The Ruble Crisis of 1998: Difference between revisions
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==Russian Financial Crisis== | ==Russian Financial Crisis== | ||
Prior to 1998, Russia had seen some growth in its economy since the first time the Soviet Union was dismantled. However, in August of 1998 the country would experience a crisis that some people today think has not fully been solved. This was caused by Russian default on its national debt, devaluation of the ruble, and a suspension of payments to foreign creditors from commercial banks. These things in the end were reasons that the crisis occurred, however the events leading up to the devaluation of the ruble are key in understanding the crisis. | Prior to 1998, Russia had seen some growth in its economy since the first time the Soviet Union was dismantled. However, in August of 1998 the country would experience a crisis that some people today think has not fully been solved. This was caused by Russian default on its national debt, devaluation of the ruble, and a suspension of payments to foreign creditors from commercial banks. These things in the end were reasons that the crisis occurred, however the events leading up to the devaluation of the ruble are key in understanding the crisis.1 | ||
The Asian financial crisis really contributed a lot to the economic crisis and the devaluation of the ruble. In November of 1997, the ruble came under speculative attack. In response the Central Bank of Russia defended its currency that lead to a loss of close to $6bn in exchange reserves. | The Asian financial crisis really contributed a lot to the economic crisis and the devaluation of the ruble. In November of 1997, the ruble came under speculative attack. In response the Central Bank of Russia defended its currency that lead to a loss of close to $6bn in exchange reserves.2 Next the Russian economy was dealt another blow when prices of oil, and metal dropped. In turn Russia lost 2/3 of its hard currency earnings.3 | ||
Finally in May of 1998 Russian government bond yields soared to 47 percent, and inflation was at 10 percent. Russian banks however did not buy these bonds because they feared the government would default, and would therefore restrict liquidity in the market place. Because of this the amount of money that moved through the banking system decreased. In 1998 household ruble deposits increased by 1.3 billion as opposed to 1997 where they increased by 29.8 billion. | Finally in May of 1998 Russian government bond yields soared to 47 percent, and inflation was at 10 percent. Russian banks however did not buy these bonds because they feared the government would default, and would therefore restrict liquidity in the market place. Because of this the amount of money that moved through the banking system decreased. In 1998 household ruble deposits increased by 1.3 billion as opposed to 1997 where they increased by 29.8 billion.4 With this liquidity problem, the Central Bank of Russia then increased the lending rates by 30-50 percent, which reduced Russian reserves by $1bn dollars.5 With oil prices being cut in half, oil companies were asking and pushing for a devaluation of the ruble, which would allow their exports to increase in value. Russia ended up losing $4.8 bn in revenue from this decrease in oil price. Then the Russian stock market collapsed, on August 13, 1998 due to fears that the government would devalue the ruble. Eventually the CBR did just that, when they floated the exchange rate causing a devaluation of the ruble, thus leading Russia to default on its domestic debt.6 | ||
==Citations== | |||
1-6, | |||
Revision as of 18:16, 13 December 2007
Devaluation of Currency
During August of 1998, Russia experienced an economic crisis that left the whole country in shambles. The crisis consisted mainly of the devaluation of the Ruble, decreased output, and default on their government securities (GKOs). Before we get into the Russian crisis it is good to understand the basic Macroeconomic theory of what causes a currency crisis.
Basic Theory says that a currency crises is a “speculative attack on country A’s currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of country A.”1 The reason this could take place is due to fears that a government will finance its deficit by printing money, or attempt to reduce its “nonindexed debt” by devaluing it. Therefore, devaluation of a currency occurs when there is pressure throughout the market to raise the exchange rate because the country cannot bear the cost of supporting its currency.2
In order to keep a low exchange rate peg, the country must buy up its currency with foreign reserves. If the foreign reserves are depleted, the country must then allow its currency to float, which can cause growth (GDP) to go down, inflation, and disruption in the financial markets.3
Citations
1,2,3 Chiodo, A. J. & Owyang, M. T. (2002, November/December) A Case Study of a Currency Crisis: The Russian Default of 1998. The Federal Reserve Bank of St.. Louis pp. 7
Russian Financial Crisis
Prior to 1998, Russia had seen some growth in its economy since the first time the Soviet Union was dismantled. However, in August of 1998 the country would experience a crisis that some people today think has not fully been solved. This was caused by Russian default on its national debt, devaluation of the ruble, and a suspension of payments to foreign creditors from commercial banks. These things in the end were reasons that the crisis occurred, however the events leading up to the devaluation of the ruble are key in understanding the crisis.1
The Asian financial crisis really contributed a lot to the economic crisis and the devaluation of the ruble. In November of 1997, the ruble came under speculative attack. In response the Central Bank of Russia defended its currency that lead to a loss of close to $6bn in exchange reserves.2 Next the Russian economy was dealt another blow when prices of oil, and metal dropped. In turn Russia lost 2/3 of its hard currency earnings.3
Finally in May of 1998 Russian government bond yields soared to 47 percent, and inflation was at 10 percent. Russian banks however did not buy these bonds because they feared the government would default, and would therefore restrict liquidity in the market place. Because of this the amount of money that moved through the banking system decreased. In 1998 household ruble deposits increased by 1.3 billion as opposed to 1997 where they increased by 29.8 billion.4 With this liquidity problem, the Central Bank of Russia then increased the lending rates by 30-50 percent, which reduced Russian reserves by $1bn dollars.5 With oil prices being cut in half, oil companies were asking and pushing for a devaluation of the ruble, which would allow their exports to increase in value. Russia ended up losing $4.8 bn in revenue from this decrease in oil price. Then the Russian stock market collapsed, on August 13, 1998 due to fears that the government would devalue the ruble. Eventually the CBR did just that, when they floated the exchange rate causing a devaluation of the ruble, thus leading Russia to default on its domestic debt.6
Citations
1-6,
