The Russian financial crisis

“What Were The Causes Of The Russian Financial Crisis Of 1998? What Role Did The IMF Play In Solving The Problem?”

Introduction:

The Russian financial crisis hit Russia on August 1998. The situation in Russia was exacerbated by the global recession during that time. This recession had its roots in the Asian crisis of 1997. In this paper, the reasons that were behind the financial crisis that hit Russia are outlined. I will try to analyze why the devaluation of the ruble and the financial crisis were inevitable and I will also look into the role that the International Monetary Fund (IMF) played into solving this problem for the Russians. The most important year in this analysis is 1998 during which most of the incidents were very significant. So, it would be very useful to start talking about the political and financial situation that Russia was in during that period. Russia’s economy, during the last decade of the 20th century, was in transition after the fall of communism in the late 1980’s. Boris Yeltsin was the President of the Russian federation, serving from 1991, and leading the Russian federation through this difficult period of transition. It is much more interesting and important for the following analysis to focus on the period from 1996 to 1998 in order to better understand the situation of the Russian federation. During the late 1996 and the early 1997, the Russian economy showed some signs of improvement and as the OECD survey revealed “the Russian economy appeared stronger than at any previous time during the transition period” ( OECD Economic Surveys, Russian Federation, March 2000, OECD Publications, p.34). This statement was supported after indications of the stabilization of output, the positive sign of the annual GDP growth and a rather tight monetary policy that was implemented by the Russian government. All these leaded to the stabilization of the inflation and the exchange rate thus making them more predictable for the investors. Adding up to all these, the living standards of the Russian population started to recover after being very low during the first years of the transition period. So, based on these improvements the Russian government wanted to try and fix things in the financial sector. This effort involved the elimination of the government’s debt and the control of the government’s fiscal imbalances. This was a very natural reaction by the Russian authorities but the main flaw in this effort was that it was based on the assumption that the relatively low interest rates that were achieved at that time would be kept at the same low level. In other words, the Russian government took the strong inflow of capital for granted and that proved to be a terrible mistake. This is how the situation stood until the November 1997. At that time Asia was hit by a financial crisis and this financial crisis affected the expectations of the investors as the export prices increased. So, the increase of the export prices and the decline in their demand caused the elimination of Russia’s current account surplus.

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The Causes Of The Russian Financial Crisis: