Russian Crisis

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Russian Crisis

The improper financial policies implemented by the Russian government during and previous to the economic crisis of November 1997 causing Russia’s economy to decline lead to a severe crisis in August of 1998 which my avoided been contained or avoided if the situation would have been handled differently.
Since May of 1998, Russia has been caught in the latest, and likely the most serious economic crisis. The crisis came to a head on August 17, 1998, when the government of then-Premier Sergei Kiriyenko abandoned its defense of a strong ruble exchange rate against the dollar by defaulted on government domestic debt forcing its restructuring, and placed a 90-day moratorium on commercial external debt payments. Those actions led to President Yeltsin’s dismissal of Kiriyenko on August 23, replaced, after a political standoff with the Duma, by a more leftward-leaning government led by 35 year former energy secretary Yevgennij Primakov. The August crisis also lowered Russians’ standard of living and set back Russia’s efforts toward establishing a market economy, perhaps for years to come.
The direct cause of crisis has been the Russian government’s failure to address fiscal imbalances. Less direct but more fundamental causes have been structural problems. The government has an inefficient tax regime that fails to generate sufficient revenues to meet fiscal obligations. More fundamentally, incomplete economic restructuring has left an economy, much of which is run on barter, that masks inefficient and even “value-subtracting” economic activities, and that makes attaining fiscal balances even more arduous. But Russia has faced difficult setbacks along the way, this current crisis being the most serious. The effects of this crisis and how Russian policymakers manage seems likely to determine the future of Russian economic reform, and, consequently, prospects for long-term Russian economic growth and development.
Crisis in October 1997 as a seed of crisis in August 1998
What the world financial crisis was, Russians knew basically from the books. It was so before October 23, 1997, when after unprecedented collapse of the world’s major stock exchanges it became clear that this could happen in Russia as well. Because Russian stock market became a part of the world financial system.
The major cause of the stock exchange collapse was common crisis of the exchange markets in South Asian countries, which were characterized by rapid economic growth and by extremely easy accessibility to the western credits. Financial market was developing correspondently. Cash inflow had been accompanied by skyrocketing growth of the securities rates.
However, by the end of the summer the external debt of some South Asian countries approached the critical point. At the same time the export, the basis of the financial pyramid, essentially reduced its growth, causing the trade balance deficit. As a result of this foreign exchanges crisis the capital forwarded to Hong-Kong stock exchange, which at the moment managed to hold its market positions.
On that day an unprecedented crush of the stock rates was recorded at Hong Kong stock exchange, the cumulative index dropped by 1600 points, or 14%. Panics embraced the market. The world’s largest investors urgently began to call back their funds not only from Hong-Kong exchange, but also from all South Asian stock markets. Then everything worked according to domino scheme – crisis jumped to all major exchanges.
On October 27, 1997 Dow Jones dropped by more than 550 points, which was the record fail in its whole history. It was deep night in Russia when it happened, and therefore the crisis came to them only on the following day.
In first minutes of the beginning of trades at Russian stock market brokers characterized the situation as “near to collapse”. Foreign investors, who played a major role on the Russian market, were intensively selling out quickly depreciating securities. Because of the quick decreasing of the stock rates in 5 minutes from the beginning, the trades on the Moscow Foreign Currency Exchange (MFCE) were paused. At the same time the rate of the stocks of RAO “Gasprom” (leading Russian stocks) at Moscow Stock Exchange dropped by 7,5%, and the trades were stopped. Second opening of the Russian Trading System practically didn’t change anything, because in 10 minutes after trades resuming “Gasprom” stocks dropped by additional 8%. One of

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