Russian Financial Crisis of 1998

 Russian Financial Crisis of 1998
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Russia Financial Crisis of 1998
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Russian Financial Crisis of 1998
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Since the Great Depression to the recent economic recession that started in the United States of
America, countries across the globe have had a share of unique economic and financial crisis.
Selim (n.d) observes that in recent years financial crisis has plagued countries in such as
Mexico in 1994, Korea, Thailand, Indonesia and Malaysia in 1997, Russia in 1998, Brazil in
1999, Turkey in 2000 and Argentina in 2001. For instance, On 17 August 1998, Russia was hit
by a financial crisis that left its economic and financial system in ruins. According to Gerry & Li
(2002, p2), the financial crisis in Russia started on 17th August 1997, the Russian government
partially defaulted on its domestic, as a result, this sent shivers across the economic and financial
system in Russia, with devastating economic and financial outcomes. Gerry and Li (2002, p.2)
continue to observe that this led to the exchange rate to plummet by 300%, inflation to soar by
70%, the unemployment rate reached 13.7, real wages dropped by 30% and the economy shrank
by 5% in that year. This economic turmoil ended two years of robust economic growth that
Russia had enjoyed since 1995. The year 1997 was a year that the future of Russians looked
bleak and economic fortunes uncertain. According to Gerry & Li (2002, p20), Russians living in
urban areas were worst hit by the financial crisis that lasted for a short. This essay seeks to
analyse critically the causes and consequences of the financial crisis that rocked Russia in 1998,
and although it was short lived it left a trail of economic ruins in its wake, marking one of the
worst financial crisis to have hit Russia post the fall of the United Soviet Socialist Republic.
Causes of Russian Crisis of 1998
Kraussl (2003) argues that globalisation and uncontrolled speculation in the financial markets are
the major reasons for the financial crisis that have rocked global economies, particularly
developing economies. Increased speed and size of capital flows into international financial
systems due to globalisation has caused devastating effects to economies, one argument purports. 
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One major characteristic of the recent financial crises that have rocked different countries is that,
financial crises in different economies were caused by different reasons. Gerry & Li (2002, p2)
point out that a specific financial crisis starts as a result of specific market failure in a given
sector of the economy, the crisis then spreads to neighbouring countries through spill-over
effects and contagion. A case in point is the Asian Financial Crisis that started in Thailand in
1997 and spread to other countries in the South-East Asia region and then to Russia through
contagion spill-over effects. An observation made by Bocutoglu and Celik (2000, p.2) who states
that, though, there is little literal evidence on the linkage between the Asian Crisis and Russian
Crisis, the Asian Crisis is partly to blame for the financial and economic woes that rocked the
Russian economy in 1998. This is because the Asian Crisis reduced the prices of Russia exports
that included traditional raw materials; the crisis also adversely affected foreign investor
confidence in the Russian market. These together with other factors coupled to cripple aggregate
demand in Russia in 1998, consequently bringing Russia’s economy to a halt in 1998.
According to Mete (2004), the Russian Financial Crisis of 1998 was as a result of coupling of
economic and political factors. Mete (2004) further observes that the Russian Government, from
after the fall of USSR to the late 1997, successfully sold GKOs and OFZs, which were Ruble
denominated debt instruments and coupon bonds. However, on 1998, the Russian government
started experiencing problems selling the Ruble denominated debt instruments due to declining
commodity prices, domestic political developments and global economic events. The Russian
Government converted the Ruble denominated debt instruments into US dollar denominated
Eurobonds to mitigate risks. However, the government continued with its heavy borrowing,
which raised concerns of its default exposure as foreign investors cut their exposure to Russia’s
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debt, equity and commodity market due to falling investor confidence. Mete (2004) observes that
during the time of heavy borrowing Russia’s economy was pegged on the external developments
and the wellbeing of the global economy due to over-reliance on capital flow from exports of
raw materials. The dependence on the health of global economies made the Russian economy
vulnerable to external shocks. Therefore, the Russian Financial Crisis is traced to external shocks
that hit the country in 19