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1998 Russian Crisis
Group 8
Nery Lemus
Wilmer Molina
Omer Erinal
Mollah Yerima
The Initial Conditions
Economy recovering from the collapse of the
Soviet Union
▫ However domestic investment was mostly
financed by foreign savings (GKO,OFZ)
▫ Growing Private and public consumption
▫ Inflation: A thing of the past
Economic Growth
Russia Trade Patterns prior to the
Crisis
Inflation: A thing of the past
billions US $
Russian Debt
60
50
40
30
20
10
0
Russian Debt
1993 1994 1995 1996 1997 1998 1999 2000 2001
Years
• Poor domestic saving rate
• Foreign debt was very high
• Russia ranked as a risky borrower
Debt
Risk Assessment
Ratings 1996-1999
Russian Crisis: Why?
• External Factors:
▫ Asian financial crisis (1997)
▫ Decline prices of oil (dependent on exports)
▫ Overvalued ruble
▫ Investor’s distrust
▫ Decline in foreign capital inflow
Russian Crisis: Why?
• Internal Factors:
▫ Weak structural and tax policies
▫ High fiscal deficit of federal budget
▫ Accumulating foreign/domestic govt. debt
▫ Lack of funds to repay debt
▫ Political crisis
A Speculative Attack, Why?
• Pegged Exchange Rate (fixed)
• CBR willing to defend the ruble
• Huge fiscal deficits
• Expectations of devaluation and sovereign
default
Timeline of Events
 Russia joined Paris Club (1996)
◦ To repay Soviet Union debt of $60 billion
◦ Increased liabilities from 7% in 1994 to 17% in 1997
 November 11, 1997
◦ 1st speculative attack on ruble
◦ CBR defends ruble at a loss of $6 billion reserves
 December 1997
◦ GDP growth of 0.8%
◦ Price of oil and metals drop (2/3 of hard currency)
Decreased Russian export revenues and deteriorated
current account from $3.9 billion surplus in 1997 to a deficit
of $4.5 billion in 1998.
◦ Fuel and natural gas made up 43% of exports
Timeline of Events
• February 1998
▫ High interest rates led to higher taxes
▫ Russia can’t agree with IMF conditions
• March 23, 1998
▫ President Yelstin fires entire govt. and Prime
Minister
• April 1998
▫ 2nd speculative attack on the ruble
Timeline of Events
 May 1998
◦ Govt. bonds yield 47%, but unsuccessful
 High Capital Flight influenced by:
◦ Low investor confidence
◦ Absence of IMF aid
◦ Fear of currency instability
◦ Fear of sovereign default
◦ Declining govt. spending
Timeline of Events
• Liquidity levels decreased (May 1998)
▫ Inability to attract investors
▫ Increased capital flight
▫ Higher taxes
• CBR increases lending rates from 30% to 50%
• CBR defends ruble with $1 billion reserves
Timeline of Events
• May 1998
▫ Lawrence Summers was denied meeting with
Prime Minister Kiriyenko
▫ Oil prices decline from $23/barrel to $11/barrel
▫ Possible devaluation of ruble to increase exports
▫ CBR increases lending rates to 150%
 Higher interest payments increased debt
Timeline of Events
• July 1998
▫ IMF provides $11.2 billion emergency aid package
▫ $4.8 billion distributed immediately, but $4
billion left in form of capital flight and another $4
billion in lost revenues from low oil prices
• September 1998
▫ $2.5 to $3 billion in loans due, but lacked funds
Timeline of Events
• August 13, 1998
▫ Stock, bond, and currency market collapsed even
though ruble denominated yields were above
200%
▫ The market lost more than 75% of its value
(from January to August of 1998)
Timeline of Events
 August 17, 1998
◦ The continuation of an overvalued ruble and lack of capital inflows
depleted reserves rapidly. Thus, Russian govt.
 Devalued the ruble
 Defaulted on domestic debt
 Declared a 90-day moratorium on repayment of foreign debt
 September 2, 1998:
◦ Forced to float the ruble
 December 1998:
◦ GDP decreased by 4.9%
Timeline of Events
• Ruble value decreased by more than 300%
against US dollar
• Between October 1, 1997 and September 2, 1998
the CBR used up $27 billion in reserves to
defend the Ruble (1/6 of GDP)
• ($16 billion in reserves were used in last 10
weeks)
So what happened?
• Capital investment left country
• Equity prices plunged
• Higher interest rates did not stop outflow of
funds
• Privatization
• Insufficient tax revenue
 New debt and reserves used to fund deficit
After the Crisis
• Successful negotiations with Paris and London
Club creditors
• Negotiations with the IMF
• Reform in banking system
• Financial position of the open sector improved
• International image deteriorated
 Ranked 161 among 180 countries for country risk
• In the August 1998, the Russian government
announced a special emergency plan to rescue
the Russian economy:
▫ the devaluation of Russian ruble
▫ the decision to close its domestic bond market
(GKO) and restructure the existing domestic debt
▫ introduction of a 90-day moratorium on the
repayment of foreign debt.
The basic negative consequences have
been:
• the collapse of the Russian financial-banking
system
• the internal social-political situation has become
worse
• Russia as a state has lost the trust of
international partners.
Russia made remarkable progress in a
number of areas
•
•
•
•
•
political development
market development
policy making
international trade
economic activity
Real GDP Growth Rates
Real GDP Growth rate
2006- 2009
10
5
0
-5
-10
-15
Unemployment Rate
2006-2009 Unemployment
rate
Unemployment rate
14
10
9
12
8
10
7
6
Percent
8
6
5
4
3
4
2
2
1
0
0
1993
1994
1995
1996
1997
1998
Interest Rates
Inflation
rate
Inflation rate
2006-2009 Inflation rate
Series1
Inflation rate
85.7
14.3
12.6
10.8
10.7
9.8
9.3 9.2
8.2
27.8
20.8
21.6
14.6
1997
1998
1999
2000
2001
8.7
7.6
14.7
14.2
13.4 13.2
12
Exchange rate
Video
http://www.youtube.com/watch?v=SrBBDuJqJI