The whole Russian economy fell to pieces at a stroke. It had a profound effect on everyone, especially the people in the ministry of finance and central bank, who have worked hard to make sure it never happens again. The ruble rate fell threefold, overnight from 6 to the dollar to 21 by early September. The crisis led to the collapse of the entire top tier of the country's largest private banks. Although most of the depositors of these banks were rescued by the Central Bank, the money was returned so slowly that inflation had eaten up a third to a half of its value.
Foreign currency deposits forcibly converted into rubles suffered the same fate. Gerashchenko, have a heart. Give us back our money. Gerashchenko bailed out the biggest banks with an emergency cash injection from the IMF, but that money immediately left Russia for tropical offshore havens and owners let their banks fold. Technically Russia did not default, but delayed all bond repayments for five years.
Investors eventually made some good money as a result. But at the time everyone thought that Russia was screwed. I remember in reading the doom and gloom reports, but their dark predictions didn't tally with life on the street where shops were full and the mood of regular Russians was brightening. I remember wandering around and asking myself: Why are there suddenly so many smaller, mid-market restaurants? When the GDP numbers came out for showing that the economy had grown by 10 percent, it took at least six months for everyone to realize that the economy was booming and another two years before that translated into a rush into Russian equities.
That was a revolutionary change in mindset. The second consolidated the empire. And the third were royalty.
That same year in what is now seen as a legendary call, Goldman Sachs chief economist and a Russian veteran who was still in his 20s, Al Breach, marked the entire Russian equity market up to Buy — a call that would have made you millions in under three years if you had followed his advice.
That trend has continued to this day as business owners are investing in their stock by paying the highest dividend yields in the world another trend started by Abramovich who emptied his oil company Sibneft of cash by paying out percent-plus of profits as dividends just before he sold it to Gazprom in The rapidly rising price of oil fueled the subsequent boom, but that took several years to kick in. With costs in rubles but revenues in dollars, the entire oil sector became a massive cash cow overnight that poured more cash into the monetarily desiccated Russian economy.
After the Asian Tiger economies Thailand, Indonesia, South Korea, Malaysia, the Philippines, Hong Kong, and Singapore went down one by one, global markets became increasingly concerned about other countries with similar financial profiles—namely, Russia and Brazil. Notably, those countries had exchange rates pegged to the US dollar and relied on capital markets for government funding. To make matters worse, global energy and nonferrous metal prices were declining sharply, weakening the commodity-heavy Russian economy.
Low oil prices hit the Russian economy first, then hurt tax revenues to the Russian government. The widening fiscal deficit increased the threat that the CBR would need to print more and more rubles to make up the shortfall.
Such money printing would devalue the currency, of course, and break the peg to the US dollar, which had been maintained at a band of 5—6 rubles to the dollar. As investor fears of default in Russian sovereign debt grew, the Russian ruble experienced a frenzy of selling pressure in currency markets—first, in November ; then, in January ; and then again, in August Weakness in the Russian economy caused investment capital to flee.
The CBR also began striking forward contracts with various foreign investors to hedge their currency risk attempting to keep the capital in Russia. The sharp rise in interest rates further slowed the economy, which further reduced tax revenues and compounded the fiscal deficit problems.
Meanwhile, the CBR was working feverishly to maintain the ruble exchange rate to the US dollar by using its foreign currency reserves to purchase rubles. It became increasingly clear that Russia could not maintain the peg to the US dollar. Consequently, on 17 August , Russia devalued the ruble and defaulted on government bonds. CFA Institute members : This is eligible for 0. Click here to record your credit. Government finances can be very sensitive to specific industries or sectors e.
Foreign capital inflows are an important financing mechanism for sovereign governments and can offset deficiencies in the fiscal budget for a considerable period of time. Central Bank of Russia. Chiodo, Abbigail, and Michael Owyang. Chance, Clifford. Dabrowski, Marek. Fischer, Stanley. Gilman, Martin. Nadmitov, Alexander.
Odling-Smee, John. Perotti, Enrico. January, Pinto, Brian, and Sergei Ulatov. Policy Research Working Paper May. The main element of this stabilization program was a currency peg. The ruble was from then on allowed to fluctuate within a narrow band around 5 ruble per one US Dollar.
Meanwhile, the contraction of the economy slowly came to an end; GDP growth, which had been negative since , rose from It even became positive in , as the economy grew by 1. Next to the stabilization program, several other factors contributed to the rising optimism as well:.
As a result of the positive economic developments, market sentiment turned positive. This coincided with a relaxation in restrictions on foreign portfolio investment. In the beginning of , foreigners got access to the GKO market. Foreign investors reacted enthusiastically and foreign portfolio inflows rose sharply in the first quarter of Meanwhile, the gross reserves rose from USD However, in the fourth quarter of , market sentiment deteriorated drastically as a result of the Asian crisis that had started with the collapse of the Thai baht in July and soon spread to several Asian countries.
In November , soon after the outbreak of the Asian crisis, the Russian ruble came under speculative attack. World commodity prices started to drop as a result of the turmoil. The government was thus not able to provide the necessary economic infrastructure, including transportation, energy and public utilities.
Furthermore, disagreement on the distribution of taxes arose between the various regions, as the share of regional tax revenues had grown at the cost of the federal revenues. Moreover, the first war in Chechnya, which cost approximately USD 5.
Debt could therefore only be financed by the issuance of more debt. The subsequent parliamentary disapproval of an anti-crisis plan completely eroded investor confidence, which created strong downward pressure on the currency. This could however not prevent the outbreak of the crisis in August In December , already several months before the actual collapse, the Russian banking sector got confronted with fund withdrawals by depositors.
The emergency measures announced on 17 August were put into place in order to halt the withdrawals. Sberbank and just a few other financial institutions received financial support from the CBR. In the months following the crisis, a bank restructuring strategy was implemented, which resulted in the closure of a large number of banks.
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