The Russian Ruble Crisis Of 1998 Economics Essay

The Russian Ruble Crisis Of 1998 Economics Essay The Russian Ruble Crisis of 1998 is termed as among the worst financial crisis to hit the Russian economy. The Crisis is believed to have been triggered by a number of factors. The Asian financial crisis of 1997 is a major cause of the crisis as it led to declines in the world commodity prices (Owyang, Chiodo 2002, p. 7). Just to be appreciated is the fact that Russian economy was heavily dependent on oil. There are other reasons such as the downfall of the Soviet Union in 1991 and the economic difficulties it brought to the Russian nation. Another common cited reason is poor financial policy practices by the Russian government as well as political crisis that were witnessed in the nation earlier that year (Owyang, Chiodo 2002, p. 7). The Russian financial crisis had various political and economic consequences. First, the crisis compromised the confidence of the citizens of Russian to the government of president Yeltsin. Indeed, facing much opposition in the parliament, Yeltsin was forced to fire Kiriyenko  as the prime minister and nominated Foreign Minister Yevgeny Primakov to the position (Tarassova, Kraakman, Black 2000, p. 12). On the economic front, the Russian crisis led to the collapsing of the Russian stock, bond, and currency market on august 13, 1998. This was a direct result of investors fear that the government could devalue the ruble as well as claims of failure by the government to repay its domestic debts. This paper gives a critical analysis on the causes and consequences of the Russian Crisis 1998. Causes of the Russian Crisis 1998 The Russian Crisis 1998 was triggered by a combination of various independent factors. First, the Russian nation experienced a decline in its productivity (Colorado School of Business 2009). According to available statistics, the Russian economic was highly dependent on petroleum, natural gas, metal, timber exports which accounted for an estimated 80 percent of its exports. It is claimed that the Asian financial crisis of 1997 significantly compromised the export demand as well as prices for these key Russian export commodities (Colorado School of Business 2009). All these had the implication of negating the nations ability to pay its workers and its domestic debts, a factor that evidently led the country into a financial crisis. Another cause of the crisis is the fact that the government relied mainly on foreign capital inflows which were marked with extremely high interest rates (McArdle 2010). The sustainable growth of an economy is greatly determined by the ability of the government to finance its affairs from its tax revenue collections. However, the Russian government was in 1998 facing an increase in its internal loan, a factor that called for engagement into external borrowing to finance them (Colorado School of Business 2009). As an explanation of this claim is the move to hike GKO interest rates to an estimated 150 percent by Kiriyenko in June 1998. Irregular internal loan payment is also to be blamed for the Russian crisis 1998 (McArdle 2010). Statistical evidence indicates that despite the many efforts by the government to resolve its internal debts, wage debts, particularly in remote regions continued to grow. This had negative impact on the nations ability to fund key budget items such as communal utilities among others. It is claimed that the government was faced with an estimated $12.5 on wage debts by early August 1998 (Owyang, Chiodo 2002, p. 9). This prompted workers to engage on strikes, a move that further complicated the economic productivity of the nation. Still, the war on Chechnya and its economic implications were cited as a potential cause of the Russian financial crisis of 1998 (Tarassova, Kraakman, Black 2000, p. 27). According to available historical information, the war cost on the Russian economy is approximated at $5.5 billion. Just to be appreciated here is the fact that this cost is exclusive of the costs incurred in reconstruction of the ruined economy of Chechnya after the war (Tarassova, Kraakman, Black 2000, p. 27). The opposition by the left wing parties of the government which led to failure to adopt anti-crisis policies by the government by mid 1998 is also another cause of the crisis. It is also claimed that prior to the meltdown, a loan given to Russian by the world bank and the International Monetary Fund was stolen, thus never functioned to serve its intended purpose. The most cited reason behind the Russian financial crisis is the ruble-dollar exchange rates crisis (McArdle 2010). During this time, the Russian government had ordered the central bank to ensure that the ruble exchange rates remained at a preset range. Based on this reasoning therefore, the central bank was forced to invest its foreign reserves in buying rubles if the exchange rate seemed to go beyond such limits. Indeed, this was a major threat to its ability to maintain reasonable foreign reserve (McArdle 2010). It is claimed that the Russian government and other non-government borrower had borrowed large amounts of foreign investment capital over the 1995-1998 period in the form of US dollars. This meant having a huge US dollar inflow for serving these debts (Marshall 2001, p. 26). However, the central bank had spent most of its foreign reserve in sustaining its floating peg policy on the rubles. This only served to negatively affect the exchange value for rubles as well as the governments ability to settle the huge international capital debts. This was further compromised by the poor government policies which negated investor confidence, causing them to sell most of their rubles and assets in Russian (Marshall 2001, p. 29). Indeed, the collapsing of the stock bond and currency market was a direct result of lack of confidence by investor due to eminent devaluing of the exchange value of ruble by the government. According to available information, the value of the stock market had reduced by an estimated over 75 percent between January and August, 1998 (Colorado School of Business 2009). This, coupled with the other economic problems facing the nation at the time signified a real threat to investments. Economic and political implications of the crisis The Russian crisis of 1998 had various social, economic and political consequences. Following the crisis, the ruble exchange value steadily depreciated reaching 21 rubles per US dollar by the September 2nd 1998 (Colorado School of Business 2009). This move prompted the central bank to abandon the ruble floating peg policies, a factor that saw the value of ruble depreciate to 22.5 by the end of the year. It is estimated that the inflation rate in Russian economy in 1998 reached the 98 percent considerably hiking the welfare costs of its citizens (McArdle 2010). The crisis oversaw the closure of various banks in Russia such as Inkombank, Oneximbank and Tokobank. It is claimed that the wage debts by coal miners in the nation grew to more than one percent of the governments overall budget (Colorado School of Business 2009). Still, the crisis led to an increase in food commodities in the nation by 100 percent (Owyang, Chiodo 2002, p. 13). In a move to stabilize its inflated economy, the government quadrupled the prices of imported products. All these served to negate the social and economic lifestyle of the Russian citizens. Another consequence of the Russian crisis is that it led commodity and financial controls through administrative techniques by region governments (Tarassova, Kraakman, Black 2000, p. 27). Governor Aleksandr Lebed for example signed a resolution for bringing down commodity prices in the Krasnoyarsk Krai region. It is also claimed that the eastern region imposed banns for commodity flow beyond the port city to safeguard the food supply for the city residents. In Baltic, tax to the federal government was suspended. All these had the end result of compromising regional budgets and GDP from 18.2 percent in 1997 to an estimated 10.8 percent during the first quarter of the 2000 financial years (Owyang, Chiodo 2002, p. 16). The Russian crisis led to a heated political crisis on the Yeltsin government. By august 23, 1998, Yeltsin fired the then prime minister Kiriyenko (Owyang, Chiodo 2002, p. 16). However, his intend to reinstate Chernomyrdin as the prime minister and his successor for the presidency received massive opposition by the parliament. This is because Chernomyrdin was claimed to have failed in implementing economic reforms in March 1998 when he was the prime minister (Tarassova, Kraakman, Black 2000, p. 31). The parliament nevertheless anonymously approved the appointment of Foreign Minister Yevgeny Primakov as the prime minister in September 11 as he was perceived as capable of resolving conflicts by Russias quarreling political interest groups. Conclusion It is clearly established that the Russian crisis 1998 was caused by structural weaknesses of Russias fiscal management as well as currency crisis, transparency and contagion. The ruble floating peg policy by the central bank compromised its foreign reserves thus limiting its ability to settle its international capital debts (McArdle 2010). This was further complicated by its huge wage debts and the eroded investor confidence which led to the sale of most their assets including rubles and stocks. Therefore, the crisis is a real example of the social, economic, and political implications of having poor government policies.