The Ruble Crisis of 1998
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.” (citation) 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.
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.
