Russian Financial Crisis

In: Business and Management

Submitted By Goodshtuff
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The Russian financial crisis occurred on August 17, 1998, exacerbated by the global recession caused by the Asian financial crisis in 1997. Russia was highly dependent on exports of raw materials, with petroleum, natural gas, metals and timber accounting for more than 80% of its exports. With the drop in global demand, prices of those commodities began to decline. This resulted in an impact on its foreign exchange reserves since Russia had a fixed exchange rate regime during this period of time, where the ruble was only allowed to move within a narrow band. With the speculative attacks caused by the Asian financial crisis along with the decline in global demand, the Central Bank of Russia stepped in to defend the ruble in the markets. Russia was also experiencing fiscal deficits and declining productivity in its economy. Foreign capital was initially attracted to the Russian market due to the high interest rates, which was then used to provide internal loans in the country. The Gosudarstvennoe Kratkosrochnoe Obyazatelstvo (GKO) bond interest rates soared to 150% in an effort to prop up the currency and to stop capital flight. Internally, debt on wages continued to grow and financing for major big budget items were impacted as debt grew. The Chechnya War from several years earlier further compounded these problems. Russia also suffered from a political crisis where the entire government was fired in 1998, causing for investor confidence to be further eroded. On July 13, 1998, a $22.6 billion financial package from the International Monetary Fund and the World Bank was approved. The purpose of the package was to swap maturing GKO short-term bonds into long-term Eurobonds. This was somewhat successful, however, the government did not implement any changes to the ruble’s exchange rate. Debt payments continued to exceed the amount…...

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