2. Russian Crisis Period In this chapter, we examine the crisis term(time_?) in Russia to clearlyunderstand the consequences of the Russian economic collapse.
We divide thispart into two main categories, first Russia in economic crisis, second othercountries in this time period. 2.1 Russia in Economic Crisis Period Russian Federation was trying to change their economy from SovietUnion’s centrally planned economy to market based economy.
As we saw at thepast, it was not easy to change the system of economy. First, the system ofeconomy was changed from the one that central authority controls major aspectsof the economy to the one that economic decisions and prices are determined bythe market forces. The first elected president of Russia, Yeltsin made somereforms, like stabilization and privatization reforms, to improve theirpurposes. In mid-1995, Russia adopted a stabilization program with the goal ofachieving single-digit inflation by 1997 and shrinking the fiscal deficit ofthe federal government to less than 3 percent of GDP by 1998. (World Bank, May 2010) Nevertheless that reforms were notenough to prevent the consequences of changing. In the fourth quarter of the1997, in the south-east Asia, the Asian financial crisis occurred.
That crisisinfluenced Russia very deeply. One of the outcome of this is the Asian crisiswas driving investors away from emerging markets globally, and in November1997, the Ruble came under pressure, forcing Russia to increase domesticinterest rates to defend the exchange-rate band (Duffie, 2003). (Düzelt!!!!!Anotheroutcome is the declining in the petroleum prices.) Russia’s economy was mostlyrelated to crude oil, and when the Asian countries was in crisis, Russia’s petroleumexport to Asia was declined. As a result of that the petroleum prices aredeclined, either. Hence, the ruble was also devaluated. In the first quarter ofthe 1998, Cernomirdin was dismissed and his placed was replaced with Kiriyenko.
In this time, as Summers and Williamson said, Russia had a large fiscaldeficit, principally because the government was tolerating underpayments of taxboth by the manufacturing sector and by energy producing enterprises, in thelatter case as a quid pro quo for extending soft budget constraints to theirmanufacturing clients. (ALINTIYA BAK NASIL YAPILIYOR.) After the second quarterof the 1998, the capital markets in Russia started to lose(?) value.
As Pintoand Ulatov said, by mid-May, the realization had set in fiscalfundamentals were weak and international liquidity low. (ALINTIYA BAK) There was huge current account deficit and a crisis wasstarted to happen at Russia’s banking system. Pinto and Ulatov explain thereason of the investors’ anxiety about lend to Russia in large amount ofquantities, “In answering it, three periods may be distinguished: the surge incapital inflows which began in the early 1997; the beginning of speculativeattacks on the ruble coinciding with the spillover of the East Asian crisis inNovember 1997; and the $16 billion – 8% of postcrisis GDP – increase in thegovernment’s dollar- denominated external debt after 1 June 1998, even thoughit was evident by May that the Russian government was facing serious fiscalproblems.” As the consequences of what we talked aboveRussian crisis officially occurred in August 17, 1998. As a result of that, thedebt on IMF and World Bank could not be paid and Pyle, Schoors, Semenova, andYudaeva explained it as”On August 17, facedwith dwindling reserves and an unsustainable fiscal situation, the governmentdevalued the ruble, halted payments on domestic debt, and declared a moratoriumon payment to foreign creditors.”(2012) Certainly, things that happened up until now have a huge effect onRussian banks.
Pyle, Schoors, Semenova, and Yudaeva expressed this situation as”So many banks were bankrupted. Interestingly, while well educated people wereless likely to run on Sberbank, they may have been more likely to run on banksin general, lending again support to the idea that well-educated people betterunderstood 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 thenumber of failed banks in the n best rankings at the table one. Table 1:The number of failed banks in the n best rankingsSource: Probability of default models of Russian banks, Probabilityof default models of Russian banks.(BAK) In the beginning of September, Primakov wasbecame new prime minister of Russia until 1999. In his term, his biggest successwas the tax reform. After 90 days of moratorium, the debt had to be paid andthe government had to do something for that. As Hanson said, thePrimakov government was pushed to make substantial spending cuts in its 1999budget, and to postpone the introduction of cuts in tax rates.
(1999) 4.1 The effects of the crisis to other countriesIn the world, all the crisis aredifferent from each other and every crisis is unique. That means every crisishas thought us something dissimilar. Also the lessons that learned could bedifferent for each country. In Russian crisis, so many countries are affectedbut some of them little some of them more.
Brazil, Turkey, and Argentina arecountries in the second group.The effect of the Russian crisis on Brazilwas excessive because the investors’ concern the about foreign exchange market.As Baig and Goldfajn said “In August and September alone, the excess demand fordollars 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- November1999(In millions of US dollars)Source: Central Bank of Brazil, and Baig and Goldfajn’s estimates. The impact on Turkey was about foreign exchangeearnings and exporting markets. As Busra Engin’s expressed “The exchangeearnings from the Russian Federation for Turkey was about 8-10 million dollarsand 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 impactis indirect, Argentine was mostly affected by Brazil crisis. They both had ahuge impact about Argentine bonds together. Guidotti and Nicolini is expressthat as “During the eight-month period marked by the Russian and Brazilian crises—fromAugust 1998 to March 1999—the risk spread on Argentine bonds averaged 800 basispoints reaching a peak of 1100 basis points in September 1998.” 3.
2 Russia after the crisis After crisis Russia had very huge amountof debt.