Stockmarket-for-novices

The Russian Financial Crisis (also called "Ruble Crisis") hit Russia on August 17, 1998. It was exacerbated by the global recession of 1998, which started with the Asian financial crisis in July 1997. Given the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials, such as oil, were among those most severely hit. (Petroleum, natural gas, metals, and timber accounted for more than 80% of Russian exports, leaving the country vulnerable to swings in world prices. Oil was also a major source of government tax revenue).

The sharp decline in the price of oil had severe consequences for Russia. However, the primary cause of
the Russian Financial Crisis was not the fall of oil prices directly, but the result of non-payment of taxes
by the and manufacturing industries.

Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to the meltdown. The economic cost of the first war in Chechnya that is estimated at $5.5 billion (not including the rebuilding of the ruined Chechen economy) was also a cause of the crisis. In the first half of 1997, economy showed some signs of improvement.

However, soon after this, the problems began to gradually intensify. Two external shocks, the Asian Financial Crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, also impacted Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet on March 23. Yeltsin named Energy Minister Sergei Kiriyenko, aged 35, as acting prime minister.

On May 29, Yeltsin appointed Boris Fyodorov Head of the State Tax Service. The growth of internal loans could only be provided at the expense of the inflow of foreign speculative capital, which was attracted by very high interest rates: In an effort to prop up the currency and stem the flight of capital, in June Kiriyenko hiked GKO interest rates to 150%. The situation was worsened by irregular internal debt payments. Despite government efforts, the debts on wages continued to grow, especially in the remote regions. By the end of December 1996, the total debts on wages reached more than 47.1 trillion Rubles. By the end of 1997, the situation with the tax receipts was very tense, and it had a negative effect on the financing of the major budget items (pensions, communal utilities, transportation etc).

A $22.6 billion International Monetary Fund and World Bank financial package was approved on July 13 to support reforms and stabilize the Russian market by swapping out an enormous volume of the quickly maturing GKO short-term bills into long-term Eurobonds. This had started to be implemented with some success by July 24, yet the Russian government decided to keep the exchange rate of the Ruble within a narrow band, although many economists, including Andrei Illarionov and George Soros, urged the government to abandon its support of the Ruble. On May 12, 1998 coal miners went on strike over unpaid wages, blocking the Trans-Siberian Railway. By August 1, 1998 there were approximately $12.5 billion in unpaid wages owed to Russian workers.

On August 14 the exchange rate of the Russian Ruble to the US dollar was still 6.29. Despite the bailout, July monthly interest payments on Russia’s debt rose to a figure 40 percent greater than its monthly tax collections. Additionally, on July 15 the State Duma dominated by left-wing parties refused to adopt most of government anti-crisis plan so that the government was forced to rely on presidential decrees. On July 29 Yeltsin interrupted his vacation in Valdai Lake region and flew to Moscow, prompting fears of a Cabinet reshuffle, but he only replaced Federal Security Service Chief Nikolai Kovalyov with Vladimir Putin.

Realizing that this situation was unsustainable, investors continued to flee Russia despite the IMF bailout. Weeks later the financial crisis resumed as the real value of the Ruble resumed its decline. Russians sought frantically to buy Dollars, but these had become scarce. Foreign investment rushed out of the country, and the ensuing financial crisis triggered an unprecedented flight of capital from Russia.

It was later revealed that about $5 billion of the international loans provided by the World Bank and International Monetary Fund (IMF) were stolen upon the funds' arrival in Russia on the eve of the
meltdown.

On August 13, 1998, the Russian stock, bond, and currency markets collapsed as a result of investor fears that the government would devalue the Ruble, default on domestic debt, or both. annual yields on Ruble denominated bonds were more than 200 percent. The stock market had to be closed for 35 minutes as prices plummeted. When the market closed, it was down 65 percent with a small number of shares actually traded. From January to August the stock market had lost more than 75 percent of its value, 39 percent in the month of May alone.

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 Buble. 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 percent 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 percent 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 shelves were being emptied, leaving a shortage of even the most basic items, such as vegetable oil, sugar or washing powder.

The crisis has reduced demand for food and lowered food consumption, because substantial depreciation of the ruble significantly raises domestic prices for food stuffs. The crisis also increased social tension; The middle class that was already forming by that time, and 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 100,000 took to the streets in Moscow, In Vladivostok 4,000, in Krasnoyarsk 3,000 and in Yekaterinburg 6,000. 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 units were placed in a state of readiness. On 20 October, President Boris Yeltsin also signed a presidential decree barring "mass protests" in Moscow between the hours of 10 p.m. and 7 a.m.and limiting them to a maximum of five 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.

The financial collapse resulted in a political crisis as Yeltsin,
with his domestic support evaporating, had to contend with an emboldened opposition in the parliament. A week later, on
August 23, Yeltsin fired Kiriyenko and declared his intention
of returning Chernomyrdin to office as the country slipped
deeper into economic turmoil. Powerful business interests, fearing another round of reforms that might cause leading concerns to fail, welcomed Kiriyenko's fall, as did the Communists.

Yeltsin, who began to lose his hold on power as his health deteriorated, wanted Chernomyrdin back; In a televised address to the nation, Yeltsin said that “heavyweights” such as Chernomyrdin, who was ousted as prime minister in March 1998 for failing to vigorously promote economic reforms, were needed to stem the nation's financial collapse. Yeltsin also suggested that Chernomyrdin would be named his successor as president when Yeltsin's term expires in 2000. But the legislature refused to give its approval. After the Duma rejected Chernomyrdin's candidacy twice, Yeltsin, his power clearly on the wane, backed down. Instead, he nominated Foreign Minister Yevgeny Primakov, who on September 11 was overwhelmingly approved by the Duma.

Primakov's appointment restored political stability, because he was seen as a compromise candidate able to heal the rifts between Russia's quarreling interest groups. There was popular enthusiasm for Primakov as well. Primakov promised to make the payment of wage and pension arrears his government’s first priority, and invited members of the leading parliamentary factions into his Cabinet. Communists and the Federation of Independent Trade Unions of Russia staged a nationwide strike on October 7 and called on President Yeltsin to resign. On October 9, Russia, which was also suffering from a bad harvest, appealed for international humanitarian aid, including food.

Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices rapidly rose during 1999–2000 (just as falling energy prices on the world market helped to deepen Russia's financial troubles), so that Russia ran a large trade surplus in 1999 and 2000. Another reason is that domestic industries, such as food processing, had benefited from the devaluation, which caused a steep increase in the prices of imported goods.

Also, since Russia's economy was operating to such a large extent on barter and other non-monetary instruments of exchange, the financial collapse had far less of an impact on many producers than it would had the economy been dependent on a banking system. Finally, the economy has been helped by an infusion of cash; as enterprises were able to pay off arrears in back wages and taxes, it in turn allowed consumer demand for the goods and services of Russian industry to rise. For the first time in many years, unemployment in 2000 fell as enterprises added workers. Since the 1998 crisis, the Russian government has managed to keep social and political pressures under control, and this has played a vital role in bringing about the current recovery.

The Russian crisis affected Baltic countries more than was expected. Estonia, Latvia and Lithuania sank into recession. The figures for 1999 showed a heavy decline in Baltic's exports to Russia and a significant decline in the growth rates of these economies. Food and beverage as well as processing industries as a whole have suffered the most.

Belarus

Overall, economic activity slowed down substantially in the immediate aftermath of the Russian crisis, with output growth falling from about 8.5 percent in 1998 to 3.4 percent in 1999. Both exports and imports contracted substantially, resulting in a drop in the current account deficit from 6.1 percent of GDP in 1998 to 2.2 percent of GDP in 1999. Externally, exports to Russia, which accounted for more than 60 percent of total exports, fell during the second half of 1998 by 10 percent. Demand for Belarusian products was weak through 1999, showing signs of recovery only during the final quarter, with the revival of economic activity in Russia.

Also, in the first quarter of 1999 as compared with 1998, except for investments, all the budget expenditures were smaller (see, Table 3). The biggest cuts were done in national security (1.9 percent of GDP compared with 2.5 percent of GDP in the first quarter of 1998) and social policy (1.5 and 2.4 percent of GDP, respectively) where the expenditures were lowered almost by one third.

Kazakhstan

The Russian crisis was a hard hitting blow to the Kazakh economy. Kazakhstan lost its price competitiveness and its exports were in shambles. On the other hand, cheap Russian goods were flowing into the economy that was killing the domestic industries. There was huge downward pressure on the tenge and their balance of payments had worsened. However the National Bank of Kazakhstan was still holding on to the tenge. In fact, they had spent close to a billion dollars to maintain the level of tenge. Their foreign exchange reserves halved.

Moldova received an IMF special mission advising the government on how to cope with the effects of the Russian crisis. Russia bought at that time 85% of Moldova's wine and brandy and most of its canned goods and tobacco. After the rouble crashed, most Russian importers put deals with Moldova on hold. The Moldovan president Petru Luchinski was quoted as saying that the Russian crisis had cost Moldova as much as five per cent of its GDP. The country's parliament was discussing a programme aimed at reducing imports and searching for new markets outside Russia.

Ukraine

The crisis cost a lot for Ukraine. It’s national currency, the Hryvnia, devaluated by 60%, domestic prices increased by 20%, the National Bank of Ukraine lost 40% of its gross reserves.

Uzbekistan

In the central asian state, the government has banned the free unlicensed sales of food, most of which is imported from Russia, as a preventative measure against price rises and panic.

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The World Bank ( formally established on December 27, 1945 ) is an internationally supported bank that provides loans to developing countries for development programms with the stated goal of reducing poverty. Back
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     The International Monetary Fund (IMF) is an international organization
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