The Causes of the Russian Financial Crisis of 1998

The crisis experience of 1998 should be a very serious lesson for the Russian authorities. It occurred at the turning point of economic development, when the market reforms and the macroeconomic stabilization had begun to bear fruit and the Russian economy had begun to recover after six years of dramatic decline. The situation in the pre-crisis year 1997 did not demonstrate apparent threats of financial chaos and currency regime collapse. Economic decline stopped: 1997 was the firstyear since the end of the 1980s when GDP growth had been positive with an annual rate of 0.8 per cent (the authorities planned 2 per cent for the following year 1998). The rate of inflation was lowered to 11 per cent, a rate that was unbelievably low when compared with the three-digit rates that were prevalent in the first half of the 1990s. The real interest rate diminished to notably lower levels, and banks began to expand credits to the real sector. Foreign investors were quite optimistic in spite of the macroeconomic and structural problems that faced the government and the CBR. The sovereign ratings of Russia were satisfactory and it was anticipated that they could be improved still further. By the beginning of the Asian financial crisis there had been a stabilization of domestic debt. Russia successfully restructured its external debt and entered the Eurobond market.