1998 Russian financial crisis
In the year before the crisis, the Central Bank aimed to maintain a band of 5.3 to 7.1 rubles per dollar. This policy meant that if the market exchange rate threatened to exceed 7.1 rubles for one US dollar, the bank would intervene by spending foreign reserves to buy rubles. Similarly, it would sell rubles if the market exchange rate threatened to drop below 5.3. Between the 1st of October 1997 and the 17th of August 1998, the Central Bank expended approximately 27 billion dollars of its U.S. dollar reserves to maintain this floating peg. The government decided to keep the exchange rate within a narrow band despite warnings from many economists including Andrei Illarionov. They urged the government to abandon its support of the ruble entirely. Investors fled the market by selling rubles and Russian assets which also put downward pressure on the currency. This forced the Central Bank to spend its foreign reserves to defend Russia's currency. That action in turn further eroded investor confidence and undermined the ruble.
On the 17th of August 1998, the Russian government devalued the ruble and defaulted on domestic debt. It declared a moratorium on repayment of foreign debt as well. On that day the government and the Central Bank issued a Joint Statement announcing changes to the trading band. The ruble-dollar trading band expanded from 5.3 to 7.1 RUB/USD to 6.0 to 9.5 RUB/USD. Russia's ruble-denominated debt would be restructured in a manner to be announced at a later date. A temporary 90-day moratorium was imposed on payment of some bank obligations. This included certain debts and forward currency contracts. From 17 to the 25th of August 1998, the ruble steadily depreciated on the MICEX exchange rate. It moved from 6.43 to 7.86 rubles per US dollar. On the 26th of August 1998, the Central Bank terminated dollar-ruble trading on the MICEX. By the 21st of September, the exchange rate reached 21 rubles for one US dollar. That meant it lost two-thirds of its value in less than a month.
Russian inflation in 1998 reached 84 percent while welfare costs grew considerably. Many banks including Inkombank, Oneximbank, and Tokobank closed as a result of the crisis. Bankers Trust suffered major losses in the summer of 1998 due to having a large position in Russian government bonds. The bank avoided financial collapse by being acquired by Deutsche Bank for 10 billion dollars in November 1998. This acquisition made Deutsche Bank the fourth-largest money management firm in the world after UBS, Fidelity Investments, and the Japanese post office's life insurance fund. In June 1998, despite the bailout, monthly interest payments on Russia's debt rose to a figure 40 percent higher than its monthly tax collections. On the 12th of May 1998, coal miners went on strike over unpaid wages blocking the Trans-Siberian Railway. By the 1st of August 1998 there was approximately 12.5 billion dollars in debt owed to Russian workers.
A week later on the 23rd of August 1998, Yeltsin fired Kiriyenko and declared his intention of returning Chernomyrdin to office. Powerful business interests welcomed Kiriyenko's fall as did the Communists. Yeltsin wanted Chernomyrdin back but the legislature refused to give its approval. After the Duma rejected Chernomyrdin's candidacy twice, Yeltsin backed down. He nominated Foreign Minister Yevgeny Primakov instead. The State Duma approved him by an overwhelming majority on the 11th of September 1998. Primakov's appointment restored political stability because he was seen as a compromise candidate able to heal rifts between quarreling interest groups. There was popular enthusiasm for Primakov as well. He promised to make payment of wages and pensions his government's first priority. He invited members of leading parliamentary factions into his Cabinet. On the 7th of October 1998, Communists and the Federation of Independent Trade Unions staged a nationwide strike calling on President Yeltsin to resign. On the 9th of October 1998 Russia appealed for international humanitarian aid including food due to suffering from a poor harvest.
Following Russia's default in August, Ukraine also defaulted one month later in September 1998. Moldova also defaulted in 1998 but ended its default by the end of the year. Russia and Ukraine remained in default until 2000. In mid-1997, Russia had finally found a way out of inflation before the crisis hit. Both Russia and countries that exported to it experienced fiscal deficits. The countries that exported to it used their resources for production but did not get paid for all their production. Their national income could not cover their national expenses for Kazakhstan and Kyrgyzstan. Russia's unemployment rate was not sharply impacted since it was only 13 percent. The employment policy in Kazakhstan was checked on the 9th of November 1998 to give freely chosen employment. The GDP per capita was one of the lowest after 1996 for Tajikistan.
Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices increased rapidly during 1999 and 2000. Russia ran a large trade surplus in 1999 and 2000 as well. Another reason is that domestic industries such as food processing benefited from the devaluation. This caused a steep increase in the prices of imported goods. Since Russia's economy operated to such a large extent on barter and other non-monetary instruments of exchange, the financial collapse had far less impact on many producers than expected. As enterprises were able to pay off debts in back wages and taxes, consumer demand for goods began to rise. The crisis was praised by James Cook senior vice president of The U.S. Russia Investment Fund. He stated it taught Russian bankers to diversify their assets. Economist Anders Åslund credits the 1998 financial crisis with providing decisive push towards real market economy in Romania and most post-Soviet countries.
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Common questions
What caused the 1998 Russian financial crisis?
The Central Bank spent approximately 27 billion dollars of its U.S. dollar reserves between the 1st of October 1997 and the 17th of August 1998 to maintain a fixed exchange rate band. This policy forced the government to defend the ruble despite warnings from economists like Andrei Illarionov, which ultimately eroded investor confidence.
When did Russia default on its debt in 1998?
On the 17th of August 1998, the Russian government devalued the ruble and defaulted on domestic debt while declaring a moratorium on foreign debt repayment. The State Duma approved Yevgeny Primakov as Prime Minister on the 11th of September 1998 following political instability after this event.
How much did the ruble lose value during the 1998 crisis?
By the 21st of September 1998, the exchange rate reached 21 rubles for one US dollar, meaning the currency lost two-thirds of its value in less than a month. Inflation in 1998 reached 84 percent while welfare costs grew considerably during this period.
Which banks closed or suffered losses due to the 1998 financial crisis?
Many banks including Inkombank, Oneximbank, and Tokobank closed as a result of the crisis. Bankers Trust suffered major losses in the summer of 1998 but avoided collapse by being acquired by Deutsche Bank for 10 billion dollars in November 1998.
What were the economic consequences of the 1998 Russian default?
Russian inflation reached 84 percent in 1998 while monthly interest payments on debt rose to 40 percent higher than tax collections by June 1998. Approximately 12.5 billion dollars was owed to Russian workers by the 1st of August 1998, leading to strikes that blocked the Trans-Siberian Railway.