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

Poor domestic saving rate Foreign debt was very high Russia ranked as a risky borrower

Debt

Risk Assessment

Ratings

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 ◦ 1 st 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 ◦ 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 ▫2 nd 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

Unemployment Rate

Interest Rates

Inflation rate

Exchange rate

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