Currency crisis on the example of russia currency crisis 1998 and 2014

Currency crisis
on the example of Russia currency crisis 1998 and 2014

Content
1.Introduction
2.Currency crisis definition and reasons
3.Russian currency crisis 1998
3.1Crisis background and main reasons
3.2Chronology of events and default
3.3Impacts of crises on the economy
3.4Recovery process and lessons from the crisis
3.5 LTCM bankruptcy
4. Russian currency crisis 2014
4.1Chronology of events
4.2Main reasons
4.3 The Impact on Finance, Economics, and Society.
4.4 Recovery Activities
5. The Impact of 2 crises on the Former Soviet States
6. Common and different features in 2 crises
6.1 Common features in 2 crises
6.2 Different features in 2 crises
7. Summary


1. Introduction
A currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced
devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and
led to the devaluation of the ruble and the default on public and private debt. Currency crises such as
Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and
low foreign reserves.
Currency crisis sometimes appear to be triggered by similar crises nearby, although the spillover from

these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis
themselves. In this paper, we examine and review the two currency crises in Russia, paying particular
attention to the events, including analysis of the currency crisis in Russia, we discuss the impacts and the
main reasons. In addition, we review the recovery process that was undertaken to avoid the crisis and
explain why those steps may have, in fact, hastened the devaluation. The following section reviews two
Russian currency crisis models, and compares their common and different features. The six section
summarize effect of the both crises on the Russian and world economy.
2. Currency crisis definition and reasons
2.1 Currency crisis definition
A currency crisis, which is also called a balance of payment crisis, is a speculative attack in the foreign
exchange market. It occurs when the value of a currency changes quickly, undermining its ability to serve
as a medium of exchange rate.
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. Currency
crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones.
Governments often take on the role of fending off such attacks by satisfying the excess demand for a
given currency using the country’s own currency reserves or its foreign reserves (usually in the United
States dollar, Euro or Pound sterling).
A currency crisis is brought on by a decline in the value of a country's currency. This decline in value
negatively affects an economy by creating instabilities in exchange rates, meaning that one unit of the
currency no longer buys as much as it used to in another. To simplify the matter, we can say that crises
develop as an interaction between investor expectations and what those expectations cause to happen.
Currency crises, which many economists define as a swift decline of more than 20 percent of a local
currency against the dollar, have hit dozens of emerging markets over the past three decades, and have
occasionally triggered regional recessions like the Latin American debt crises in 1982 and the Asian
financial crisis in 1997–98. The United States has augmented aid packages arranged by the International
Monetary Fund (IMF) in the past to help stabilize important trading partners and limit contagion,
recognizing that tremors even in small economies far away could hurt domestic growth. Drawing on


lessons from previous crises, the IMF has developed new tools and a revised approach to avert the quick

collapse of currencies. Still, few economists are convinced the world has seen its last currency or
financial crisis.
2.2 Currency crisis reasons
With the development of market economy and the acceleration of globalization, stagnation of economic
growth is no longer the main reason of the currency crisis. A large number of economists’ studies show
that overvalued exchange rates, current account deficits, falling exports and economic activities’ slowing
are the indication of a coming currency crisis. During the actual running, currency crisis usually triggered
by the bursting of the bubble economy, the banks’ non-performing debts increasing, the serious
imbalance of payments, too massive external debt, financial crisis, political instability, the distrust to the
government and so on.
If investors' confidence in the stability of an economy is eroded, then they will try to get their money out
of the country. This is referred to as capital flight. Once investors have sold their domestic-currency
denominated investments, they convert those investments into foreign currency. This causes the exchange
rate to get even worse, resulting in a run on the currency, which can then make it nearly impossible for
the country to finance its capital spending. Predicting when a country will run into a currency crisis
involves the analysis of a diverse and complex set of variables. There are a couple of common factors
linking the more recent crises: most of the countries borrowed heavily (current account deficits); in some
countries currency values increased rapidly; uncertainty over the government's actions made investors
panic.


3. Russian currency crisis 1998
3.1 Crisis background and main reasons
After the collapse of the USSR, Russia in the 1990s, almost constantly was experiencing financial
difficulties. Therefore, it was in desperate need of foreign loans, but could not reliably guarantee the debt
repayment. A huge government debt became a consequence of the large external and internal debts.
According to the Central Bank, at the time of crisis, the Central Bank reserves were $ 24 billion, liabilities
to non-residents in the STL / FLB (state short-term liabilities / federal loan bonds) market and the stock
market - more than $ 36 billion. The total amount of payments to non-residents by the state was
approaching 10 billion dollars a year.

The situation with financial difficulties was compounded with the political struggle taking place between
the Government appointed by Boris Yeltsin who adhered to liberal values, and the State Duma, which at
that time was controlled by the Communist Party. The imbalance in the relationship of the State Duma
and the Cabinet was reflected in the growth of the state debt of the Russian Federation. The fact that
Duma voted for unbalanced budgets, therefore increasing fiscal spending of the Government,
Government was looking for ways to close the budget hole, increasing the national debt by issuing state
treasury bonds (T-bills).
"Black Tuesday" in October 1994 was one of the dates after which Government decided to finance budget
deficit not through currency emission, but through so called non-inflationary sources, which actually
meant external and internal borrowing.
Mass process of issuing T-bills started after the re-election of President Yeltsin. If in 1995 the volume of
T-bills issue was estimated at 160 billion dollars, in 1997, this number rose to 502 billion rubles. Buyers
of state treasury bonds were offered high interest rates, so demand for T-bills was impressive. Making it
simple, for every ruble borrowed for one year, State promised to return 5-7 rubles of budget money. So
actually the system turned into a pyramid - the old obligations of the Russian Federation could be covered
only due to the issues of new ones.
In the 90th the Bank of Russia introduced so called "Currency corridor" in order to support the national
currency exchange rate in the desired range, and ensure the profitability of T-bills in dollar terms. At the
same time, the Government allowed foreigners to invest in treasury bonds. 1997 was the year when Tbills market became liberalized, and number of non-residents, who owned T-Bills counted as much as 30%
of the whole market. Non-residents were happy to receive a high profit, and take their money out of the
country while paying a modest 15 per cent tax.
Very soon, economists understood that this is an alarm, arguing that the payments for T-bills are twice as
big as the tax revenue of the state. It became obvious that the bubble will soon burst. At the time of the


default CBR reserves were only $ 24 billion, while Russia's obligations in the STL / FLB market and the
stock market exceeded $ 36 billion, according to the Bank of Russia.
One more reason of the currency crisis was that the situation was exacerbated by decline in world
commodity prices (especially oil, gas, metals) and the Asian financial crisis, that began in spring 1998.
Because of these events, government revenues in foreign currency declined, while private foreign lenders

became extremely reluctant in giving loans to countries with unstable economies.
Besides starting from early 1992, when the so called liberalization of prices was made, and hyperinflation
of 356% occurred people start disbelieve the Government, and prefer not to invest their money anywhere.
So, to sum it up we can see that the main reasons of the Russian financial and currency crises were low
Government reserves, as Government spent much more than it could earn from the tax revenues; no plan
of economic development and local production; over issue of T-bills; external factors such as Asian
Crisis and low prices on commodities (Oil).
3.2 Chronology of events. Black august and default.
According to experts, the alarm about a possible devaluation of the ruble and default sharply increased on
3rd of July 1998 after the statement of the Executive Director of the IMF, Michel Camdessus, who said,
that even in the case of Moscow will fulfill all the requirements of the fund, the organization is unlikely to
arrange a loan of 15 billion dollars, which is Russia requested.
The chronology of events that preceded default can be seen as following:
July 7, 1998 Bank of Russia stopped issuing Lombard loans to banks.
July 9, 1988 negotiations with the IMF were completed, the result was an agreement, that Russia will
receive 22.6 billion dollar loans within 2 years.
July 20, 1988, IMF decided to allocate the first tranche of Russian recovery loan in the amount of 14
billion dollars. Ruble devaluation threat reduced.
July 24,1988 the Central Bank of Russia lowered the refinancing rate to 60%.
July 29, 1988 Director of the Institute of Economic Analysis Andrei Illarionov harshly criticized the
policy of the CBR( Central Bank of Russia) and called for the early ruble devaluation by Government.
August 5, 1998 the government decided increase the limit of foreign borrowings sharply - from 6 to 14
billion dollars. In fact, this decision meant the impossibility of Government financing the budget from
domestic sources.
August 6,1998 IBRD decided to provide Russia a third loan for economic restructuring in the amount of
$ 1.5 billion. Russian foreign debt liabilities rating reached the minimum values in the world market.


August 11,1998 Russian securities on the stock market exchange fell down. The fall in share prices on the
RTS exceeded 7.5%, after which trading was stopped. All day banks were actively buying up the

currency, and in the evening a number of the largest banks declared about suspension of the operations.
August 12,1998 a sharp increase in demand for foreign currency has led to a halt of interbank credit
market and liquidity crisis. CBR has reduced the limits on currency sale by large commercial banks,
reducing its costs to maintain the ruble exchange rate.
August 13, 1998 Moody's and Standard & Poor`s downgraded the credit rating of Russia. An emergency
meeting of the Finance Minister Mikhail Zadornov and Central Bank Deputy Chairman Sergei
Aleksashenko with representatives of the largest Russian banks was held. The Government stated that the
maintenance of the foreign exchange market and the market of state short-term bonds is the responsibility
of the commercial banks.
August 14, 1998 Firs lines of people, who requested to return their deposits appeared in front of the banks.
August 15,1998 President Boris Yeltsin, interrupted his vacation and returned to Moscow. Prime Minister
Sergei Kiriyenko held a meeting with the heads of the Central Bank, the Finance Ministry and the
Kremlin's special representatives in international financial institutions. The Prime Minister instructed to
develop measures to stabilize the situation.
August 17, 1998 Prime Minister Sergei Kiriyenko announced the introduction of "a set of measures aimed
at the normalization of financial and fiscal policy," which actually meant a default and devaluation of the
ruble. Repayment of the loans to non-residents, transactions in the money market and collateral
operations were suspended for 90 days. Purchase and sale of T-bills was also stopped.
Along with the suspension of payments on T-bills, CBR moves to a floating exchange rate within the
boundaries of the currency corridor of 6 to 9.5 rubles to the dollar. The ruble fell against the dollar
immediately in half.
The same day, the banks stopped returning deposits. Streets were full with anxious depositors. Central
Bank of the Russian Federation made a statement in which explained the situation in a following way:
"The problem of the Russian banking system is that the majority of banks, especially large ones, have
liabilities denominated in foreign currency and assets - in rubles. In the case of devaluation they expect a
very large hole in the balance sheet that not comparable with the volume of forward liabilities. "
August 18, 1998 Alexander Livshits has resigned from the post of deputy head of the presidential
administration. The international system Visa Int. blocked "Imperial" bank cards and recommended other
Russian banks to suspend issuing cash by the cards. Central Bank announced a ban to banks to make a
spread of foreign currency exchange more than 15%.

August 19,1998 Government announced decision to postpone restructuring of the STL.


August 20, 1998 deputy chairman Sergei Aleksashenko announced a refusal of the temporary
administration in commercial banks. The new measures included providing bank with loans on condition
of collateral of the shares of the bank.
August 21 Visa Int. sent announcements to all foreign banks, recommending not to issue cash for a
number of Russian banks` cards.
As a result of devaluation, falling production and tax collection in 1998, gross domestic product
decreased three times - up to $ 150 billion - and became smaller than the GDP of Belgium. Russia has
become one of the largest debtors in the world. Its external debt rose up to 220 billion dollars (165 billion
US dollars amounted to state debt, 30 billion - banks debt $ 25 billion – companies` debt). The amount
was five times as big as the entire annual budget revenues and accounted for almost 147% of GDP.
Taking into account the domestic debt of the various authorities to state employees and enterprises on
wages and general obligations on the government projects it exceeded $ 300 billion, or 200% of GDP.
In August 1998, all fiscal and monetary system collapsed simultaneously in Russia. Tax collection rates
fell as low as possible. Inflation accelerated three times, and altogether with the fourfold devaluation of
the ruble treasury, citizens and businesses` incomes all felt down tremendously.
A number of Russian banks could not survive the default. Thus, the Bank of Russia revoked the license of
Inkom bank, that was among the five largest banks in Russia.
3.3 Impacts of crises on the economy
Though financial and currency crisis is always a tragedy for a nation, which is followed by long recovery
process, we can actually distinguish both negative and positive impacts of the 1998 Russian financial and
currency crisis.
First of all we need remember that this was the first financial crisis in history, when government also
defaulted on the debt in local currency. As a rule state would emit more currency and in such way repay
its debts. But on August 17, 1998 Russian Government announced default both on external and internal
debts. Logically such actions resulted in a loss of confidence by both foreign and domestic investors in
the solvency and competitiveness of the financial system in Russia. This also resulted in a sharp decline
in the credit rating of Russia and all Russian companies. A sharp outflow of capital from Russia began

rapidly. Ratings of Russian commercial banks were also lowered, which led to the loss of opportunities to
attract foreign investment and foreign loans. Being cut of both internal and external sources of financing
the deficit of the state budget meant that Government was left with only one method of covering budget
deficit - emission financing. This has increased the rate of inflation and growth of consumer prices.
There were serious violations in the work of the banking system and the implementation of payments.
Direct losses of commercial banks due to the Government's failure to service its debt obligations
estimated at $ 45 bln. rubles. The total losses of the Russian banking system caused by decisions of 17th


of August were estimated at 100-150 bln. rubles. As a result, many banks became insolvent. A significant
part of commercial banks went bankrupt.
Due to the failure of many large banks to perform their obligations to depositors, under the reason of
force majeure, the whole banking system of the country has lost the trust of the population, which has
negative long-term implications not only for the domestic banks, but also for the country's economic
system as a whole.
Unmanaged devaluation of the ruble led to a sharp contraction of the money supply in real terms,
worsening liquidity crisis and rising defaults. To overcome these effects, as well as to stabilize the
banking system in times of a massive outflow of deposits Government had to use currency emission
heavily, which in its turn could lead to a inflationary spiral with long-term negative effects of
macroeconomic instability.
Reduced real income and savings of the citizens in Russia, increased the number of people with income
below the poverty line, high unemployment numbers all these were the consequences of default. This
situation happened due to harsh increase in domestic consumer prices, which was caused by depreciation
of the ruble income and savings, as well as the loss of people`s savings in banks that went bankrupt. As a
result of the decisions taken on August 17, real income of the population decreased by 31.1 percent in one
month. Lost savings in bank deposits were estimated by the International Confederation of Consumer
Societies in the tens of billions of rubles.
Companies were also seriously affected by the crisis, their deposits in troubled banks have been frozen. In
1998, the entire Russian industry got struck in a payment crisis.
If we want to mention positive consequence of the crisis of 1998 we should agree that due to the

devaluation of the ruble prices for imported goods in the country increased, while prices of domestic
goods abroad fell, which allowed to increase export. This gave new opportunities for domestic industry to
gain profitability, cut off from its imports and increase export opportunities.
Small businesses realized their strength and began to develop into a larger enterprises. New types of
businesses that were not common to countries with resource economics, like Russia start to develop at the
time. Since 1999, food processing, light industry, service industries, began to grow and consumer demand
was also growing subsequently.
The main positive result of the crisis of 1998 can be called abolishment of the raw model of the economy
and development of the other sectors of economy, which were replaced by imports before the currency
crisis.
3.4

Recovery process and lessons from the crisis


The post-crisis decline in Russia was short and soon gave way to a large-scale growth. A significant role
in this growth played a change in the macroeconomic policy of the Russian Government and the Central
Bank.
Overvalued exchange rate of the ruble was considered not useful as an anti-inflation measure and ruble
has become almost completely floating currency. Although this led to a short-term surge in prices, in
most way this measure made a positive impact on the Russian economy. Russian companies carrying
costs in rubles, became more competitive both on global and domestic markets. In addition, free
formation of the ruble value eased the accumulation of foreign exchange reserves of the Central Bank of
the Russian Federation, which increased the stability of the financial system of the country.
Monetary regulations were also relaxed. Government completely abandoned the practice of restricting
money supply by non-payment of salaries, pensions, and defaulting on government contracts. This has
contributed to the normalization of the situation in the financial sector and the growth of confidence in the
actions of the state.
In the post-default years fiscal discipline improved a lot. The federal budget for 1999 was adopted with a
deficit of 2.5% of GDP (for the budget for 1998, the same indicator amounted to 4.7% of GDP). It was

also decided not to fund the budget deficit at the expense loans, because this measure on the one hand did
not give the desired anti-inflationary effect, on the other hand was undermining the stability of the
economy. The result was a decline in the profitability of investing in securities and, accordingly,
increasing the attractiveness of investments in the real sector of the economy, which contributed to
growth of production.
An effective anti-crisis measure that was conducted by the Russian government in the early days after the
default was the containment of the growth of prices for the products of natural monopolies (electric power,
transportation, and so on). As a result, the rate of increase in these prices was twice less than the rate of
inflation in the economy as a whole. It was an additional impetus for the economic growth and it also
contributed to the inflation slowdown.
3.5 LTCM bankruptcy
In 1996 and 1997, the hedge fund managed by Long-Term Capital Management (LTCM) had an
outstanding series of success and has earned an unrivaled reputation in the management of financial risk.
However, in August 1998, Russia defaulted on its debt and a chain of unprecedented market movements
began. This brought a terrible outcome for LTCM. Some say that the moral of the story is that the
management of risk in the fund was insufficient, although partners (participants) of the Fund were experts
in this field on Wall Street.
The collapse of the hedge fund in 1998 was a stunning event. Approximately half of the LTCM partners
had PhD in Financial Sciences, most of them were from the Massachusetts Institute of Technology (the
famous MIT). Two of the partners, Robert Merton and Myron Scholes received the Nobel Prize for their


research, which has become a cornerstone in the hedge derivative risks. LTCM also included a group of
traders with considerable experience in the markets and the leader of the "Dream Team" was a trader with
an outstanding reputation. However, just a few months the fund has lost more than $ 4 billion, and LTCM
was accused of a serious threat to the security of the global financial system. Many argued that this
collapse shows that modern financial risk management techniques did not work.
4. Russian Currency Crisis 2014
4.1 Chronology of Events
In 2014,Russian currency crisis was about the collapse of the Russian ruble and sharp economic

slowdown in Russia. The decline in the Russian ruble has increased the costs for Russian companies, they
had to make interest payments on debt that issued in U.S. dollar or other foreign currencies that have
strengthened against the ruble; thus Russian companies need cost more ruble to repay their debt holders in
dollars or other foreign currencies. Investors decline confidence in the Russian economy and sell off their
Russian assets, which led to a decline in the value of the Russian ruble and sparked fears of a Russian
financial crisis.
The crisis has affected the Russian economy, consumers and companies, and regional financial markets,
as well as Putin's ambitions regarding the Eurasian Economic Union. The Russian stock market has
experienced large declines, with a 30% drop in the RTS Index from the 16 December in 2014.
The following graph shows events how to affect Russian ruble.
Timetable of collapse of the Russian
Affair

Time

Dollar/Ruble

Annexation of Crimea

18 March 2014

36.2477

Minsk Protocol

5 September 2014

37.0028

Donbas general elections

2 November 2014

43.0072

Central Bank intervention

16 December 2014

68.4910

4.2 Main Reasons
The main causes of Russian currency crisis in 2014 are the fall in the price of oil in 2014 and international
economic sanctions.
4.2.1 Fall in oil prices


Crude oil is a major export of Russia, it declined in price by nearly 50% between its yearly high in June
2014 and 16 December 2014.The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in
December 2014. The drop in the oil prices was caused by a drop in the demand for oil across the world, as
well as increased oil production in the United States.International Energy Agency release the latest Oil
Market Report provides this telling figure - showing a gulf opening between levels of global oil supply
and global demand to consume that oil:

From this diagram we can see that the supply of oil is higher than the demand of oil from 2013.
The IEA also goes into great depth about which countries are creating these imbalances. Even though
production is way up in the United States, and the OPEC nations are keeping production steady, the
demand is slack or less than expected in Europe, Japan, and China. It also point out the biggest fall
happened in Russia. According to the report a "severe downgrade" is forecasted for Russian oil demand.
Combined with the fact that economic activity is expected to decline markedly in the country and

revenues of oil export are decreasing with oil prices slumped, as well as international economic sanctions
created hardship for many companies. Because roughly half of the Russian Federation's governmental
revenue comes from the sale of oil and gas, this fall in oil prices hit Russia hard. Russia needed an oil
price of $100 per barrel to have a balanced budget. As the price of oil falls, and Russia doesn’t have the
ability to dramatically increase oil production to compensate for the lower price, thus due to the reduced
profit from selling oil, the government has substantially lower income. Russia's economy suffers from
Dutch disease, a term economists use to describe a situation in which a country focuses on developing its
natural resources, and damage other economic activity.
4.2.2 International economic sanctions
Because Russia's annexation of Crimea and the Russian military intervention in Ukraine, Russia
experienced international economic sanctions.
Due to Russia's military intervention to Ukraine in 2014,any international aid to Russia is considered
unlikely.


In 2014, Russia made several incursions into Ukrainian territory. Beginning with Crimea, Russian
soldiers control the strategic positions and infrastructure within the Ukrainian territory of Crimea, which
Russia annexed after a disputed referendum. Subsequently, demonstrations by pro-Russian groups in the
Donbass area of Ukraine escalated into an armed conflict between the Ukrainian government and
separatist forces of the self-declared Donetsk and Lugansk People's Republics.
The majority of members of the international community and organizations have condemned Russia for
its actions in post-revolutionary Ukraine,they accuse Russian break international law and violate
Ukrainian sovereignty. Many countries implemented economic sanctions against Russia.
Officials in the U.S. government have also said that despite the financial crisis, the United States and the
European Union will not ease economic sanctions imposed on Russia due to Russia's annexation of
Crimea and Russian assistance to separatists fighting Ukraine in the War in Donbass.
The United States and the European Union start economic sanctions from March 2014. On March 17, the
result of Ukraine's Crimean autonomous region referendum shows that more than ninety percent of the
voters decided to join the Russian federation, the European Union agreed to freeze 21 Russian and
Ukrainian officials personal assets, and it is forbidden to issue a tourist visa to them. Shortly thereafter,

Mr Obama has decided freeze assets and banned enter the United States to related 11 Russian and
Ukrainian officials in Ukraine and Crimea pro-Russian leaders,
On March 20, the United States announced expand the scope of sanctions against Russia officials, and the
Russian Banks were sanctioned.
The European Union decided to increase the intensity of sanctions against Russia, including increase
sanction to 12 officers and cancel scheduled EU-Russia summit in June 2014.
On March 24, 8 members except Russia decided not to participate in scheduled summit in Sochi.
On July 16, U.S. President Mr. Obama announced a new round of economic sanctions on Russia, the
targets were major institutions, such as the Russian natural gas industrial bank and Russian oil companies,
and other energy and defense companies.
EU leaders also had intentions to sanction Russian companies that damaged or threat Ukraine's
sovereignty, territorial integrity and independence by material or financial means.
Because MH17 was shot down on July 29, the United States and the European Union announced
expanded sanctions against Russia in the Russia's energy, finance, defense sectors. It is the most severe
sanctions against Russia until now. American announced three Russian Banks were under sanction, they
are VTB (VTB), agricultural bank of Russia, and bank of Moscow. In addition, because OCK has
contract with Russia's military, it has also been included in the sanctions list. The United States will


suspend export some goods to Russia's energy sector. The European Union limit Russia's state-owned
financial institutions enter the EU financial market.
The international economic sanctions demonstrate the effectiveness of the joint U.S. and European
campaign to force Putin to pull back from Ukraine, like sanctions against Iran forced the Islamic state to
negotiate over its nuclear program. The U.S. believes the sanctions have negatively affected Russian
economy so far and also expects the economic sanctions to lead to the further decline of the Russian
economy. It’s clear that the U.S. orchestrated sanctions in order to contain the Russian economy
becoming stronger and that would only be eased as a result of Russia living up to commitments to end
support for Ukraine separatists,
Economic sanctions have also contributed to the decline of the ruble since Russian companies have been
prevented from rolling over debt, forcing companies to exchange their rubles for U.S. dollars or other

foreign currencies on the open market to meet their interest payment obligations on their existing debt.
Some other possible causes also lead to the currency crisis. Russia was already near a recession before the
Crimean crisis, and Russia ranks low on the World Economic Forum's rankings of road quality,
technological adaptation, and burden of government regulation. Russia's already weak economy made it
difficult to withstand the challenges imposed by low oil prices and international sanctions. The Russian
Central Bank's "erratic response" to the falling ruble was also blamed for deepening the crisis.
4.3 The Impact on Finance, Economic, and Society.
4.3.1 The impact on Russia.
The first impact on agricultural and sideline products. As it was banned imports from the U.S. and
Europe ,the inflation increased in Russia, the cost of Russian people's life was increased. At present,
Russia is negotiating with China, Argentina, Ecuador, Brazil for looking for new import channels of food.
The second impact on economy. On 16 December 2014，the RTS’s price index was declined 12%, it was
the greatest fall of the global financial crisis since November 2008, and the Micex index declined 8.1%
before ending the day. Until 16 December, nearly 30% was declined. In response to rising interest rates
and international economic sanctions , the interest rate of inter bank loans rose to 28.3% in 3 months, it
was higher than any time in 2008.
Because the high volatility and decline of the Russian ruble, many Russians have chosen to purchase
durable goods, such as washing machines, televisions, furniture, and jewelry, and change their pensions
and savings from rubles to US dollars or euros. Some foreign companies have stopped their business
activities in Russia, such as Volvo car dealerships, the online stores of Apple, and Ikea temporarily
stopped sales of certain goods in Russian.


In order to protect the Western firms from the high volatility of the ruble, many Western financial
institutions, including Goldman Sachs, have started cutting the flow of cash to Russian companies since
they have restricted some longer-term ruble-denominated repurchase agreements (repos). Repos had
allowed Russian companies to exchange securities for cash with Western financial institutions, so the
restrictions are likely to add pressure to the Russian financial system.
If capital control or currency control is implemented by Russia, Russia may also be excluded from the
MSCI Emerging Markets Index composed of 26 countries. Since such measures would make foreign

entities to access Russian securities markets more difficult, Russia would be reclassified as an
independent market.
The third impact on energy. The oil and gas resources development of the Arctic Ocean relying too
heavily on technical equipment from Europe and the United States. Sanctions make halt of
corresponding production and oil and gas resources development. Europe and the United States are clear
about Russia's fiscal dependence on oil prices. Therefore, the current international market price of crude
oil decrease is the European and American countries work together through various means to influence
the outcome of the global oil market. Especially United States cancel the crude oil export and decrease a
large number of crude oil inventories, Saudi Arabia and other producers continue to increase production,
these make Russian’s export of oil more difficult.
4.3.2 The Impact to Global Financial Markets.
Other global financial markets were affected by the financial crisis in Russia. U.S. financial markets also
declined, Dow Jones Industrial Average declined nearly 3% in 3 business days, in part due to the Russian
financial crisis.
Financial institutions that hold relatively high amounts of Russian debt or other assets have been affected
by the Russian financial crisis. The PIMCO Emerging Markets Bond Fund hold 21% of Russian
corporate and sovereign debt,it has declined about 7.9% from about 16 November 2014 to 16 December
2014.
Companies from North America and Europe that heavily relied on Russian economy have been affected
by the crisis. Such as American car company Ford Motor Company,German engineering company
Siemens and so on.
4.4 Recovery Activities.
To prevent Russian rubles decline in value, Russia's central bank raised interest rates 7 times, from 5.5%
to 17%, and the government also started to regulate and intervene foreign exchange market. Russia's
central bank had spent about $68 billion to intervene foreign exchange market, but it did not contain the
fall of ruble, and exacerbate the massive capital outflows, increase the pressure on Russia's foreign
exchange reserves.


Russia imposed ban on import of fruits, vegetables, meat, fish, milk and dairy products from the U.S. And

European Union. According to the statistics, Russian imported fruits and vegetables from EU were about
2 billion euros every year, and imports food and agricultural products from the United States around 1
billion euros. Russia's import ban has a certain influence to agricultural and sideline products of Europe
and the United States.
5. The Impact of 2 crises on the Former Soviet States
The financial crisis for the former Soviet Union states in 1998 explains the significant macroeconomic
imbalances. The irresponsible fiscal policies and lack of structural reforms led to unsustainable internal
and external economic situation. In the absence of rapid policy adjustments, this situation lead to a
financial crisis.
For other CIS countries, the spread of "infection" from Russia (both trade and financial channels) led to
crisis in economies with similar problems. Among these the most obvious problem was a serious budget
deficit. The fiscal imbalance permanently remained very significant in Russia, Moldova, Georgia and
Kyrgyzstan. If you include the cost of the payment of the debt, the imbalance was even greater.
Exchange rate stability in most countries was achieved by central bank intervention (especially in Russia
and Ukraine), while foreign exchange reserves in these two countries replenished through payments of
IMF. Proceeds from the reserves sales, in turn, served as a source of financing the budget deficit.
Moldova, Georgia and Kyrgyzstan have relied mainly on government transfers, and to support a stable
exchange rate and reduce the budget deficit reduced the external debt.
After a sharp weakening of the ruble at the end of 2014 - 2015, devaluation of the other currencies of the
CIS countries was only a matter of time.
At the end of 2014, the rate of the Armenian dram has fallen sharply against other major currencies, the
Belarusian ruble has been the de facto devalued by 30% (formally the Belarusian ruble has not been
reduced, but it was introduced 30% tax on the purchase of foreign currency).
In the late spring - early summer of 2015 the Russian ruble has entered a period of strengthening and
seemed to stop the new wave of devaluation in the countries of the Commonwealth.
But the unfavorable situation in the energy market made ruble weaker (plus the Russian authorities in
order to fill in the budget, considered weak ruble to be beneficial). And a new wave of devaluation of
currencies of post-Soviet countries continued as well.
The National Bank of Kazakhstan, which, according to the World Bank, only in 2015 spent on
maintaining the national currency rate of $ 17 billion, has decided to release the Tenge to float freely.

Experts also talk about the possibility of new devaluation of Azerbajan manat and Ukrainian hryvnia.


CBA after the start of a sharp drop in oil prices in late February this year, has already held a devaluation
for manat. Then the rate of the manat to the US dollar was reduced immediately by more than 33%.
The current Kiev authorities are likely to talk about the stability of the hryvnia (though the rate of
Ukrainian currency since the change of power in the country in February 2014 fell from 8,6- 8.9 hryvnia
to the dollar to about 24).
But the current external stability of hryvnia is only a matter of time. And there are two main reasons:
firstly, the majority of Ukrainian citizens have no more money to buy the currency, all money is spent on
current consumption. Second is a huge decrease in Ukraine export.
6. Common and different features in 2 crises
6.1 Common features in 2 crisis
6.1.1 Lower oil price led to the outbreak of the crisis.
Crude oil is a major export of Russia, roughly half of the Russian Federation's governmental revenue
comes from the sale of oil and gas, so the fall in oil prices hit Russia hard. Oil and natural gas prices fell
sharply on the international market in 1997.The world market prices of oil dropped below $100 from
nearly $200 a barrel from the middle of the second half of 1997 to 1997.Due to the international energy
prices dropped, the Russia lost more than $70 in revenue. In June 2014 and 16 December 2014,it was
declined in price by nearly 50% .The price of oil fell from $100 per barrel in June 2014 to $60 per barrel
in December 2014. As the price of oil falls, and Russia don’t have the ability to dramatically increase oil
production to compensate for the lower price, thus due to the reduced profit from selling oil, the
government has substantially lower income.
6.1.2. Serious influence on Russia's economy and society caused by sharp ruble devaluation
Two currency crises seriously impact the Russian economy and society.2 currency crisis leaded to the
collapse of the Russian ruble and sharp economic slowdown in Russia. The decline in the Russian ruble
has increased the costs for Russian companies, they have to make interest payments on debt that issued in
U.S. dollar or other foreign currencies that have strengthened against the ruble; 2 currency crises also has
increased the living cost of Russian citizens, currency crisis result in general increases in prices, and
caused damage to total household deposits.

6.1.3 Serious influence on Global Financial Markets.
Two currency crises affected other global financial markets. U.S. and European Union financial markets
also declined. American hedging fund affected by financial market of Russia, suffered huge losses in
1998. Foreign speculators lost about of $33 billion in the Russian financial crisis. In 2014,Financial
institutions that hold relatively high amounts of Russian debt or other assets have been affected by the


Russian financial crisis, companies from North America and Europe that heavily relied on Russian
economy have been affected by the crisis as well.
6.2 Different features in 2 crises
6.2.1 Different political background of the currency crisis.
In 1998, turbulent political scene in Russia made aggravate mistrust of the public and foreign capital to
the Russian market. In March 1998, the Russian President nominated Sergei Kiriyenko as prime minister,
but it was strongly opposed by the House of Commons, the political struggle between the government and
parliament was intensified. At the moment of a new political fight, economic reforms presented by the
government were strong opposed by the parliament. The financial crisis and the political crisis were
intertwined, Russian economy became more unstable and vulnerable.
International economic sanction is a background of the currency crisis in 2014. Because Russia's
annexation of Crimea and the Russian military intervention in Ukraine, Russia experienced international
economic sanctions.Russia made several incursions into Ukrainian territory in 2014,The majority of
members of the international community and organizations have condemned Russia for its actions in
post-revolutionary Ukraine, they accuse Russian break international law and violate Ukrainian
sovereignty. Many countries implemented economic sanctions against Russia.
7. Summary
Currency crisis is always a great shock for economy. Both crises in 1998 and 2014 decreased real output
in Russia, increased inflation, and made number of companies go bankrupt. Foreign investors lost their
confidence in Russian market, which also had a bad effect for the economy overall.
As we already mentioned before, one of the main reasons why Russia had faced both currency crises is a
strong dependence on oil price. Government revenue is almost 50 percent made by oil and gas export, and
a deep decline in price of any of those is a hard attack on Russian budget. Of course, Russia took lesson

from 1998 crises, and other industries such as chemical, car manufacturing, food and light industries start
developing, but they are still not even fully satisfying domestic market, and we shouldn’t be talking about
export. Sanctions against Russia also played some role in bringing down activities on the financial
markets and developing problems of many companies debt refinancing, but government is helping those
companies and CBR is also taking some measures in order to stabilize situation and create a new impulse
for economy. 1998 was a year when Russian Government was living in a debt, it was issuing T-bills
continuously to cover a hole in the budget and wasn’t thinking about consequences. Many people lost a
lot of money during the period when Government announced default on T-bills, so they lost confidence
in both Government and banking sectors. Though these days there was no default or bank bankruptcy still
a lot of people lost their money in means of foreign currency, that’s why banks might incur even bigger
outflow of deposits in national currency now also.


The lessons Russia learned from both of these crises is that government and public debt control is very
important, that country should develop some other industries that could both supply fully domestic market
and can be exported to raise government revenues and increase foreign reserves. Besides it is very
important to gain people confidence in government and banking sector thus make them desire to invest
money in state`s economy.
Russia is still on its way recovering from the 2014 currency crisis, but we can be sure that this recovery
will be faster and more efficient than those occurred 16 years ago.


References：
/> /> />Abbigail J. Chiodo and Michael T. Owyang (2002) “A Case Study of a Currency
Crisis: The Russian Default of 1998”, Review, November/December 2002, pp.7-18
Brian Pinto, Evsey Gurvich, and Sergei Ulatov (2004) “Lessons from the Russian
Crisis of 1998 and Recovery”, Managing Volatility and Crises, A Practitioner’s
Guide, The World Bank, February 2004.
URL :< />Nigel Gould-Davies and Ngaire Woods (1999) “Russia and the IMF”, International
Affairs, 75(1), pp. 1-22, January 1999

URL:< />
URL: />URL: />Кризис банковской системы России 1998 года, его причины и последствия, Грибовская
Надежда Васильевна, Москва 2000
Росстат. Цены: [электронный ресурс] // Федеральная служба государственной статистики
– база данных / www.gks.ru
Гилман, М. Дефолт, которого могло не быть / М. Гилман. – М.: Время, 2009