1998 Russian Financial Crisis By: Heath Turner, Joel Firman, Malessa Hubbard, and Robert Warren

The Political Structure of Russia A democratic federal law-bound state with a republican form of government. Three Branches Legislative Assembly Executive Powers Judicial Courts

Legislative Assembly The Council of Federation State Duma

Executive Powers Dual Executive President The Government of Russia Boris Yeltsin Two Terms: 1991-1999; Independent Party The Government of Russia Prime Minister Sergei Kiriyenko March 23 1998- August 23 1998 Viktor Chernomyrdin August 23 1998-September 11 1998 Yevgeny Primakov September 11 1998-May 12 1999 Sergei Stepashin May 12 1999-August 9 1999 Vladimir Putin August 9 1999- May 7 2000

Judicial Courts Three Court system Constitutional Court Supreme Court Supreme Court of Arbitration

The Central Bank of the Russian Federation Chairmen Sergeĭ K. Dubinin was Chairman of the Central Bank of the Russian Federation in 1995-1998 (Bank of Russia 2015) Viktor V. Gerashchenko was Chairman of the Central Bank of the Russian Federation in 1998-2002 (Bank of Russia 2015) Responsibilities

Timeline Summer 1997: Asian crisis causes an attack on the ruble December 1997: Prices of oil and nonferrous metal drop and the Russian government was expecting a 2% economic growth in 1998, but real GDP ↓ 4.9% February 1998: New tax code submitted to the Duma and Russia fails to agree on additional IMF funding March 1998: President Yeltsin fires entire government

Timeline (coninued) May 1998: Dubinin warns government ministers of debt crisis within 3 years with reports present, government bond yields increased to 47%, oil prices decrease to $11/barrel August 1998: Russian government devalues ruble, defaults on domestic debt and declares moratorium on payment to foreign creditors, and stock market closed for 35 minutes as prices plummeted

High Government Debt and over-Valued Currency Russia had to increase GKP’s and OFZ’s because they were not able to raise adequate taxes and the IMF prohibited borrowing from the Central Bank of Russia (1995-1997) 1. Cash plus noncash basis Source: Ministry of Finance, Goshomstat, and internal IMF reports

Source: Central Bank of Russia

Source: International Monetary Fund (IMF) Not in slide, but what I will discuss: Inflation fell from 131% in 1995 to 22% in 1996 to 11% in 1997. Russia was promising relations with West (World Bank/IMF aid), then output recovered slowly. May 1998, the Central Bank of Russia is forced to defend the ruble with $1 billion. Russian oil and gas companies push for devaluation of the ruble to increase the value of their exports affected by the decrease in oil prices. The lending rate is now 150% by the CBR. In August 1998, the IMF approves emergency aid packages which raises the fears of devaluation by investors weakening the stock, bond, and currency markets. These series of events led to devalue of ruble on Aug 17, 1998, dramatic rise of inflation, and ruble is floated. Source: International Monetary Fund (IMF)

Source: IMF

Source: Russian Statistics Committee and International Bank for Reconstruction and Development staff estimates

1998 Stock Crash IMF loan trouble Stocks and Bonds plunge Interest rates triples Ruble Collapses Market crashes, cash reserves dwindle under $14 billion Sale of state-owned oil company shares fail Trading suspended Fear of Moscow running out of money Devalue Ruble, Russians buy dollars Russia defaults on IMF loans Estimated losses at $100 billion for investors

Source: http://www.tradingeconomics.com/russia/stock-market

Oil Prices dropped from $23 to $11 in year Oligarchs advocated devaluation of Ruble March- oil companies lose $500 million Reinvestment failed Losses reached $23 billion

Unemployment 13% Wages suspended Dropped 2/3 Poverty- 40% Source: Russian Statistics Committee and International Bank for Reconstruction and Development staff estimates

Resolution: Causes Depreciation of the Ruble

Resolution: Causes This depreciation led to the recovery of oil prices Helped Russian domestic markets: Specifically food industry This is due to the impact that depreciation has on exports: Depreciation can raise demand as domestic currency translates to more rubles.

Resolution: Causes Price of Oil Recovers

Resolution: Causes This effect leads to a trade surplus in following years

Resolution: Causes Russia was excluded from capital markets after the default This forced fiscal responsibility which reduced inflation and aided recovery Russia’s recovery was surprisingly rapid Both GDP and inflation improved

Resolution: Evidence Inflation decreases

Resolution: Evidence GDP recovers rapidly

References Bank of Russia. (2015). The Central Bank of the Russian Federation. http://www.cbr.ru/eng/today/?PrtId=cbrf_sub. Bank of Russia (April 2015) "The Russian Crisis 1998." Rabobank. n.d. Web. Desai, Padma. “Why Did the Ruble Collapse in August 1998?” American Economic Review: Papers and Proceedings, May 2000, 90(2), pp. 48-52. Gilman, Martin G. No Precedent, No Plan: Inside Russia's 1998 Default. Cambridge, MA: MIT, 2010. Print. Kharas, Homi; Pinto, Brian and Ulatov, Sergei. “An Analysis of Russia’s 1998 Meltdown: Fundamentals and Market Signals.” Brookings Papers on Economic Activity, 2001, 0(1), pp. 1-67. The Russian Federation. (1993). "The Constitution of the Russian Federation." The Russian Federation. December 25. "Russia's 1998 Financial Crisis in the Regions: A Case Study." Stratfor. Accessed April 21, 2015. https://www.stratfor.com/analysis/russias-1998-financial-crisis-regions-case-study. "Historical Crude Oil Prices (Table)." Historical Oil Prices: InflationData.com. Accessed April 21, 2015. http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp. "The Russian Crisis 1998." Rabobank. Accessed April 21, 2015. https://economics.rabobank.com/publications/2013/september/the-russian-crisis-1998/. PBS. Accessed April 21, 2015. http://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html. Pinto, Brian, and Sergei Ulatov. "Financial Globalization and the Russian Crisis of 1998."Policy Research Working Paper. https://openknowledge.worldbank.org/bitstream/handle/10986/3797/WPS5312.pdf?sequence=1.