Russian Financial Crisis

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                           MACROECONOMICS CIA 1,2nd SEMESTER

                    TOPIC: THE RUSSIAN FINANCIAL CRISIS 1998

The Russian Financial crisis also known as the Russian flu or the Ruble Crisis hit Russia on 17 August 1998. The basic consequence of this crisis was the Russian Government and the Russian Central Bank devaluing the ruble and defaulting on their debt.

Soon after the Asian financial crisis that took place in 1997, Russia faced the most genuine breakdown of its economy in 1998. On 17 August the Russian government debased the ruble, defaulted on local obligation and pronounced a 90-day ban on instalment to outside leasers.

A few months ago in 1997 the countries in the region around the Pacific Rim faced currency crises just the same way that Russia faced eventually in 1998.

The Russian Default of 1998 is considered as a mere case study of a currency crisis.

A currency crisis can be defined as a speculative attack on a country’s currency whose consequence can be a forced devaluation and possible debt default.

INTRODUCTION

The crisis was backed by some really exogenous shocks. Primary shock was the Asian financial crisis, followed by the reduction in oil and non-ferrous metal prices. Russian economy was comparatively weaker as compared to other economies due to the flexible budget constraints and the non-payment system which sustained for quite a long time. During the same period of time, the huge unsustainable public debt and the overvalued real exchange drained off Russia’s limited resources and revenue as well.

In 1995, with the aid of International Monetary Fund Russia experienced very little success in attaining macroeconomic stabilization. And during the crisis IMF did not play a positive role in rehabilitating Russia’s market. This neglect of IMF led to the collapse of Russia’s economy in 1998. Massive loan package due to 1998 and the massive capital outflow also exerted a severe pressure on the ruble.

THE MAIN CAUSES OF THE CRISIS

Since 1997 there have been many extreme changes in the global financial climate which posed speculative attacks in order to weaken the ruble.

But there were many weaknesses of the Russian economy that got exposed in the course of the crisis.

1. Failure to restructure the economy:  Russia's financial circumstance was hopeless for quite a while. Even before the process of modification actually took place there was already a seeming decline in the economy of USSR.

Yegor Gaidar brought about two justifications for the self-disagreement of Russia's business sector communist. To begin with, communism had been profoundly pervaded into the Russians' brains with the goal that ventures were viewed as some portion of state. Second, a large portion of the venture chiefs originated from the social framework of the totalitarian culture. They needed to comply with the charges from the state organization.

In the first place, Russia ransomed enormous ventures with certain appropriations in light of  the fact that numerous industrial facilities still cannot make benefit without anyone else's input and only 40% of the workers were being paid full of their wages and on time. So, the redistribution of the assets could not actually be controlled by the business sector itself. Second, the expenses of the enterprises would be controlled by administration not by expense law. In this way, the transactions between the ventures and the state powers accelerated the defilement.

1. High government debt and over-valued currency: It is presently acknowledged that the primary reason of Russia's emergency included unsustainable open obligation flow and the exaggerated swapping scale.

Unable to raise satisfactory duty accumulation and being prevented by the IMF from obtaining from the Central Bank of Russia (CBR), Russia had to build GKO's (fleeting bills) and OFZ's (long haul bonds).

All together to pull in more subsidizes, the annualized yields on Russia's administration securities were much higher than alternate nations, as high as 30 percent. On the one hand, high interest rate drained Russia’s limited revenue. On the other hand, high-cost debts were never executed to restructure faults in the economy.