Financial crisis can be defined as a sharp decline in the value of property, businesses and consumers unable to pay their debts and financial institutions experiencing a liquidity crunch. A financial crisis is often associated with a panic or bank operation, during which investors sell assets or withdraw money from savings accounts because they fear that the value of those assets will decline if they are in a financial institution. A financial crisis may occur if institutions or assets are overvalued and can be exacerbated by irrational or herd-like investor behaviour. Russia’s economy was on the brink of a crisis on August 1998. At that time, Russia’s situation is worsened by the global recession. The recession had its roots in the 1997 Asian crisis.

In this article we will look into the reason behind the Russian financial crisis which hits Russia economy are detailed.

Back Ground and Course of Events

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”. 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.

Political Fallout

Yeltsin, who began to lose his hold on power as his health deteriorated, wanted Chernomyrdin back, but the legislature refused to give its approval. After the Duma rejected Chernomyrdin’s candidacy twice, Yeltsin, his power clearly on the wane, backed down. Instead, he nominated Foreign Minister Yevgeny Primakov, who was approved by the State Duma by an overwhelming majority on 11 September 1998.

Primakov’s appointment restored political stability because he was seen as a compromise candidate able to heal the rifts between Russia’s quarreling interest groups. There was popular enthusiasm for Primakov as well. Primakov promised to make payment of wages and pensions his government’s first priority and invited members of the leading parliamentary factions into his Cabinet.

Communists and the Federation of Independent Trade Unions of Russia staged a nationwide strike on 7 October 1998 and called on President Yeltsin to resign. On 9 October 1998, Russia, which was also suffering from a poor harvest, appealed for international humanitarian aid, including food.

Conclusion

The Russian ruble crisis had many different causes that contributed to the sudden crisis of confidence, including falling energy prices, heightened geopolitical risks, and increasing demand for the U.S. dollar. With the ruble still trading near its lows with the U.S. dollar in 2021, the country continues to suffer from the same problems that caused the crisis.

International investors may want to take caution when investing in Russia, given the ruble crisis and its aftermath. Dollar-denominated debt could become difficult to service in rubles, while equities could suffer, thanks to deteriorating spending power among consumers and businesses. These trends could eventually lead to a similar crisis or recession down the road.