Transcript Russia

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

Россия
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
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Natural Resources
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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 “nonpayment” 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. 1998 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 13th 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 2nd Fixed exchange rate abandoned
 Exchange rate jumped from 6-21 rubles for 1
dollar.
Aftermath and Recovery
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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.
