financial markets.

institutional deficiencies in an
economy undergoing the transition to the market economy from the Socialist economy.

Group 3 1998 Russian Financial Crisis

21/3/2012

External Economic Indicators


Ruble exchange rate Declined from 6.235 in July to 7.095 in Aug & to 16.064 by Sep By Feb 1999 it reached 23 because of forced devaluation Foreign reserves In May 98 it was $ 11 billion and sharp decline to $ 8.2 billion due to continuous buying of ruble by central bank in order to keep the exchange rate stable Loan from IMF

Received $ 4.8 billion in July 98.

Loss of revenue from exports led to the current account deficit $ 4.5 billion in 1998 from current account surplus of $ 3.6 billion in 1997.
Group 3 1998 Russian Financial Crisis

21/3/2012

Case Analysis

Country Specific:
Stabilization Program Structural Issues Impact on Enterprise sector Impact on Government Debt

Global

Group 3 1998 Russian Financial Crisis

21/3/2012

Stabilization Program

Program Objectives:
Reduce inflation to single digit by 1997 Reduce fiscal deficit to below 3% of GDP by 1998

What was done?


Fixed exchange rate to anchor prices Reduction in fiscal deficit Put a stop to monetization of fiscal deficit

Group 3 1998 Russian Financial Crisis

21/3/2012

Stabilization Program - repercussions

Could not meet fiscal targets increasing interest rates


Introduction of nonpayment system Currency Overvaluation

Group 3 1998 Russian Financial Crisis

21/3/2012

Structural issues (1992-97)


Excess industrialization

Restructuring of the industries was a daunting task & it required heavy investment . Closing down of the factories was not socially & politically tolerable

Force of IMF

At the IMF urge, Russia abolished its centrally-planned economy, eliminating control on trades & capital movements, privatization of state enterprises. IMF advised Russia to follow shock therapy model to bring the capitalism economy model.

Group 3 1998 Russian Financial Crisis

21/3/2012

Impact on Enterprise sector

Inadequate nature of privatization program Mezzanine funding Loan size determined by auctions that lacked transparency and suspected to be rigged Poor corporate governance Exceptionally high interest rate killing growth Exceptionally high subsidies by Govt. to keep industries afloat Overdue payments (from 15% to 40% of GDP from 1994-1998) Growing use of non-cash payments

Group 3 1998 Russian Financial Crisis

21/3/2012

Impact on Government Debt


d pd ndfs r g - government debt to GDP - primary fiscal deficit to GDP - non-debt financing sources to GDP - real interest rate paid by government - growth

Increased pd, increased interest rates, yet d did not increase b/w 1995-1997 NCS and subsidies contributed to increased pd Real interest rate was a composite of rubble and dollar debt Russia enjoyed substantial valuation gains on dollar-debt

Group 3 1998 Russian Financial Crisis

21/3/2012

Global
Huge Capital inflow due to positive sentiment (1995-97) Russian banks acting as funnel borrowing dollars and investing in rubal government debt. Heavy mismatch and risk to banks due to the fixed exchange rate. Readers should recognize that this issue was sold--as all Russian debt has been in the past several months--essentially because investors believe that Moral Hazard Euro zone lending Russia despite crisis in expectation of a bailout by IMF Russia will not be allowed to fail, rather than because its fundamentals are encouraging

Group 3 1998 Russian Financial Crisis

21/3/2012

Key Learnings

Countries facing debt crisis may actually benefit from cut-off to market access
Russia pulled the plug on IMF-World bank fund by devaluing currency Forced fiscal reform, dismantling of nonpayment system leading to a surprisingly quick recovery

Major transitions should be supported by cautious and low risk policies

From high to single digit inflation And planned to market economy .are major transitions which swelled govt. debt and killed enterprises

Group 3 1998 Russian Financial Crisis

21/3/2012

Key Learnings

Assessing the strength of a countrys economy by rule-ofthumb can lead to highly erroneous conclusions

Russias Debt : GDP ratio was under check and was used as the rationale to further finance using debt, however the fact that Overvalued rubble and high dollar debt was the reason for constant Debt : GDP was overlooked.

When, finally it was realized that the deficit had to be monetized it was too late.

Group 3 1998 Russian Financial Crisis

21/3/2012

Thank You

Group 3 1998 Russian Financial Crisis

21/3/2012

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