This website uses cookies to ensure you have the best experience. Learn more

Russian Financial Crisis Essay

2376 words - 10 pages

            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 ...view middle of the document...

Investors continued to view the market with caution, the ruble continued to devalue, and capital flight continued out of Russia despite the bailout.
            The stock, bond, and currency markets in Russia collapsed on August 13, 1998, as investors feared further devaluation of the ruble and possible default on domestic debt. The annual yields on ruble denominated bonds were at an all time high of over 200%.  Prices for the financial instruments dropped quickly and were down by 65% at the end of the day. This caused the government to implement a floating exchange rate. On August 17, 1998, the government  “devalued the ruble, defaulted on its domestic debt, halted payment on ruble-denominated debt (primarily GKOs), and declared a 90-day moratorium on payment by commercial banks to foreign creditors”.
Taking a look at the fundamentals of the Russian economy and analyzing them will give us an idea of what exactly happened in 1998 and the preceding years. Our objective is to explain the different aspects and underlying causes of the currency crisis.
Analysis of the Fundamentals:
GDP:
The PPP adjusted GDP was trending downwards from 1992 to 1998 with only one year of positive growth in 1997. Annualized growth rates ranged from -15% to -4% with the positive 1997 exception of around +1.5%.
Federal Budget and Federal Debt:
Looking at the federal budget, we can see that there have been significant deficits (5-11% of GDP) over the years from 1992-1998. As a result, more borrowing caused the federal debt to GDP ratio to jump from around 20% in 1992 to more than 50% in the beginning of 1998. Large proportions of the debt were coming from foreign lenders, however the share of domestic debt was increasing due to the creation of a domestic short-term Treasury Bill (GKO) market in 1995.
The federal debt level to GDP became unsustainably high and debt service payments were increasing significantly. In combination with a negative growth of real GDP, this turned out to be a vicious circle for the Russian economy. In order to finance their budget deficits they had to raise more money, which was only possible at higher interest rates. This again caused the level of debt and debt service payments to increase.
One problem that they had was that due to the fixed exchange rate regime, they could not inflate away the value of foreign debt. Money creation by the Central Bank of Russia therefore only reduced the value of domestic debt.
Inflation:
During the transition period from the soviet system to a market economy, Russia experienced hyperinflation of several hundred percent per year. Starting from 1994 however, there was a clear down trend and inflation was decreasing gradually over the next years until 1997, when it reached a minimum of 11%.
Interest rates (Lending rates):
Significantly decreasing interest rates from 1995 to 1997 were an indicator of lower inflation rates and therefore a positive sign for economic recovery after the transition from the...

Other Papers Like Russian Financial Crisis

Why Finance Is Good For Us

9150 words - 37 pages such ultimatum. But President Putin giving his first press conference since the crisis began said using force to protect Russians in Ukraine remained a "last resort". There is no question the noose is now tightening around those who refuse to submit to the new authority in Crimea. And it is getting ever more hostile. Around the bases the pro-Russian supporters are threatening journalists and the families of the soldiers locked inside. Some

Management Essay

1405 words - 6 pages came to be known as the Falciani List or Lagarde List -- to governments around the world. When some account-holders’ names emerged during the financial crisis, the narrative of banks helping the wealthy avoid taxes fueled political tensions, especially in Europe where many governments were preaching austerity and slashing social services. Investigators in various European countries have said the information in the leaks has helped them

Mena, Gcc & Eu Energy Security

6903 words - 28 pages president Barack Hussein Obama during his visit in Brussels to discuss trade relations and the Ukrainian crisis, as he told the European Union that they can’t rely only on United States to reduce the Union dependency on Russian energy as relations with Moscow chill over its seizure of Crimea from Ukraine. The EU relies on Russia for about third of its oil and gas, and the 28 member states have concerns about their security of energy supplies. Almost 40

Issues In Corporate Govarnance In Bangladesh

4439 words - 18 pages compliance by corporations. These concerns have triggered a shift away from “soft law” such as comply or-explain requirements. In the U.S., the Sarbanes-Oxley (SOX) Act, and the revised, NewYork Stock Exchange (NYSE) and NASDAQ listing rules have created more stringentstandards for financial disclosure, committee and board nominations, and audit policies. In Asia, revised corporate governance regulations in several countries such as Hong Kong

Economic Turmoil In Latvia

1512 words - 7 pages independence on May 4, 1990. The population of Latvia is 2,165,165 with an ethnic makeup of Latvian 61.1%, Russian 26.2%, Belarusian 3.5%, Ukrainian 2.3%, Polish 2.2%, Lithuanian 1.3%, other 3.4% (CIA, 2014). Natural resources include peat, limestone, dolomite, amber, hydropower, timber, and arable land. Latvia is often too wet and in need of constant drainage. Approximately 3,953,686 acres of farmland or 85% of Latvia has been improved by

Fundamental Analysis Of Siemens Ag

2930 words - 12 pages Siemens AG is a German global operating technology company and was founded 1847 in Berlin. The four principal divisions of the company are energy, healthcare, industry and infrastructure and cities. In this fundamental analysis I will first outline the major financial key figures for creditors and liability claimholders. In terms of the SWOT analysis I will analyze the industry and global environment Siemens is operating in. The final point

Debate Paper

2628 words - 11 pages opposition factions is a concern of those arguing against intervention. United loosely with the objective of overthrowing Assad’s military forces they have different ideals and perspectives on long term goals for Syria. Given access to weapons and training, rebel groups may turn against each other creating another protracted engagement. Another argument supporting intervention proposes bringing down the Assad regime could weaken Russian and

Toyota World Wide

6277 words - 26 pages  global financial crisis of 2008 as it was forced in December 2008 to forecast its first annual loss in 70 years. In January 2009 it announced the closure of all of its Japanese plants for 11 days to reduce output and stocks of unsold vehicles. Akio Toyoda became the new president and CEO of the company on June 23, 2009 by replacing Katsuaki Watanabe who became the new vice chairman by replacing Katsuhiro Nakagawa. Toyota has factories in most

Project On Iphone 5

2385 words - 10 pages language of each country and has to be encoded. Economy: advanced technology creates an edge for Apple iPhones hence increasing their demand in the global market. The global problems such as the recent financial crisis which hit the whole global market contribute negatively towards the marketing of products. Politic: Every country has its own politic, rules, regulations that limit Iphone5 process. So it has to bend to rules if it wants the product

Crossing Borders

9964 words - 40 pages . This appeared to be confirmed by the following half century of war, protectionism and deep economic crisis until, in the middle of the twentieth century, cosmopolitan capitalism made its big comeback. Globalization is more than anything else the feature of today’s capitalism which leads many to argue that there is a new imperialism, or even that imperialism has been replaced by something else (for instance, by “post-imperialism” or by

Lafarge S.A

2924 words - 12 pages financial compensation by developing a program to provide non-formal primary level education to the children and to provide continuous basic healthcare facilities for all. It also provided vocational training for the adults, particularly women, on different trades to create income-generating opportunities (Laszlo & Myers, 2006). The scenario above can be best described by the expectancy theory of motivation. The performance – reward

Related Essays

Russian Foreign Policy In Central Asia Since 2001: Assessing The Successes And Failures

7007 words - 29 pages . Since 9/11, Russia has increased economic links with the Central Asian states, not only in terms of energy cooperation. It has also pushed to promote cultural and linguistic education that would re-establish the Russian-Central Asian connection. Moreover, it has played an important role as an external actor in the politics of the region, by supporting different authoritarian regimes through financial and military assistance. Therefore, since 2001

Russia Essay

1815 words - 8 pages was therefore clipped of any ability to carry out serious legal reform due to its inability to enforce the laws they were meant to put in place. Financial Crisis of 1998. This crisis seemed to be the culmination of all the problems the reforms failed to address. With a default on its debt and devaluation of its currency due to lack of necessary revenue, the economy fell into severe decline, negatively effecting income, living standards and

Hedge Funds Essay

2410 words - 10 pages . Even though the Fed was privileged to this information, they still opted not to support LTCM financially. They concluded that it would have sent the wrong message to other financial institutions; meaning that the FED will rescue them at the slightest sign of a crisis, which would encourage irresponsible risk taking, making Financial Institutions weaker and the market fragile. The support of the FED would also undermine the policy makers, in

International Hotel Management Essay

1557 words - 7 pages available for management decision making which will also allow the organization to better plan its future activities and events. 3. Russia specific factors: the 1998 crisis and devaluation of the ruble, which made foreign staff very expensive as compared to locals. high cost of lease land in city centers The Russian hotel business is one of the most dynamic industries showing high annual growth GOP (gross operating profit) Europe varies from 3–4