2. period. 2.1 Russia in Economic Crisis Period

2. Russian Crisis Period

In this chapter, we examine the crisis term(time_?) in Russia to clearly
understand the consequences of the Russian economic collapse. We divide this
part into two main categories, first Russia in economic crisis, second other
countries in this time period.

2.1 Russia in Economic Crisis Period

Russian Federation was trying to change their economy from Soviet
Union’s centrally planned economy to market based economy. As we saw at the
past, it was not easy to change the system of economy. First, the system of
economy was changed from the one that central authority controls major aspects
of the economy to the one that economic decisions and prices are determined by
the market forces. The first elected president of Russia, Yeltsin made some
reforms, like stabilization and privatization reforms, to improve their
purposes. In mid-1995, Russia adopted a stabilization program with the goal of
achieving single-digit inflation by 1997 and shrinking the fiscal deficit of
the federal government to less than 3 percent of GDP by 1998. (World Bank, May 2010) Nevertheless that reforms were not
enough to prevent the consequences of changing. In the fourth quarter of the
1997, in the south-east Asia, the Asian financial crisis occurred. That crisis
influenced Russia very deeply. One of the outcome of this is the Asian crisis
was driving investors away from emerging markets globally, and in November
1997, the Ruble came under pressure, forcing Russia to increase domestic
interest rates to defend the exchange-rate band (Duffie, 2003). (Düzelt!!!!!Another
outcome is the declining in the petroleum prices.) Russia’s economy was mostly
related to crude oil, and when the Asian countries was in crisis, Russia’s petroleum
export to Asia was declined. As a result of that the petroleum prices are
declined, either. Hence, the ruble was also devaluated. In the first quarter of
the 1998, Cernomirdin was dismissed and his placed was replaced with Kiriyenko.
In this time, as Summers and Williamson said, Russia had a large fiscal
deficit, principally because the government was tolerating underpayments of tax
both by the manufacturing sector and by energy producing enterprises, in the
latter case as a quid pro quo for extending soft budget constraints to their
manufacturing clients. (ALINTIYA BAK NASIL YAPILIYOR.) After the second quarter
of the 1998, the capital markets in Russia started to lose(?) value. As Pinto
and Ulatov said, by mid-May, the realization had set in fiscal
fundamentals were weak and international liquidity low. (ALINTIYA BAK) There was huge current account deficit and a crisis was
started to happen at Russia’s banking system. Pinto and Ulatov explain the
reason of the investors’ anxiety about lend to Russia in large amount of
quantities, “In answering it, three periods may be distinguished: the surge in
capital inflows which began in the early 1997; the beginning of speculative
attacks on the ruble coinciding with the spillover of the East Asian crisis in
November 1997; and the $16 billion – 8% of postcrisis GDP – increase in the
government’s dollar- denominated external debt after 1 June 1998, even though
it was evident by May that the Russian government was facing serious fiscal

As the consequences of what we talked above
Russian crisis officially occurred in August 17, 1998. As a result of that, the
debt on IMF and World Bank could not be paid and Pyle, Schoors, Semenova, and
Yudaeva explained it as
“On August 17, faced
with dwindling reserves and an unsustainable fiscal situation, the government
devalued the ruble, halted payments on domestic debt, and declared a moratorium
on payment to foreign creditors.”
(2012) Certainly, things that happened up until now have a huge effect on
Russian banks. Pyle, Schoors, Semenova, and Yudaeva expressed this situation as
“So many banks were bankrupted. Interestingly, while well educated people were
less likely to run on Sberbank, they may have been more likely to run on banks
in general, lending again support to the idea that well-educated people better
understood the “too-big-to-fail nature” of Sberbank vis-à-vis the
“small-enough-to-fail” nature of most private banks.” (2012) We can see the
number of failed banks in the n best rankings at the table one.


Table 1:The number of failed banks in the n best rankings

Source: Probability of default models of Russian banks, Probability
of default models of Russian banks.(BAK)


In the beginning of September, Primakov was
became new prime minister of Russia until 1999. In his term, his biggest success
was the tax reform. After 90 days of moratorium, the debt had to be paid and
the government had to do something for that. As Hanson said, the
Primakov government was pushed to make substantial spending cuts in its 1999
budget, and to postpone the introduction of cuts in tax rates. (1999)


4.1 The effects of the crisis to other countries

In the world, all the crisis are
different from each other and every crisis is unique. That means every crisis
has thought us something dissimilar. Also the lessons that learned could be
different for each country. In Russian crisis, so many countries are affected
but some of them little some of them more. Brazil, Turkey, and Argentina are
countries in the second group.

The effect of the Russian crisis on Brazil
was excessive because the investors’ concern the about foreign exchange market.
As Baig and Goldfajn said “In August and September alone, the excess demand for
dollars in the foreign exchange market was 11.8 and 18.9 billion dollars,
respectively” It is shown in table 2.


Table 2: Brazil: Foreign Exchange Market Net Flows, July 1995- November

(In millions of US dollars)

Source: Central Bank of Brazil, and Baig and Goldfajn’s estimates.


The impact on Turkey was about foreign exchange
earnings and exporting markets. As Busra Engin’s expressed “The exchange
earnings from the Russian Federation for Turkey was about 8-10 million dollars
and this number is the 13-15% of the Turkey’s foreign exchange earnings.” (2007)
Argentine was affected by the Russian crisis but we can say that the big impact
is indirect, Argentine was mostly affected by Brazil crisis. They both had a
huge impact about Argentine bonds together. Guidotti and Nicolini is express
that as “During the eight-month period marked by the Russian and Brazilian crises—from
August 1998 to March 1999—the risk spread on Argentine bonds averaged 800 basis
points reaching a peak of 1100 basis points in September 1998.”


3.2 Russia after the crisis


After crisis Russia had very huge amount
of debt.