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The Russian Ruble Crisis Of 1998

1573 words - 7 pages

The Russian Ruble Crisis of 1998 is termed as among the worst financial crisis to hit the Russian economy. The Crisis is believed to have been triggered by a number of factors. The Asian financial crisis of 1997 is a major cause of the crisis as it led to declines in the world commodity prices (Owyang, & Chiodo 2002, p. 7). Just to be appreciated is the fact that Russian economy was heavily dependent on oil. There are other reasons such as the downfall of the Soviet Union in 1991 and the economic difficulties it brought to the Russian nation. Another common cited reason is poor financial policy practices by the Russian government as well as political crisis that were witnessed in the ...view middle of the document...

It is claimed that the Asian financial crisis of 1997 significantly compromised the export demand as well as prices for these key Russian export commodities (Colorado School of Business 2009). All these had the implication of negating the nation’s ability to pay its workers and its domestic debts, a factor that evidently led the country into a financial crisis.
Another cause of the crisis is the fact that the government relied mainly on foreign capital inflows which were marked with extremely high interest rates (McArdle 2010). The sustainable growth of an economy is greatly determined by the ability of the government to finance its affairs from its tax revenue collections. However, the Russian government was in 1998 facing an increase in its internal loan, a factor that called for engagement into external borrowing to finance them (Colorado School of Business 2009). As an explanation of this claim is the move to hike GKO interest rates to an estimated 150 percent by Kiriyenko in June 1998.
Irregular internal loan payment is also to be blamed for the Russian crisis 1998 (McArdle 2010). Statistical evidence indicates that despite the many efforts by the government to resolve its internal debts, wage debts, particularly in remote regions continued to grow. This had negative impact on the nation’s ability to fund key budget items such as communal utilities among others. It is claimed that the government was faced with an estimated $12.5 on wage debts by early August 1998 (Owyang, & Chiodo 2002, p. 9). This prompted workers to engage on strikes, a move that further complicated the economic productivity of the nation.
Still, the war on Chechnya and its economic implications were cited as a potential cause of the Russian financial crisis of 1998 (Tarassova, Kraakman, & Black 2000, p. 27). According to available historical information, the war cost on the Russian economy is approximated at $5.5 billion. Just to be appreciated here is the fact that this cost is exclusive of the costs incurred in reconstruction of the ruined economy of Chechnya after the war (Tarassova, Kraakman, & Black 2000, p. 27). The opposition by the left wing parties of the government which led to failure to adopt anti-crisis policies by the government by mid 1998 is also another cause of the crisis. It is also claimed that prior to the meltdown, a loan given to Russian by the world bank and the International Monetary Fund was stolen, thus never functioned to serve its intended purpose.
The most cited reason behind the Russian financial crisis is the ruble-dollar exchange rates crisis (McArdle 2010). During this time, the Russian government had ordered the central bank to ensure that the ruble exchange rates remained at a preset range. Based on this reasoning therefore, the central bank was forced to invest its foreign reserves in buying rubles if the exchange rate seemed to go beyond such limits. Indeed, this was a major threat to its ability to maintain...

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