The 1998 Russian Financial Crisis. Part 2: The Effects

The Effects

On August 17, 1998, Russia was forced by an escalating payments crisis to devalue the Ruble dramatically, declared its intention to restructure all official domestic currency debt obligations by the end of 1999 and imposed a 90 day moratorium on the repayment of private external debt, to aid its commercial banks suffering from the ongoing investors frenzy.

On September 2, the central bank of the Russian Federation decided to float the bubble. By September 21, the exchange rate had reached 21 Rubles to the US Dollar. On September 28, Boris Fyodorov was fired from the position of the Head of the State Tax Service.

Russian inflation in 1998 reached 84% and welfare costs grew considerably. Many banks, including Inkombank, Oneximbank and Tokobank were closed down as a result of the crisis. The salaries of miners alone were to consume $919 million, more than 1% of the federal budget. By August of that year, the government had paid $4 billion to settle miners’ strikes. Prices for almost all Russian food items have gone up by almost 100% while imports have quadrupled in price. Many citizens were stocking up for bad times and throughout the country shop shelver were being emptied, leaving a shortage of even the most basic items such as vegetable oil, sugar or washing powder.

The crisis had reduced the demand for food and lowered food consumption because substantial depreciation of the Ruble significantly raised domestic prices for food stuffs. The crisis also increased social tension. The middle class that was already forming by that time and that had some hope for stability, ceased to exist as millions of people lost their bank savings.

On October 7 that year, demonstrations were held in many cities. Around 100000 took to the streets in Moscow, in Vladivostok 4000, in Krasnoyarsk 3000 and in Yekateringburg 6000. Defence minister Igor Sergeyev cancelled his scheduled visit to Greece in the first week of October, in order to be at hand should matters get out of control. Similarly select military were placed in a state of readiness. On October 20, President Boris Yeltsin signed a presidential decree barring mass protests in Moscow between the hours of 10p.m. and 7a.m. and limiting them to a maximum of 5 days.

As the crisis deepened, regional governors had been introducing emergency measures: In Krasnoyarsk Krai in Siberia, governor Aleksandr Lebed, had signed a resolution to hold down prices “using administrative methods”, a television report said. The authorities in the far eastern city of Vladivostok had banned deliveries of food to areas beyond the port city, and there had been talks of introducing rationing there. In Russia’s Kaliningrad enclave on the Baltic, the governor announced a suspension of tax payments to the federal authorities.

The regional budgets also suffered from the 1998 crisis. The spending of the regions declined from 18.2% of the GDP in 1997 to 14.8% of the GDP. Spending on the economy (by 1.5% of the GDP) and social expenditures (by 1.6% of the GDP) were especially heavily reduced. The expenditures continued to decline in the following period. They dropped another 1% of the GDP in 1999 to 13.8% of the GDP, and to 10.8% of the GDP in the first quarter of 2000. One of the main factors in the reduction was the decline in subsidies for housing and municipal services, from 3.5% to 2.7% of the GDP.

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