Presentation on theme: "Russian Fiscal Crisis 1998 Econ 490 By Erna Alexandra Avetian Jesus Medina."— Presentation transcript:
Russian Fiscal Crisis 1998 Econ 490 By Erna Alexandra Avetian Jesus Medina
Content Background Lead up to Crash GKOs Exchange Rate IMF Crash Aftermath Lessons
Russia’s Geography It is located in Northern Asia Approximately 1.8 times the size of the United States Largest country in the world terms of area It boarders 14 countries
Natural Resources Oil, natural gas, iron ore, magnesium, chromium, nickel, platinum, copper, tin, lead, tungsten, diamonds, phosphates, gold, timber, and nonferrous metals. 20% of the worlds production of oil and natural gas. In the forests of Siberia it holds 20% of the worlds timber.
The 1990’s; Lead up to Crash The war with Chechnya cost a estimated 5.5 billion dollars on top of a undisclosed amount that went back to rebuilding the country. Inherited Soviet Union debt Cabinet Corruption, Favoritism, Bad privatization Asian Crisis of 1997 Depression in the Asian market Large drop in demand for Russian crude oil and nonferrous metals
The 1990’s; Lead up to Crash (cont) “New Russian” Millionaires Money made in Russia was leaving the country Most reinvestment was through foreign investment ○ Leaving the country sensitive to exchange rate volatility The government spent approximately 15-20% of annual GDP for 3 years giving hidden subsidies to private enterprises and banks. Plus, many “non- payment” arrangements were made
Russian Oligarchs Roman Abramovich Russian orphan High school drop out Worked at a steal plant, eventually becoming manager In 1992, the plant was scheduled to be privatized, he somehow managed to buy it. Now: $18.2 billion net worth ○ Owns Chelsea FC ○ “Private Army” a staff of 40-guards
GKOs By 1998 Russia had been issuing large amount of short term bonds. (GKOs) The economy was in such bad shape that it began to be operated as a Ponzi scheme. Most debt was issued to foreign investors leaving the Economy highly depended on foreign cash inflows Which made the Economy vulnerable to large cash outflows if investors become fearful of economic development.
Exchange Rate “Floating-Peg” policy of the Central Russian Bank Became the catalyst to the Crisis With in 1 year leading up to Aug the Central Bank spend close to $27 billion of its reserves to maintain the exchange rate.
IMF (International Monetary Fund) July 1998 IMF and World Bank issued a $22.6 billion financial package to stabilize the economy Replaced huge amounts of short-term GKOs with long-term Eurobonds. On the eve of the crash a over night transfer was made by IMF, and in the morning it was discovered that $5 billion of IMF money had gone missing
August 13 th 1998 Russian stock, bond and currency markets crash
Government Action Kremlin and Central Bank of Russia issued joint statement: ○ Exchange rate range widened ○ Ruble debt would be restructured ○ Temporary 90-day moratorium By Sept 2 nd Fixed exchange rate abandoned Exchange rate jumped from 6-21 rubles for 1 dollar.
Aftermath and Recovery Domestic food prices doubled While imports quadrupled Increase in price of imports fueled Russia’s domestic production of everything. Every sector of the economy began to see improvement. By 1999 and 2000 crude oil prices rose just as rapidly as they fell. Giving Russia a needed trade surplus Sales of crude oil went from 0% to 9.8% of the GDP by late 2000 Government decided to build up reserves and let the nominal exchange rate appreciate.
Lessons Subsidies to failing enterprises does little to help the economy If public debt is unsustainable infusing the market with cash will have the opposite effect from what is expected Prevention is much less costly then a cure.