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The Russian Crisis Essay

2367 words - 10 pages

The Russian Crisis 1998
Economic Report Other authors

In 1997, Russia’s economic growth was positive for the first time since the formation of the Russian Federation in 1991. Nevertheless, the country’s fixed exchange rate regime together with its fragile fiscal position appeared to be unsustainable when the international markets got affected by spillover effects of financial distress elsewhere in the world. In the course of 1998, the outbreak of a severe banking, currency and sovereign debt crisis could not be prevented. Author: Iris van de Wiel

Point of no return
August 13th, 1998
The Russian stock, bond and currency markets collapse as a result of fears for a ruble devaluation and a ...view middle of the document...

Inflation rises to 27.6% in 1998 and 85.7% in 1999. As a result of food price increases, social unrest grows and citizens start to demonstrate in various cities. Figure 1: Reserves and the exchange rate

Rabobank | Economic Research Department‐russian‐crisis‐1998/

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Source: World Bank

November 20th, 1998
The Russian Deputy Minister of Finance Mikhail Kasyanov declares the country would be able to repay less than USD 10bn of its USD 17bn foreign debt. In the following weeks, Russian bank deposits decrease by 15% compared to August 1998.

The Russian economy contracts by 5.3% in 1998. GDP per capita even reaches its lowest level since the formation of the Russian Federation in 1991 (see Figure 2). Sovereign debt restructurings take place in 1999 and 2000. An IMF agreement of USD 4.5bn, concluded in July 1999, is meant to help Russia to regain access to the international financial markets access. However, allegations of irregularities in the banking sector again have a negative impact on the country’s financial market access and government bond yields remain high during the course of 1999. Nevertheless, thanks to both the sharp depreciation of the ruble, which continues in 1999, and an increase of international oil prices, the Russian economy recovers rather quickly and grows by 6.4% in 1999, 10% in 2000 and 5.3% in 2001. Meanwhile, inflation falls from 85.7% in 1999 to 20.8% in 2001 and 21.5% in 2001. The unemployment rate, which was 13% in 1998 and 1999, decreases to 9% in 2001. Figure 2: GDP Growth

Source: World Bank Although Russia accounts for only 4.2% of world GDP in 1997, the outbreak of the Russian crisis and the following sovereign default shock global financial markets for two main reasons. First, among the emerging markets, Russia is a major borrower of short‐term capital. Second, the outbreak of the Russian crisis emphasizes the economic and financial fragility of emerging markets. At the time Russia’s sovereign default is the largest in history. As a result of the Russian crisis, spreads on sovereign bonds in other emerging markets

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and on long‐term corporate bonds in industrial countries rise substantially. The financial havoc has a large impact on the global financial markets and contributes to the collapse of hedge fund LTCM, which requires a USD 3.6 bailout.

Economic History
The Russian crisis took place in the first decade of Russia’s transition from communism to a free market economy. The Soviet Union, of which Russia was the most important member, had a centrally planned economy, with a corresponding fixed‐price system, full employment and small income differences. In the first five decades of its existence the Soviet Union experienced rapid industrialization and high economic...

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