contents:
Introduction
Ch. 1. The characteristics of financial crisis situations
Ch. 2. The identificators of currency crisis
Ch. 3. The essence of financial crisisies of 1997-1998
Ch. 4. The Russian financial crisis of 1998 be seen from an exchange
rate point of view
Ch. 5. What effects did the Russian financial crisis of 1998
have on the exchange rate, and what were the causes of the crisis
Ch. 6. Could the Russian financial crisis of 1998 have been
forseen, and how did it affect the exchange rate during the period of the
crisis
Ch. 7. Recommendations
Conclusion
Bibliography
introduction
Actuality and Scientific Value. The decade of the 1990s was
certainly marked by a rather unusual number of financial and economic crises
with the Asian Crisis of 1997 and the Russian Crisis of 1998 as perhaps the
most prominent such cases. These crises naturally renewed interest in the study
of the relevant causes, consequences, and cures for such episodes. In the wake
of these recent events, one very important question has been the need and the
feasibility of predicting such crises.
Purpose of Research. The given paper will be aimed at
deriving lessons from the Russian financial crisis through examining the root
causes of macroeconomic and financial sector indicators spanning the period
1997-1999.
Subject of Research - the financial crisis in Russia of 1998.
Objects of Research. The significant variables of Russian
economy at 1998 state - foreign direct investment, inflation, world oil prices,
real interest rates, current account, foreign exchange reserves, stock prices,
real exchange rate, and export growth will be examined in the work.
Tusks of Research:
-
to
study the conception of financial crisis in economics;
-
to
give a notion of the financial crisis of 1998 in Russia;
-
to
study the causes of the financial crisis of 1998 in Russia;
-
to
give characteristics of the financial crisis of 1998 in Russia;
-
to
describe the process of the development of the financial crisis of 1998 in Russia;
-
to
work out recommendations on regulation techniques of the financial crisis.
The theoretical base of research composed the following works.
While the different types of crises could range from "garden
variety" currency crises to rather esoteric real estate bubbles, studies
of such crises exhibit empirical and theoretical commonalties which will be
highlighted below (for types of crises, see IMF World Economic Outlook, 1998).
Also, these crises can have significant social costs as noted in Shabbir
(1999).
In an attempt to note possible empirical regularities, Kaminsky et al
(1998, Vol. 45, No 1) reviews about twenty-five relevant studies. Due to the
disparate nature of the studies in terms of their methodologies and specifications,
the overall empirical results do not provide "a clear-cut answer
concerning the usefulness of each of the potential indicators of currency
crisis".
Kaminsky et al (1998, 90) also presents an extension of previous work
which employs the 'signals' approach to identifying and predicting currency
crises. Based on empirical results for a sample of fifteen developing countries
and five industrial ones during 1970-95, the authors report that the variables
with the best track record in anticipating crises include output, exports, real
exchange rate deviations, equity prices and the ratio of broad money to gross
international reserves.
Epitomized by Krugman (1979, 99), the First Generation Models tend to focus
on the role of economic and financial 'fundamentals' such as the unsustainable
fiscal policies in the face of the fixed exchange rate as the major cause of an
eventual currency crisis. Given a fixed exchange rate regime, the persistent
need to finance government budget deficits through monetization would surely
lead to a reduction in the international reserves held by the Central Bank.
Since such reserves are finite the speculative attack on the currency is
the eventual outcome of this scenario. This rather simple model suggests
certain 'fundamental' imbalances such as the gradual decline in international
reserves, growing budget and current account deficits, domestic credit growth,
and gradual exchange rate overvaluation as the potential early warning
indicators of speculative attacks.
The development of the so-called Second Generation Models of the currency
crises were motivated by the EMS currency crisis in 1992-93 where some countries
such as the UK and Spain suffered crises despite having adequate international
reserves, manageable domestic credit growth and non-monetized fiscal deficits -
characteristics that ran counter to the necessary conditions asserted by the
first generation models.
Obstfeld (1994, 190) and Krugman (1998, 67) addressed the concerns raised
by these counter-examples. The main innovation of these Second Generation Models
lies in identifying the role that the 'expectations' of the market agents may
play in precipitating currency crises. These models allow for "multiple
equilibria" and, under certain (generally untenable) circumstances of
perfect information-based decision making, could argue that predicting crises
may not be feasible due to the 'self-fulfilling' nature of the expectations of
the crisis.
Finally, the Third Generation Models are based on the notion of
'contagion' where the mere occurrence of a crisis in one country increases the
likelihood of a similar crisis elsewhere As described in Masson (1998, Working
Paper 120), three related scenarios can be identified to represent the paradigm
of contagion: 'monsoonal effects', 'spillover effects' and 'pure contagion
effects'.
The basis Resources of the analytical part of research includes:
-
The
Analytical Report & Macroeconomic Analysis by short-term forecasting institute
of economic forecasting of the Russian Academy of Science; describes bank
system of Russia per 1996-2000 and presents models of functioning, the
tendency, prospect of development
-
The
World Economic Outlook Review (1998) presents the IMF staff’s analysis and projections of
economic developments at the global level, in major country groups (classified
by region, stage of development, etc.), and in many individual countries. It
focuses on major economic policy issues as well as on the analysis of economic
developments and prospects. It is usually prepared twice a year, as
documentation for meetings of the International Monetary and Financial
Committee, and forms the main instrument of the IMF’s global surveillance
activities.
-
Financial Stability Review
Financial Crisis Management Articles 1998 (1999). The Financial Stability
Review is essentially aimed at financial sector players and observers, such as
decision makers, academics and market participants. It reviews developments
affecting financial institutions, markets and their infrastructures from a
cyclical and structural perspective.
-
The annual report of the Central Bank of Russia (1998).
The transformation of financial systems has highlighted several potential
sources of instability, such as financial bubbles, bouts of market volatility
and changes in the allocation of risk between participants. At the very heart
of the financial system, central banks play a decisive role in preserving its
stability. For this reason, they carry out a thorough analysis of the soundness
of the financial system's various components, based on a close dialogue with
its main relevant players.
Aimed at encouraging analysis and exchanges of views, the Financial Stability
Review is divided into two parts. The overview provides a detailed account of
recent developments in the international environment and the financial system
addresses financial vulnerabilities and sheds light on the initiatives designed
to enhance financial stability.
Hypothesis of research: Can we state that political crisis in complex
with macroeconomical factors initiated the financial crisis in Russia of 1998? What factor was more essential?
Structure
of Research. The given research includes presentation, introduction, two chapters
(theoretical and analytical ones), conclusion, list of references and appendix.
Analysis
part was
devoted to studying of all the questions enlightened the main characteristics
of the financial crisis in economics; the
basic features of financial crisis of Russian economy in 1998; the state of the
Russian economy in 1998, of the bank system and inner market state.
The research
examined the default identifications in 1998 in bank system and causes of financial crisis of Russian economy in 1998.
In
Conclusion the lessons from the situation of Russian default of 1998
will be identified.
Methodology
Methodology of research embraces the following stages:
1. Statement of theory of hypothesis.
2. Obtaining the data:
a) Primary data (interviews, periodical materials); (Appendix 2)
b) Analytical foundation (statistics, analytical reports). (List of
resources)
The tested 10 indicators are selected on the basis of currency crisis
theories and further empirical literature. In addition to the traditional
macroeconomic variables, we include several indicators describing the
vulnerability of domestic banks. These indicators include the growth of bank
deposits, the ratio of the lending rate to the deposit rate, and the ratio of
bank reserves to assets.
We also employ variables that indicate vulnerability to a sudden stop of
capital inflows. These variables are public debt, broad money to reserves, and
private sector liabilities.
3. Estimation of the parameters of the data. The basic tool for this purpose is
served by the financial analysis, through which it is possible objectively to
estimate the internal and external attitudes of analyzed object.
As it was mentioned earlier, the recent efforts at devising an early
warning system for an impending financial crisis have taken the form of two
related approaches.
The first approach estimates a probit or logit model of the occurrence of
a crisis with lagged values of early warning indicators as explanatory
variables. This approach requires the construction of a crisis dummy variable
that serves as the endogenous variable in the probit or logit regression.
Classification of each sample time point as being in crisis or not depends on
whether or not a specific index of vulnerability exceeds an arbitrarily chosen
threshold.
For example, for currency crises, the index of vulnerability is sometimes
based on a weighted average of percentage changes in nominal exchange rates,
gross international reserves and short-term interest rate differentials (e.g.
local versus US rates when dealing with crises in the Philippines).
Explanatory variables typically would be variables in the real sector of
the economy, financial variables, external sector and fiscal variables. This
approach has the advantage of providing a framework for statistically measuring
the magnitude and significance of the effects of various potential explanatory
variables on the onset of a crisis. The estimated model also allows the
estimation of the probability of occurrence of a crisis in the future given
projected or anticipated values of the explanatory variables.
Negative aspects of the approach partly derive from the following:
1. The model does not address the independence of crisis occurrence from
period to period - except indirectly through serial correlations that exist in
the explanatory variables.
2. Additional serial correlations may even be introduced inadvertently
through the explicit manner in which the crisis dummy variable is constructed.
For example, the use of exclusion windows (where the crisis variable
automatically is set to zero for k periods immediately following a time point
rated to be in crisis) establishes perfect correlation between a crisis time
point, and the next k periods following it. In general, any serial correlation
in the crisis dummy variable which is not taken into account in the probit or
logit regression would cause the estimates of the model to be inconsistent.
3. Another source of inconsistency: errors in the construction of the
crisis dummy variable leading to misclassification of time points - either a
false signal of a crisis or a missed reading of a crisis.
4. The method does not provide a direct measure of the weakness or
intensity of the signal of each explanatory variable regarding the onset of a
crisis.
The second method uses a signaling approach to get a more direct measure
of the importance of each candidate explanatory variable. The approach
constructs a similar binary variable from each explanatory variable - thus
imputing a one (for crisis) or a zero (no crisis) signal from each explanatory
variable at each point in time in the sample. A signal-to-noise is then
computed for each explanatory variable over the whole sample period - as a
quantitative assessment of the value of the variable as a crisis indicator.
This signal-tonoise ratio is defined as the ratio of the success rate of
crisis predictions relative to the false alarm rate. More specifically, this
approach allows a direct ranking of variables as crisis indicators and provides
a quick focus on the source of the crisis (assuming an encompassing set of indicators).
But the approach does not take into account strong correlations among
indicators, provides no framework for statistical testing or calculation of crisis
probabilities in the future, and is still open to misclassification errors that
can bias the conclusions of the analysis.
Probit and logit models, pioneered by Frankel and Rose (1996), use
limited dependent variable models known as probit or logit regressions to
identify the causes of crises and to predict future crises. This approach
defines a crisis indicator equal to one or zero depending on whether a currency
crisis does or does not occur within the specified time period.
Frankel and Rose (1996) attempted to find out how international debt structure
and external factors affected the probability of currency crises. They used a
number of external, internal and foreign macroeconomic variables in a
multivariate probit model specified for 105 developing countries, covering
annual data from 1971 to 1992.
They defined a crisis as at least 25% depreciation of the nominal
exchange rate that also exceeds the previous year's depreciation level by at
least 10% and constructed a dummy crisis variable according to that rule.
Results of their model indicate that the significant variables are output
growth, foreign direct investment/total debt, reserves, domestic credit growth,
external debt and foreign interest rates. Sachs, Tornell and Velasco (1996)
also used a probit model to analyze currency crises, particularly the Mexican
Tequila Crisis of 1995, using a sample of 20 emerging countries that were
vulnerable to contagion effect.
They used the weighted sum of the percent decrease in reserves and the percent
depreciation of the exchange rate as their crisis index. (International Journal
of Applied Econometrics and Quantitative Studies Vol.1-4(2004)
They found that crises happened only in the countries with weak fundamentals
such as low reserves, fragile banking systems and overvalued
exchange rate. They also found evidence showing that short-term capital inflows
do not matter when reserves and fundamentals are strong whilst government
consumption and current account deficits matter only in the countries with weak
fundamentals and weak reserves.
Berg and Pattillo (1999) tested models offered by Kaminsky, Lizondo and
Reinhart (1998), Frankel and Rose (1996) and Sachs, Tornell, Velasco (1996) to
see if these models could predict the Asian Crisis using information available
at the end of 1996. They found out that the models offered by Sachs, Tornell, Velasco
(1996) and Frankel and Rose (1996) were ineffective in forecasting the Asian
Crisis. The Kaminsky, Lizondo and Reinhart (1998) model, on the other hand,
proved to be successful.
Crisis probabilities generated by this model for the period between May 1995
and December 1996 were statistically significant predictors of actual crisis
occurrence over the following 24 months. Berg and Pattillo (1999) also found
out that in all three approaches, the probability of a currency crisis
increases when domestic credit growth is high, the real exchange rate is
overvalued relative to trend, and the ratio of M2 to reserves is high.
In a recent study, Komulainen and Lukkarila (2003) examined the causes of
financial crises in 31 emerging market countries during 1980-2001 using a
probit model based on 23 variables.
Their findings show that financial crises occur together with banking
crises and an increase in private sector liabilities, public debt, and foreign
liabilities of banks, unemployment, inflation, and US interest rates raises the
probability of a crisis.
Feridun (2004) summarizes the empirical literature on financial crises. According
his work, the probit model is estimated for a set of 20 monthly observations spanning
the period 1988:1 – 1998:8. Most data are gathered from DataStream. The data
for government debt figures come from several sources, including International
Financial Statistics, the World Bank’s WDI and IMF country reports.
The used probit model assumes that the probability distribution function
corresponds to normal distribution. Since in currency crisis situation a
successful attack leads to sharp currency depreciation and substantial reserve
losses, both the signal approach and limited dependent models traditionally
define a currency crisis as a discrete event. One common technique is to
construct an index of exchange market pressure as a weighted average of
exchange rate changes and reserves changes (as well as interest rates in some
cases). The crisis is said to occur when the index exceeds a certain threshold
level.
At this point, we’ll calculate an exchange market pressure index (EMP)
for Russia. The index includes exchange rate depreciation and loss of reserves,
which are weighted to influence equally. The exchange market pressure index
takes the form:
EMP = ?e – (s e/s r)*?r (2)
-
where
?e denotes the change in exchange rate and ?r in international reserves,
-
se and
sr denote the standard deviation of exchange rate alteration and reserves, respectively.
We’ll determine the values of the EMP index more than two standard deviations
above the mean as a crisis. Since macroeconomic variables often worsen prior to
the actual crisis, we define as a crisis not only the crisis month but also the
eleven months before. In other words, we use a one-year window for our
variables.
4. Stating of the conclusions.
1. What are the characteristics of financial crisis situations?
A currency crisis is defined as 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.
The speculative attack need not be
successful to be dubbed a currency crisis. This might occur because investors
fear that the government will finance its high prospective deficit through seigniorage
(printing money) or attempt to reduce its nonindexed debt (debt indexed to
neither another currency nor inflation) through devaluation.
A devaluation occurs when there is market pressure to increase the
exchange rate (as measured by domestic currency over foreign currency) because
the country either cannot or will not bear the cost of supporting its currency.
In order to maintain a lower exchange rate peg, the central bank must buy up
its currency with foreign reserves. If the central bank’s foreign reserves are
depleted, the government must allow the exchange rate to float up - a devaluation of the
currency. This causes domestic goods and services to become cheaper relative to
foreign goods and services. The devaluation associated with a successful
speculative attack can cause a decrease in output, possible inflation, and a
disruption in both domestic and foreign financial markets.
Burnside, Eichenbaum, and Rebelo (2001) show that the government has at
its disposal a number of mechanisms to finance the fiscal costs of the
devaluation. Which policy is chosen determines the inflationary effect of the
currency crisis.
The standard macroeconomic framework applied by Fleming (1962) and
Mundell (1963) to international issues is unable to explain currency crises. In
this framework with perfect capital mobility, a fixed exchange rate regime
results in capital flight when the central bank lowers interest rates and
results in capital inflows when the central bank raises interest rates.
Consequently, the efforts of the monetary authority to change the
interest rate are undone by the private sector. In a flexible exchange rate
regime, the central bank does not intervene in the foreign exchange market and
all balance of payment surpluses or deficits must be financed by private
capital outflows or inflows, respectively.
The need to explain the symptoms and remedies of a currency crisis has
spawned a number of models designed to incorporate fiscal deficits, expectations,
and financial markets into models with purchasing power parity. These models
can be grouped into three generations, each of which is intended to explain
specific aspects that lead to a currency crisis.
The valid state of affairs at crisis historical periods of any human community
is presented in diagram (See figure 1).
Figure 1. The state of affairs at crisis historical periods
Basically there are two kinds of economic
crises:
1.
The stagflation crisis (or underproduction crisis) is the final
effect of government-stimulated growth (or the war, which is no more that a
special kind of government investment). Just before the crisis (in the
hidden phase) we can observe: shortage of goods, government regulation of
the market (like rationing coupons or fixed prices), and the black market.
These
are signals of the increasing market unbalance. When the crisis starts (in the evident
phase) we can observe: unemployment, decline of the production, and
inflation (or even hyperinflation), because publicity no longer believe in
money offered by the government.
2.
The overproduction crisis (or deflation crisis) is the final
effect of growth stimulated by private financial institutions (like banks or
investment funds).
Just
before the crisis (in the hidden phase) we can observe: rocketing increase
of prices on the stock market, and a periodical increase of inflation. These
are signals of the increasing market unbalance. When the crisis starts (in the evident
phase) we can observe: sharp fall of the stock prices, unemployment,
decline of the production, problems with selling goods (overproduction), and
thus deflation. (See economic tools // Access: www.geocities.com)
Of
course in the real world things are more complicated, and sometimes crisis is
some combination of two basic kinds of crises mentioned above.
For
example, when a country with government-stimulated economy borrows money from
an external and free financial market (i.e. from abroad financial institutions
abroad), the crisis usually begins with a drastic fall of the national currency.
Mexican
crisis of 1994 is a good example here. The reasons for the crisis are the same
like in stagflation crisis but the course of the crisis resembles rather an overproduction
crisis - because of free financial markets involved.
The preliminary research has shown that literature on financial crises is
categorized into three mainstream models, namely first-generation models, second-generation
models, and third-generation models. (See the list of bibliography)
The representative study that uses the logit/probit framework (Kindleberger
2001, 90) deals with predicting banking crises. Based on observations for
1980-94 for a large sample of developed and developing countries, it reports
that banking crises tend to occur when the macroeconomic environment is weak
especially when growth rate of GDP is low and inflation is high.
Considering the question of currency
crisis’ origin we tend to focus on the role of economic and financial
'fundamentals' such as the unsustainable fiscal policies in the face of the
fixed exchange rate as the major cause of an eventual currency crisis. Given a
fixed exchange rate regime, the persistent need to finance government budget
deficits through monetization would surely lead to a reduction in the international
reserves held by the Central Bank. Since such reserves are finite the speculative
attack on the currency is the eventual outcome of this scenario.
This rather simple model suggests certain 'fundamental' imbalances such
as the gradual decline in international reserves, growing budget and current
account deficits, domestic credit growth, and gradual exchange rate
overvaluation as the potential early warning indicators of speculative attacks.
Also, high real interest rates, balance of payment deficits and presence
of deposit insurance scheme were found to be significant precursors of banking
crises.
FINDINGS.
- A currency crisis is defined as 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.
- The speculative attack need not
be successful to be dubbed a currency crisis. This might occur because investors
fear that the government will finance its high prospective deficit through
seigniorage (printing money) or attempt to reduce its nonindexed debt (debt
indexed to neither another currency nor inflation) through devaluation.
- A devaluation occurs when there is market pressure to increase the exchange
rate (as measured by domestic currency over foreign currency) because the
country either cannot or will not bear the cost of supporting its currency.
- In order to maintain a lower exchange rate peg, the central bank must
buy up its currency with foreign reserves. If the central bank’s foreign
reserves are depleted, the government must allow the exchange rate to float up
- a
devaluation of the currency. This causes domestic goods and services to become
cheaper relative to foreign goods and services.
- The devaluation associated with a successful speculative attack can
cause a decrease in output, possible inflation, and a disruption in both
domestic and foreign financial markets.
2. What
are the IDENTIFICATORS OF currency crisis?
Given the fact, that the currency crises may be preceded by multiple economic
and even political problems, the modeling of currency crisis prediction should
involve a relatively broad range of indicators. The variables that
receive 'ample' support as useful predictors of currency crises include:
1. M2/International reserves - official foreign currency reserves
in the central bank, in financial bodies of the country or in the international
currency - credit organizations. Currency reserves are intended for
international payments, on a case of unforeseen situations, for the purposes of
reception of the income and regulation of the currency market. In the balance
of payments of the country currency reserves are an active. (Economic tools //
[E-resource])
2. The real exchange rate which is defined as RER,
where P is the domestic price level and P * the foreign price level. P and P *
must have the same arbitrary value in some chosen base year. Hence in the base
year, RER = e.
The RER is only a theoretical ideal. In practice, there are many foreign
currencies and price level values to take into consideration. Correspondingly,
the model calculations become increasingly more complex. Furthermore, the model
is based on purchasing power parity (PPP), which implies a constant RER. The
empirical determination of a constant RER value could never be realized, due to
limitations on data collection. PPP would imply that the RER is the rate at
which an organization can trade goods and services of one economy (e.g.
country) for those of another. (Kaminsky, Lizondo, Reinhart 1998, 34)
For example, if the price of good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price
of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also
worth mentioning that government-enacted tariffs can affect the actual rate of
exchange, helping to reduce price pressures. PPP appears to hold only in the
long term (3–5 years) when prices eventually correct towards parity.
More recent approaches in modeling the RER employ a set of macroeconomic
variables, such as relative productivity and the real interest rate
differential.
3. Domestic inflation in classical economics is an
increase in the total stock of money. As the consequence of that, so called price
inflation occurs and is revealed in a rise in general level of prices of
goods and services over time. Although "inflation" is sometimes used
to refer to a rise in the price of a specific set of goods or services, a rise
in price of one set (such as food) without a rise in others (such as wages) is
not included in the original meaning of the word. Increases in the price of
financial assets (stocks, bonds, etc.) are not included in the calculation of inflation
by governmental or banking agencies. (Bustelo Paper. No.16)
4. Trade Balance is one of the key indicators. It is the value of the
goods and services sold to other countries and bought from them, it forms part
of the balance of payment (Current Account).
The balance of trade is a correlation between the sum of money gained by
some country economy by exporting goods and services to other countries and the
cost of goods and services imported to the country that is the difference
between export and import. At first export is analyzed as it has direct impact
on the economic acceleration. Whereas import reflects demands for goods within
the country (import increase reflects stocks forming, which may signify
possible further slow increase in selling).
Rate of exchange affects trade balance as it corrects the nominal value
of the imported goods and services. In case the sum of exported goods and
services exceeds the price of imported ones Trade Balance is positive
(surplus), in case import surpasses export it is negative (deficit). Surplus
(or decrease of deficit) is favorable for the national currency rate of
exchange advance. Trade balance volatility may be significant for GDP
forecasts, as import volume is subtracted from GDP (See below) whereas export
volume is added to it. (Berg 1999, 567)
5. Export performance which is the relative success or failure of
the efforts of a firm or nation to sell domestically-produced goods and
services in other nations. (Lages 2005, 80)
6. Real GDP growth - the gross domestic product (GDP) or gross
domestic income (GDI) is one of the measures of national income and output for a
given country's economy. GDP is
defined as the total market
value of all final goods and services produced within the country in
a given period of time (usually a calendar year). It is
also considered the sum of value added at every stage of production (the
intermediate stages) of all final goods and services produced within a country
in a given period of time, and it is given a money value.
The
most common approach to measuring and understanding GDP is the expenditure
method: GDP = consumption
+ gross investment + government
spending + (exports − imports), or, GDP = C + I + G + (X-M);
- and the fiscal deficit as
potential early warning indicators. (Dooley 1997, Working Paper Number 6300)
On the other hand, the variables associated with the external debt
profile or the current account balance did not fare well.
Findings.
- Summing
up the theoretical survey the following indicators at crisis period in economy
can be stated in Table 1.
Table
1 Interrelating indicators under a stress classification
|
Macroeconomic stress
|
External stress
|
Financial stress
|
|
Fiscal deficit
|
International reserves
|
Composition of foreign capital
flows
|
|
Inflation rate
|
Foreign investment
|
Interest rates
|
|
Real GDP growth or level
|
Exchange rate
|
Credit growth
|
|
Savings-investment gap
|
Trade balance
|
Money supply
|
|
Employment/unemployment
|
Terms of trade
|
M2/international reserves
|
|
Financial market indices
|
|
Parallel financial market premium
|
|
Government consumption
|
OECD growth
|
Central bank credit to banks/public
sector
|
|
|
Private sector debt
|
3. what
is the essence of financial crisisies of 1997-1998?
Wall
Street Journal in August, 1998 has
written about the financial firestorm that has been scorching economies around
the globe is intensifying into one of the world's worst and most baffling
currency crises since the system of fixed exchange rates crumbled a quarter of
a century ago. (Wall Street Journal - Aug. 24, 1998)
Frightened
investors and quick-moving speculators in markets as far apart and different as
Brazil and Hong Kong, Canada and Russia, Japan and Venezuela were scurrying to
exchange local currencies for the U.S. dollar.
Selling
those currencies means selling stocks and bonds in their respective markets,
pushing down stock prices and pushing up interest rates in emerging-market
economies and even in some that emerged long ago, such as Hong Kong.
We can mark the strict connection between the Asian financial crisis of
1997 and the Russian currency crisis of 1998. Cooper (1999) has established,
that «the Asian financial problems, and other factors have created uncertainty
in the appearing markets of the capital on the part of investors " and as
sharply falling prices for oil have made firm currency incomes insufficient,
aggravating crisis.
Before the Russian financial crisis of August, 1998, Russia experienced a shortage of foreign investments into the country and as consequence a
shortage of trust, leading to falling of the Total National Product, the high
inflation, raising unemployment and high interest rates.
Hence, it has affected external economic indicators which included the exchange
rate between the American dollar and the Russian ruble and reduction in foreign
reserves in Russia.
There are a handful of studies which try to predict economic and/or
financial crises, see Ozmucur & Shabbir (1999); Onis & Ozmucur (1989a,
1989b) used logit and probit models to predict "need for IMF
programs" and "bottlenecks" in the economy.
Real exchange rate, real interest, external terms of trade, excess demand
(money supply growth- real GDP growth), and share of current account balance in
GNP, all with one or two lags, are used as explanatory variables in their
model.
As
the crisis mounts, so does the number of explanations many of them deriving
from ominous combinations of domestic and international factors:
-
Plunging
commodity prices, such as the drop in oil prices that has pummeled Russia, Mexico and Venezuela;
-
Political
instability in several pivotal countries, highlighted just Sunday by Russian
President Boris Yeltsin's abrupt dismissal of his cabinet and the appointment
of Viktor Chernomyrdin as prime minister;
-
Doubts
about the financial wherewithal and willingness of the International Monetary
Fund to respond to the next big economy in need of aid;
-
A
spreading nervousness among global investors about being exposed to emerging markets;
-
And a
deeply intermeshed global financial market that, with increasing speed, transmits
one market's weakness to others. (Berg, Pattillo 1999, 570)
What
made the crisis so unnerving is that there was no clear solution in sight - no
financial firebreak that governments or international financial institutions
can construct to slow the spread. Hopes that the crisis, ignited by the July
1997 devaluation of the Thai baht, would soon burn itself out have been dashed
by this month's devaluation and default in Russia and the side effects that
flared Friday, including record lows for the Mexican peso and the Canadian
dollar, and the Venezuelan central bank's decision to give the bolivar more
room to fall.
Findings.
There
are combinations of domestic and international factors which caused the
crisis situations of 1997-1998:
-
Plunging
commodity prices, such as the drop in oil prices (Russia, Mexico and Venezuela);
-
Political
instability (Russia);
-
Doubts
about the financial wherewithal and willingness of the International Monetary
Fund to respond to the next big economy in need of aid;
-
A
spreading nervousness among global investors about being exposed to emerging markets;
-
And a
deeply intermeshed global financial market that, with increasing speed, transmits
one market's weakness to others.
4.
Can the RUssian Financial crisis of 1998 be seen
from
an exchange rate point of view?
In
theory, a currency's value mirrors the fundamental strength of
its underlying economy, relative to other economies. But in the current
white-knuckled climate, traders and lenders are trying to guess what every
other trader thinks. While traders use the most modern communications, they act
by fight-or-flee instincts. If they expect others are about to sell the Russian
ruble for U.S. dollars, they try to sell their ruble first. It isn't just
economics at work now; it's a psychology that at times borders on panic.
When
a currency's value fell the prices of imported goods tended to rise, fueling
inflation sometimes severe enough, as in Russia in August of 1998, to spark
civil unrest. On the other hand, devaluation made exports cheaper for consumers
in foreign markets.
But
in a world with lots of cross border borrowing, the effects of devaluation go
deeper than that. Bankers and corporations that have borrowed in U.S. dollars
suddenly found themselves owing far more rubles. They couldn't pay and they in
effect went bankrupt. The financial system seized up. That could make it harder
for local companies to get credit, and without credit, exporters couldn't
realize the competitive advantage that the devalued currency confers.
As
it has been discussed above, some external economic indicators show expansion
of crisis. The schedule (See Figure 2) shows fluctuation of the exchange
rate of US dollar to below cut during and after crisis.
One of factors
which have affected fluctuation of the exchange rate of ruble was the evident level
of foreign direct investments. We can state that this crisis process had been
expected (See Figure 4). (Resource: Taimur & Goldfajn
WP/00/160, October 2000)
Figure 2-4
Exchange Rate 1995-2000. CPI Inflation. Russian Merchandise Trade Balance
A narrow exchange rate band was in place keeping the exchange rate between
5 and 6 rubles to the dollar (see Figure 2). And oil, one of Russia’s largest exports, was selling at $23 per barrel - a high price by recent
standards. Fuels made up more than 45 percent of Russia’s main export commodities
in 1997.
Findings.
The crisis undoubtedly could be seen, so as when the ruble came under
attack in November 1997 and June 1998, policymakers defended the ruble instead
of letting it float. The real exchange rate did not vary much during 1997.
Clearly a primary component of a currency crisis in the models described here
is the central bank’s willingness to defend an exchange rate peg.
Prior to August 1998, the Russian ruble was subject to two speculative attacks.
The CBR made efforts both times to defend the ruble. The defense was successful
in November 1997 but fell short in the summer of 1998. Defending the ruble
depleted Russia’s foreign reserves.
Once depleted, the Russian government had no choice but to devalue on August
17, 1998.
5. WHat effects did the
Russian Financial Crisis of 1998 have on the exchange rate, and what were the causes
of the crisis`?
Satoshi Mizobata (2001, 11) finds the first harbingers of the financial
crisis emerged already in October 1997. So as, at the beginning of 1998, 32% of
all Russian banks were considered to be in a critical condition. Actually, between
December 1997 and August 1998, the number of loss-making banks doubled, and
bank profits in general deteriorated rapidly. Bank lending in January-September
1998 also marked a sharp decline.
In
general, most of the Russian commercial banks were established during the
perestroika period and after the collapse of the Soviet Union.
The
banking sector developed in numbers under hyperinflation in the first stage
(1992-1995), the number of financial institutions rose rapidly thanks to lax licensing
requirements. Interest rates were negative and the exchange rate tumbled in
several steps. Financial institutions benefited from short-term speculative
activities and minimized risk by diminishing their assets, thus producing a
credit crunch.
During
the first period, when many weak financial institutions mushroomed, banks’
financial services were insufficient and hyperinflation wiped off long-term
debt. Commercial banks could receive direct credit, equivalent to a free loan,
from the central bank and gain profits through foreign currency speculation and
short-term lending to enterprises. The suspension of direct lending by the
central bank to the government in May 1993 was the starting point for the
development of a government bond market as a non-inflationary source of
financing the fiscal deficit. At this point, the share of government securities
held by the banks was relatively low.
The
distinctive features of future severe financial crisis could be observed during
the second period (from 1994 to the end of 1995), - Russia experienced a ruble
market crash, called the "Black Tuesday", in October 1994 and a bank
liquidity crisis in August 1995.
Scandalous collapse of ruble or "Black Tuesday" was called that
day when a dollar exchange rate at Moscow currency stock exchange has passed
for the three-thousandth mark. «Many experts have stated then that the
assumption, that falling of ruble has achieved a maximum and it is possible to
expect financial stabilization. And what has taken place on Tuesday on October,
11 was like the most dreadful dream - a rate has failed and has made 3926
rubles for dollar.
The assistant of the general director of the International Currency Bank
considers, that "The reasons of scandalous collapse of a rate have only
agiotage character. It is impossible to find any logic explanation of the
situation". In the meantime in commercial stalls and large shops mass replacement
of price lists has already begun and especially for the import goods…». (Scandalous
collapse of ruble " Black Tuesday " Jhagel // Izvestiya, 13 October
1994)
It was also informed, that Yeltsin has signed the Decree about firing
S.Dubinin, the Minister of Finance, and also has directed the offer to the Duma
about V.Gerashchenko's removal from the post of the chairman of the board of
the Central bank. (Izvestiya, 14 October 1994)
On October, 13 at tenders of ICB the ruble exchange rate has fallen from
3736 up to 2994 rubles for dollar. (The dollar has heard the president and has
fallen. Game is over? // Izvestiya, 15 October 1994) The investigation
commission of the reasons of default was appointed.
From the interview on October, 15, 1994 of A.Illarionov and M.Dmitriev:
“Everything that happened at a currency stock exchange hasn’t been only a result
of tactical mistakes of the Central Bank and the government. It was their own purposeful
and persevering policy on "lowering" of the Russian national
currency. Gerashenko and Chernomyrdin lowered the rate, so as it was extremely
necessary for both Victors, - to minimum, 4 thousand rubles for dollar course”.
(News, October, 15, 1994)
In autumn of 1994 deficiency of the budget has extremely grown up (in particular
due to categorical orders of the president and prime-minister to finance additional
requirements of agrarian and industrial complex and military-industrial complex),
that it was necessary to extract about 15 billion rubles for its covering. By
September the Russian government has saved up over 4 billion dollars. Their
sale on old rate could give no more than 8 billion rubles – it was too little!
In order to earn on a currency reserve 16 billion it was necessary to raise a
rate up to 4 thousand for dollar. (Why does the government need in crash of
national currency?// Izvestiya, 15 October 1994)
On October, 11 the Central Bank has made ruble intervention (buying up dollars)
and it has excited a dollar exchange rate. Meantime on October, 11 Gerashenko
smiled, and Chernomyrdin was not going to interrupt his rest in Sochi.
He was called to Moscow with the action of the president on displacement Gerashenko.
In order to leave him on this post, it was necessary to promise Yeltsin to
return the ruble rate in norm and the same Gerashenko has executed dollar
intervention.
The gas and oil companies have won from a collapse of ruble, but
manufacturing and agricultural industries were not maintaining competition of
the foreign goods. The common citizens individual sector, importers and the western
investors has lost.
As
some banks went bankrupt, the number of banks declined. The source of bank
profits shifted from ruble to foreign currency transactions, in particular foreign
currency loans preferred by borrowers due to lower interest rates. As for
banks’ liabilities, gravity moved from central bank loans to deposits from
residents and legal persons, and to inter-bank credits (from the inter-bank
short-term financial market). At the same time, banks started investing on a
large scale in government securities with high yields. The result was the
so-called “1995 structure”, characterized by the policy of monetary stabilization
and by the dependence on financing the fiscal deficit through increases of
domestic and external government debt. (Mizobata 2001, 19)
In
the second stage of bank sector development (1996-1997), Russian banks faced
large restrictions on gain opportunities.
Transfer
to the so-called “corridor exchange rate system” reduced advantages stemming
from foreign currency investment, thereby contributing to a rise in
ruble-denominated investment. In addition, the opening of government securities
market to foreigners in May 1996 led to a wave of non-residents’ investment in
Russian GKOs. The latter meant an increase of debt unaccompanied by an increase
of Russia’s overseas assets. Russian banks also escalated investment in government
securities.
During
this stage, the oligarchic large banks were created through various channels
such as combination of banking and industrial capital, capital concentration in
banking groups (holding companies), and shares-for-loans privatization.
Foreign-owned banks were also established.
So,
in the third stage (end of 1997 - August 1998), Russian financial institutions
experienced high levels of instability and were eventually struck by the crisis:
1.
The number of banks decreased owing to a wave of mergers and acquisitions of
small banks by the larger ones.
2.
Domestic and external government debt snowballed.
3.
In the first
half of 1998, bank control over industrial enterprises started to weaken.
4.
In May-June 1998, foreign investors held about a third of the outstanding
Russian government securities.
The analysis shows that the Russian GDP contracted 4.6% in 1998 and a contracting
economy is more vulnerable to financial crises. It is noticeable that the year
1998 was a particular year for Russia as real GDP reached the minimum value of
the period 1990-2003, starting to increase afterwards.
The Russian inflation rate, on the other hand, was 84.4% in 1998, almost
73% higher than that of the previous year. During the same period, Russian
interest rates increased sharply as a sign of loss of investor confidence, and
the value of the ruble plummeted. (See Table 2)
Table 2. Probit Model Results
|
Variable
|
Coefficient
|
Z-statistic
|
Variable
|
Coefficient
|
Z-statistic
|
|
Inflation
|
42.14
|
1.74*
|
US interest rates
|
3.12
|
0.442
|
|
Real exchange rate
|
-29.12
|
1.68*
|
FDI / GDP
|
-9.12
|
1.873*
|
|
Export growth
|
-1.34
|
-1.69*
|
World Oil Prices
|
-13.21
|
1.678*
|
|
Import growth
|
0.23
|
-0.22
|
Real interest rate
|
-11.14
|
1.681*
|
|
M1
|
0.34
|
9.83
|
Public debt / GDP
|
-6.43
|
0.56
|
|
Domestic credit / GDP
|
11.35
|
0.71
|
Current account/GDP
|
-6.51
|
1.67*
|
|
Stock prices
|
-24.83
|
-1.67*
|
GDP per capita
|
-21.12
|
1.66*
|
|
Terms of trade
|
-11.83
|
-0.11
|
Fiscal balance / GDP
|
36.98
|
0.27
|
|
Lending and deposit rate spread
|
-0.14
|
0.09
|
M2 / foreign exchange reserves
|
20.92
|
0.62
|
|
Bank reserves / bank assets
|
-0.01
|
0.12
|
Foreign exchange reserves
|
-22.95
|
2.86***
|
|
*Significant at the 10% level. ** Significant at the
5% level, *** Significant at the 1% level.
|
On September 2
the Central Bank of the Russian Federation decided to float the ruble. By September 21 the exchange rate had
reached 21 rubles to the US dollar. On September 28 Boris Fyodorov was fired
from the position of the Head of the State Tax Service.
Table 3 Regression
Summary
|
Variable
|
Expect-ed Sign
|
Found Sign
|
(3)
|
Variable
|
Expect-ed Sign
|
Found Sign
|
(6)
|
|
Inflation
|
+
|
+
|
*
|
US interest rates
|
+
|
+
|
|
|
Real Exchange Rate
|
_
|
_
|
*
|
FDI / GDP
|
_
|
_
|
*
|
|
Export Growth
|
_
|
_
|
*
|
World Oil Prices
|
_
|
_
|
*
|
|
Import Growth
|
+
|
+
|
|
Real interest rate
|
+
|
_
|
*
|
|
M1
|
+
|
+
|
|
Public debt / GDP
|
+
|
_
|
|
|
Domestic Credit/GDP
|
+
|
+
|
|
Current account/GDP
|
_
|
_
|
*
|
|
Stock Prices
|
_
|
_
|
*
|
GDP per capita
|
_
|
_
|
*
|
|
Terms of Trade
|
_
|
_
|
|
Fiscal balance / GDP
|
+
|
+
|
|
|
Lending and deposit rate spread
|
+
|
_
|
|
M2 / foreign exchange reserves
|
+
|
+
|
|
|
Bank reserves / bank assets
|
+
|
_
|
|
Foreign exchange reserves
|
_
|
_
|
***
|
|
Columns (3) and (6): *
Significant at the 10% level.** Significant at the 5% level.*** Significant
at the 1% level.
|
At the end of July 1998, the US dollar – ruble exchange rate stood at
$1=R6.235. By the end of August 1998 it declined to $1=R7.905, and by the end
of September it had declined to $1= R16.064.
Figure 5 Rate deviations of ruble (July-September, 1998)
Due to the sharp depreciation of the ruble, Russian foreign exchange reserves
declined.
The government
and the central bank announced the following measures:
1) Devaluating
and letting the ruble float freely;
The
effects of ruble devaluation were disastrous because almost all investment was
short-term and because western banks concluded forward contracts with Russian
commercial banks without hedging the currency risk. The burden of principal and
interest payments on government securities rapidly increased. Issues of
government securities suddenly lost their benign effects and became a heavy
burden on public finances.
2) Capital
flow restrictions for non-residents;
Moreover,
proliferating taxes as well as various kinds of tax exemptions and privileges revealed
the weakness and inefficiency of Russia’s taxation system. The wide spread of
tax arrears and non-monetary transactions like barter, that brought a decline
of tax collection, was in fact a hidden subsidy to firms and banks.
3) A 90-day
freeze on the repayment of private external debt;
4) Suspension
of trading in Russian government securities;
Deposit
repayment was suspended and most deposits were transferred to the federal
saving bank, the Sberbank.
5) Restructuring
of the banking system.
Banks lost
most of their liquid liabilities, and banks’ net worth-to-total assets ratio
diminished. Many banks, including Inkombank, Oneximbank and Tokobank,
were closed down as a result of the crisis.
Foreign
capital rapidly withdrew, and mutual accumulation of arrears caused the
bankruptcy of some banks (the domino effect). Banks could not service
even fundamental payments.
Findings.
To resume all
the factors, analyzed above, moral hazard in the banking system based on banks’
incentives to gain profit through speculative transactions led to the Russian
financial crisis on August 17, 1998.
6. Could the Russian Financial Crisis of 1998 have
been forseen, and how did it affect the exchange rate
during
the period of the crisis?
The political collapse resulted in a financial crisis as Yeltsin, with
his domestic support evaporating, had to contend with an emboldened opposition
in the parliament. A week later, on August 23, Yeltsin fired Kiriyenko and declared
his intention of returning Chernomyrdin to office as the country slipped deeper
into economic turmoil. (Will Russia survive its economic and political crisis?
September 17, 1998 // [E-resource] Online Newshour – Access: www.pbs.org)
Prior to the culmination of the economic crisis, the GKO bonds issuance
policy was described as similar to a pyramid scheme or Ponzi scheme with the
interest on matured obligations being paid off using the proceeds of newly
issued obligations. (Frankel & Rose 1996, 360)
Declining
productivity, an artificially high fixed exchange rate between the ruble and
foreign currencies to avoid public turmoil, and a chronic fiscal imbalance were
the background to the meltdown. Two external shocks, the Asian financial crisis
that had begun in 1997 and the following declines in demand for (and thus price
of) crude oil and nonferrous metals, also impacted Russian foreign exchange reserves.
A political crisis came to a head in March when Russian president Boris Yeltsin
suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet on
March 23. Yeltsin named Energy Minister Sergei Kiriyenko, aged 35, as acting
prime minister. On May 29, Yeltsin appointed Boris Fyodorov Head of the State
Tax Service. In an effort to prop up the currency and stem the flight of
capital, in June Kiriyenko hiked GKO interest rates to 150%.
A
$22.6 billion International Monetary Fund and World Bank financial package was
approved on July 13 to support reforms and stabilize the Russian market by
swapping out an enormous volume of the quickly maturing GKO short-term bills
into long-term Eurobonds. This had started to be implemented with some success
by July 24, yet the Russian government decided to keep the exchange rate of the
ruble within a narrow band, although many economists, including Andrei Illarionov
and George Soros, urged the government to abandon its support of the ruble. On
August 14 the exchange rate of the Russian ruble to the US dollar was still
6.29.
Despite
the bailout, Russia's monthly interest payments still well exceeded its monthly
tax revenues. Additionally, on July 15 the State Duma dominated by left-wing
parties refused to adopt most of government anti-crisis plan so that the government
was forced to rely on presidential decrees. On July 29 Yeltsin interrupted his
vacation in Valdai Lake region and flew to Moscow, prompting fears of a Cabinet
reshuffle, but he only replaced Federal Security Service Chief Nikolai Kovalyov
with Vladimir Putin.
Realizing
that this situation was unsustainable, investors continued to flee Russia despite the IMF bailout. Weeks later the financial crisis resumed as the real value
of the ruble resumed its decline. Russians sought frantically to buy dollars,
but these had become scarce. Foreign investment rushed out of the country, and
the ensuing financial crisis triggered an unprecedented flight of capital from Russia.
It
was later revealed that about $5 billion of the international loans provided by
the World Bank and International Monetary Fund were stolen upon the funds'
arrival in Russia on the eve of the meltdown.
The
Russian economy in 1998 unfolded under the impact of the developments connected
with the out break and aftermath of budget and financial crisis, and an adverse
situation in the world market.
Factors
which were affecting the development of the money supply are the following. At the end of
August, the money supply in terms of M2 reached Sk 460.8 billion, representing
a year-on-year increase of 7.9%. Hence the development of the money supply
followed the course set in the monetary programme.
According
to preliminary data, the volume of net foreign assets in the banking sector (at
fixed exchange rates) fell month-on-month by Sk 7.7 billion, due to faster
growth in foreign liabilities (by Sk 15.9 billion) than in foreign assets (by
Sk 8.2 billion) and to developments on the interbank foreign exchange market.
The fall in the net foreign assets of the NBS (Sk 7.6 billion) was accompanied
by a slight decline in net foreign assets of commercial banks (Sk 0.1 billion).
In
August, the foreign exchange reserves of the NBS (at fixed exchange rates) fell
month-on-month by Sk 4.5 billion, due mainly to the negative balance of foreign
exchange fixing (Sk 8.4 billion). The decline was partly offset by government
borrowings in the amount of Sk 3.9 billion. Foreign liabilities of the Government
and the NBS increased by Sk 3.1 billion.
Foreign
assets of commercial banks increased month-on-month by Sk 12.7 billion, due
mainly to growth in deposits and loans granted to foreign banks (Sk 9.1 billion).
Foreign liabilities of commercial banks increased month-on-month by Sk 12.8
billion, due to growth in deposits and borrowing from foreign banks (Sk 10.8 billion).
|
Figure 6 Unemployment rate and inflation rate
|
(%)
|
The
development of net foreign assets was affected by the financial crisis in Russia. Foreign investors were obliged to compensate for funds lost or blocked in Russia by selling liquid assets and securities on national and international markets and by
reducing their open positions in the currencies of other countries. These steps
led to a fall in stock market indices and the exchange rates of some currencies.
Apart
from Russia, the crisis reduces credibility in other emerging markets as well,
including the entities of those countries. This may restrict the possibility of
Slovak entities to borrow funds abroad.
The
decline in net foreign assets and the relatively rapid fall in the crown’s exchange
rate were caused by the conversion of crown deposits held by non-residents into
foreign currency deposits and the increased demand on the part of residents, particularly
business entities, since part of the purchases in NBS foreign exchange fixing
was done on the basis of client orders.
The
fall in net foreign assets was offset by the development of domestic resources,
when net domestic assets increased month-on-month by Sk 9.2 billion, while the
rate of year-on-year growth reached 12.0%.
In
August, the volume of net credit to the Government increased further by Sk 2.1
billion, once again exceeding the budget figure for the month. At the end of August,
the volume of credit reached Sk 116.5 billion, representing a year-on-year increase
of 33.9%. Public finances were also affected by the purchase of government
bonds by non-residents in the amount of Sk 3 billion.
Since
government securities (denominated in domestic currency) held by non-residents
are not included in net credit to the Government (according to present practice),
the position of the public sector has visibly improved. If securities held by
non-residents and non-banks had been included, the volume of net credit to the
Government would have totalled Sk 130.3 billion at the end of August, and
the rate of year-on-year growth would have reached 56.5%.
At
the end of August, the performance of the State budget resulted in a deficit of
Sk 8.7 billion, representing a modest improvement (Sk 0.2 billion) compared
with the previous month. Budget revenue reached Sk 116.1 billion and
expenditure totalled Sk 124.8 billion.
At
the end of the month, the net position of the Government vis-a-vis the banking
sector reached (according to preliminary data) Sk 61.7 billion, representing a
month-on-month reduction of approximately Sk 1.5 billion (almost the same
deficit level as in July). The fall in the level of internal debt was due to an
increase in the repayment of principal on government bonds issued in previous
years, in relation to the response at government bond auctions in August.
|
Diagram 1 Development of NBS foreign
exchange
Reserves
|
(US$
millions)
|
Growth
in M2 was positively influenced by the lending activities of commercial banks,
which increased month-on-month by Sk 1.6 billion. This represented a slowdown
in the rate of year-on-year growth (from 4.4% in July to 4.0% in August). In
August, bank lending to households and enterprises again remained below the projected
level, acting as a brake on government spending and moderating the effect on
the money supply.
At
the end of August, the total foreign exchange reserves of the NBS (at current
exchange rates) reached US$ 3,621.5 million, representing a month-on-month
decline of US$ 148.5 million. The volume of foreign exchange reserves was 3.0
times greater than the average volume of monthly imports of goods and services
to Slovakia during the first six months of 1998.
According to the annual report of the Central Bank of Russia (1998, 10) signs of macroeconomic instability, caused by both internal and external
factors, appeared even in the first half of the year. It became manifest in the
following trends:
-
imbalances increased in the tax and budget sphere as efforts to
meet budget revenue targets and, consequently, make planned expenditures and
service state debt failed;
-
GDP decreased;
-
the financial state of enterprises deteriorated and mutual nonpayment’s
grew;
-
capital investment declined;
-
indicators characterizing the standard of living worsened;
-
a current account deficit developed and started to grow.
We can follow the dynamics of Russian Federation Macroeconomic
Indicators during 1993-97. (See Table 4)
Table 4. Dynamics of Russian Federation Macroeconomic Indicators
during 1993-97
|
Russian Federation Macroeconomic
Indicators, 1993-97
|
|
|
|
|
|
|
|
1993
|
1994
|
1995
|
1996
|
1997
Actual/
Estimated
|
|
|
|
|
|
|
|
|
(Annual percentage
changes unless otherwise indicated)
|
|
Production and prices
|
|
|
|
|
|
|
|
Real GDP
|
-8.7
|
-12.6
|
-4.0
|
-2.8
|
0.3
|
|
|
Change in consumer prices
|
|
|
|
|
|
|
|
Annual average
|
895.9
|
302.0
|
190.2
|
47.8
|
14.7
|
|
|
12-month
|
841.6
|
202.7
|
131.4
|
21.8
|
11.4
|
|
|
|
|
|
|
|
|
|
(In percent of GDP)
|
|
Gross national saving
|
26.6
|
29.7
|
25.2
|
22.4
|
22.2
|
|
|
Federal Government
|
-3.9
|
-8.4
|
-3.8
|
-6.8
|
-6.0
|
|
|
Other
|
30.5
|
38.1
|
29.0
|
29.2
|
28.2
|
|
|
|
|
|
|
|
|
|
Foreign saving
|
-1.4
|
-3.8
|
-1.3
|
-0.5
|
-0.8
|
|
|
|
|
|
|
|
|
|
Gross domestic investment1
|
25.2
|
26.0
|
23.9
|
21.9
|
21.4
|
|
|
|
|
|
|
|
|
|
Enlarged government deficit
|
7.4
|
10.4
|
5.7
|
8.2
|
...
|
|
|
Federal government (cash basis)
|
|
|
|
|
|
|
|
Fiscal deficit
|
6.5
|
11.4
|
5.4
|
8.0
|
6.5
|
|
|
Domestic financing2
|
6.6
|
11.4
|
5.6
|
7.4
|
5.1
|
|
|
External financing3
|
-0.1
|
0.0
|
-0.2
|
0.6
|
1.4
|
|
|
|
|
|
|
|
|
|
(Percent change)
|
|
Money and credit (end-period
change)4
|
|
|
|
|
|
|
|
Base money, narrow definition
|
647.1
|
185.7
|
117.6
|
26.2
|
28.0
|
|
|
Net domestic
credit of the banking system
|
358.0
|
263.1
|
141.5
|
54.8
|
...
|
|
|
Ruble broad money
|
429.0
|
197.7
|
127.4
|
33.6
|
30.0
|
|
|
Ruble money velocity, level
|
11.1
|
11.0
|
12.1
|
11.2
|
8.2
|
|
|
|
|
|
|
|
|
|
Interest rates, percent per annum
|
|
|
|
|
|
|
|
Deposit
|
...
|
...
|
86.9
|
48.6
|
15.05
|
|
|
Credit
|
...
|
...
|
160.3
|
103.0
|
32.05
|
|
|
Interbank rate
|
...
|
...
|
171.8
|
101.7
|
19.05
|
|
|
Central Bank of Russia refinance rate
|
210.0
|
180.0
|
160.0
|
48.0
|
21.05
|
|
|
Treasury bill rate
|
...
|
...
|
176.0
|
102.0
|
40.46
|
|
|
|
|
|
|
|
|
|
(In billions of U.S.
dollars)
|
|
Total exports, fob
|
58.3
|
69.6
|
81.5
|
90.2
|
88.8
|
|
|
Total imports, fob
|
44.2
|
48.5
|
64.0
|
73.9
|
72.2
|
|
|
External current account (deficit -)
|
2.6
|
10.4
|
4.5
|
2.2
|
3.9
|
|
|
Public external debt service due
|
19.3
|
19.2
|
18.4
|
14.8
|
10.4
|
|
|
Public external debt service after
rescheduling
|
2.8
|
3.7
|
6.4
|
9.5
|
6.3
|
|
|
|
|
|
|
|
|
|
(In percent of exports
of goods and nonfactor services)
|
|
Public external debt service due
|
29.6
|
24.4
|
19.6
|
14.5
|
10.2
|
|
|
Public external debt service after
rescheduling7
|
4.3
|
4.7
|
6.8
|
9.3
|
6.2
|
|
|
|
|
|
|
|
|
|
(In months of imports of
goods and nonfactor services)
|
|
Gross reserves coverage
|
1.7
|
1.2
|
2.4
|
2.0
|
2.2
|
|
|
|
|
|
|
|
|
|
Memorandum items:
|
|
|
|
|
|
|
|
GDP in trillions of rubles
|
172
|
611
|
1,630
|
2,256
|
2,678
|
|
|
Exchange rate rubles per US$1 (pd.
average)
|
933
|
2,205
|
4,557
|
5,123
|
5,780
|
|
|
GDP in billions of U.S. dollars
|
184
|
277
|
358
|
440
|
463
|
|
(Sources:
Russian authorities; and Fund staff estimates and projections)
1Investment includes both
capital formation and capital repair, as consistent with the methodology of
Russian Goskomstat.
2Includes domestic bank
financing, change in the stock of government securities held with the private
sector, proceeds from privatization and the sale of gold and other precious
metals, principal repayments to domestic nonbanks, and other financing.
3Includes rescheduling of
principal and interest plus (net) disbursements.
4Monetary data calculated
as percent change for same month in preceding year.
5September data.
6Data as of December 16.
7During the period 1992-96,
cash payments fell significantly short of amounts falling due, with the
remaining debt service obligations either being rescheduled or falling into
arrears pending discussions on debt rescheduling with various creditors.
On the whole, compared with 1997, GDP shrank in 1998 by 4.6%;
of this, added value in the manufacturing sector decreased by 6.8% and in the
services sector by 1.8%.
Price dynamics was one of the main factors that determined
the general economic situation and the situation in all sectors of the economy
in the second half of the year as a result of the financial crisis.
At the start of 1998, fiscal reform and performance remained both the crucial
element and the crucial question at the center of Russia’s economic program
with the IMF.
Stanley Fischer, the First Deputy Managing Director of the International
Monetary Fund stated that “the Russian reform of the tax code and increased revenue
collection are on one side of the equation; on the other side, increasing the efficiency
of government spending and strengthening expenditure management deserve no less
attention.
Equally important for future growth is continued progress with structural
reforms, whose implementation had for some years lagged until recently - but it
must be noted and emphasized that the structural components of the Russian
reform program moved ahead as agreed with the IMF (indeed even a little faster)
during 1997”. These remarks were prepared for delivery at the U.S.- Russian Investment
Symposium, at Harvard University, on January 9 1998. (Fisher, 1998)
In the whole, nineteen ninety seven was a year of achievement for the Russian
economy. But the dynamics of household expenditures on final
consumption was determined by the dynamics of personal income and consumer
prices.
An overview of Economic Policy in Russia in 1999 (2000, Ch. 7,8) shows
that nominal personal cash incomes in Russia in 1998 aggregated 1,700.5 billion
rubles, an increase of 3.5%, or 57.3 billion rubles, on 1997.
The household cash income to GDP ratio in 1998 decreased by 1.9 percentage
points compared with 1997, to 63.3%.
Inflation was the main factor which caused a sharp fall in living
standards. Compared with 1997, 1998 real household income declined by 18.9%; of
this, real imputed per capita average monthly wage fell by 13.9% and real
imputed monthly pension decreased by 4.8%.
The share of wage and other social benefits in personal cash income increased
from 39.3% in 1997 to 42.4% in 1998 and that of earnings from entrepreneurial activities
from 13% to 16.5%.
The share of pensions, allowances, students’ grants and other social
transfers in personal cash income declined from 14.9% to 13.3%, income from
property from 5.7% to 5.6% and other incomes from 27.1% to 22.2%.
Differentiation of the personal income of the population remained
significant in 1998: 10% of the highest income population received 32.8% of total
cash income (32% in 1997), while 10% of the lowest income population received
2.4% of total cash income (2.4% in 1997).
Per capita cash income rose by 3.6% from 1997 to 1998, while the per
capita subsistence minimum increased by 20%. Low-income segment of the population
grew by 4.3 million, or 14%, and 35 million people, 23.8% of the total population,
found themselves below the poverty line. (An overview of Economic Policy in Russia
in 1999, 2000, Ch. 7,8)
Household expenditures and savings (consumer expenses, compulsory payments,
purchase of foreign exchange, deposit growth, and purchase of bonds and other
securities) in 1998 totaled 1,672.7 billion rubles, which represents an increase
of 3.5% on 1997. The share of consumer expenditures in total personal cash
income rose from 67.9% in 1997 to 78.3% in 1998.
In January 1998, real income began to fall, and to manage in that
situation, people had to cut savings and spend more on goods and services.
An upsurge of inflation at the time of the financial crisis and the
scarcity of budget funds, which made it impossible to repay all debts to the
population or compensate their losses from inflation, resulted at the end of
the year in a further drop in real personal income. At the same time, real
consumer expenditures tended to fall and that led to a reduction of household
expenditures on final consumption.
The year 1998 saw a nominal year on year reduction in both revenues and expenditures
of the consolidated budget, which began in May.
Inflation in the Russian economy in 1998 resulted from the impact of
several factors, such as price movement in the sectors controlled by natural
monopolies, real personal income, the correlation between consumer and producer
prices in the manufacturing and services sectors, ruble exchange rate
variations, psychological factors relating to consumer motivation, heavy
dependence of the domestic consumer market on imports, and so forth.
From January through July 1998 the factors that determined the rates and
proportions of the price dynamics caused inflation to subside.
Thus, under the influence of institutional factors, such as presidential
and government decrees that were passed earlier to curb price growth in sectors
controlled by natural monopolies, producer prices fell by 0.3% compared with
the December level. In the same period of 1997, producer prices rose by 6.2%.
The ruble exchange rate to the dollar from January to July 1998 was relatively
stable and was regarded as an “anchor” that curbed inflation.
As a result, the grossly overvalued rate of the ruble against the dollar
in the consumer market served as a restraint on the growth of prices of
imports, which met virtually half the demand for consumer goods.
At a time when real household cash income was at a low level, limited demand
had no effect on inflation growth.
According to the Annual Report of the Central Bank (1998, 18), in the
seven months of 1998 the consumer price index fell to 104.2% from 109.6% in the
same period of 1997.
The sharp exacerbation of the financial crisis in August 1998 activated
the potential inflationary dangers connected with the dynamics of the ruble
exchange rate. The devaluation of the ruble was the main reason why the smooth
slowing down of price growth in the first seven months of the year gave way to
a surge in prices.
It should be noted that inflationary expectations actually became the
expectations of a fall in the exchange rate.
Even in August the consumer price index (CPI) amounted to 103.7% and in
September it rose to 138.4%. The producer price index increased from 98.8% to
107.5%.
At the beginning of the 4th quarter of 1998 the rate of inflation slowed
down and the October CPI fell to 104.5%.
Two factors were behind these developments:
-
first,
the measures taken by the Bank of Russia put an end to sharp exchange rate
fluctuations of the ruble and its dynamics more or less stabilised;
-
second,
it was the result of demand restraints in the household sector.
In the next two months, however, inflation quickened to 5.7% in November
and 11.6% in December.
Owing to the seasonal price growth at the end of 1998, food prices rose
at a rapid rate, while service prices remained virtually unchanged from their
normal level.
Owing to the September surge in prices and the accelerated CPI growth in
the 4th quarter, year on year inflation rose to 84.4% against 11% in 1997.
In the real economy, the price situation was less dramatic: in 1998
producer prices grew by 23.2% (against 7.4% in 1997), although in the machine
building sector they rose by 29.3%. (Annual Report of the Central Bank 1998,
23)
The gap that developed between import and domestic prices by the end of
1998 created a rather favorable situation for the industries manufacturing
import substitutes. This particularly applied to the light and food industries.
Prices in capital construction went up by 12.1% year on year and freight
transport became 16.7% more expensive. It should be noted, however, that as a result
of the price regulation measures taken with regard to the natural monopolies
the price of transporting cargo by rail fell by 19.4%. (Annual Report of the
Central Bank 1998, 34)
Findings.
Analysis has shown that signs of macroeconomic instability,
caused by both internal and external factors, appeared even in the first half
of the year.
It became manifest in the following trends:
-
imbalances increased in the tax and budget sphere as efforts to
meet budget revenue targets and, consequently, make planned expenditures and
service state debt failed;
-
GDP decreased;
-
the financial state of enterprises deteriorated and mutual nonpayment’s
grew;
-
capital investment declined;
-
indicators characterizing the standard of living worsened;
-
a current account deficit developed and started to grow.
The currency collapse was exposed with political crisis as Yeltsin, with
his domestic support evaporating, had to contend with an emboldened opposition
in the parliament. Moreover, the Russian economy in
1998 unfolded under the impact of the developments connected with the out break
and aftermath of budget and financial crisis, and an adverse situation in the
world market.
In the whole, nineteen ninety seven was a year of achievement for the Russian
economy. But the dynamics of household expenditures on final
consumption was determined by the dynamics of personal income and consumer
prices.
The Russian reform of the tax code and increased revenue collection were
on one side of the equation; on the other side, increasing the efficiency of
government spending and strengthening expenditure management deserved no less
attention. For softening the crisis tendentions it was important for future
growth to continue a progress with structural bank reforms, whose
implementation had for some years lagged then.
7. Recommendations.
When
looking at the Russian Financial Crisis of 1998 from an exchange rate point of
view, what lessons can be learned
and
what led to the crisis?
Most capital account crises are caused by foreign currency and maturity
mismatches on private or public sector balance sheets coupled with a specific
(domestic or external) trigger.
Crisis prevention requires minimizing balance sheet vulnerabilities and
avoiding crisis triggers (good macro policies, insulation from contagion by
differentiating through adherence to standards, data transparency).
The IMF could contribute to crisis prevention through surveillance,
technical assistance, and programs - by providing liquidity, inducing stronger
policies, enhancing credibility and discipline, and signaling markets.
It is necessary to admit that money matters, but policies matter as well
- and if policies are poor and existing balance sheet vulnerabilities are
large, then the marginal impact of IMF resources on crisis prevention is also
low. The Russian case proves it.
In the process of the post-crisis
-
bank
restructuring,
-
networks,
-
political
interests,
-
bargaining
among governments and other economic and political actors have played a much
stronger role than market institutions (like bankruptcy).
After
the financial crisis, the improvement of banks’ market adaptability must
go hand in hand with the strengthening of government intervention. Banking
sector reorganization has been not only market-led but also state-driven. On
the surface at least, there seems to be a correlation between bank
restructuring and their financial recovery. Bank capital, debt and assets
exceed pre-crisis levels, bringing some analysts to argue that Russia has completed the first stage of its financial recovery. In particular, the
increases of bank profits and long-term loans are regarded as the most important
achievements of banking sector reforms.
However,
both government experts and bank managers have pointed out the persistent instability
of the financial system.
The
well-known economist, honorary doctor of the Institute of International
Economic and Political Research, sees the date as a moment of truth for Russia's reformers. «The bold but unsuccessful step toward a market economy, excessive
hopes for aid from Western businessmen and financiers, difficulties in the
process of privatization and a lack of reliable control over the activity of Russian
bankers deprived the federal budget of all revenues and turned the state into a
bankrupt overnight. Such was the sad result of August 1998 for Russia», - said Oleg Bogomolov. «But its lessons have been learned, and therefore there is
no need to expect a repetition of such developments, he pointed out. The
Russian economy is no longer considered a sick one...»
Russia has managed to
substantially lower the rates of inflation, though they are still higher than
the government planned, the academician said. The Cabinet of Ministers has
given up the dubious methods of financing expressed in issuing short-term
government bonds at high interest rates. There are no financial pyramids of the
1998 kind today.
Since that
time the government and Central Bank have formed a system to monitor the
activity of banks. Besides, in the past few years the state has received
substantial revenues as a result of high fuel prices in the world market. This
has made it possible for the Central Bank to accumulate considerable gold and
hard-currency reserves in an amount of 37 billion dollars.
The
devaluation of the ruble has also been an asset. It made imports inaccessible
to the people, and the domestic industries managed to fill the gap with
good-quality goods. All these factors have made it possible for the Russian
economy to reach the trajectory of growth. Today Russia, unlike many countries,
has a well-balanced budget and taxes that are the lowest in Europe.
Now the
government must stimulate investment to develop the real sector of the economy
and do all in its power to regain the Russian people's trust in economic
reforms which was undermined by the 1998 crisis, said Oleg Bogomolov.
The agency
reports that the major global investment banks - Merrill Lynch, Goldman Sachs
and Deutsche Bank - have predicted the ruble will increase by four per cent
within the next six months.
This forecast
assumes the Russian Central Bank will pursue the corresponding policy so as not
to let the country’s high inflation rate grow further.
Bloomberg
stresses that experts take into consideration the fact that the shift in the ruble
exchange rate could hamper the profits of oil producers and energy suppliers,
which make up over 50 per cent of the federal budget's inflow.
The Central
Bank sets the move of the ruble’s exchange rate in accordance with the
“currency basket”, which consists 55 per cent of U.S. dollars and 45 per cent
of euros.
Although the
degree of speculative activities has been relatively lower, the negative
attitude of banks toward lending to industrial corporations and their continuing
focus on foreign currency dealings and securities investment reproduce the kind
of speculative behavior which was the main cause of the 1998 crisis. Lobbyists
have put steady pressure for subsidies and loans on new financial institutions
such as ARCO, the Russian Development Bank, and the Agricultural Bank.
Political interests have also ensured that ARCO, the driving force of bank
restructuring, is established with only limited responsibilities and funds.
Moreover,
political pressures on the CBR have intensified. There is a danger that
stronger state intervention in the banking sector may give rise to a new series
of “government failures”.
The
Putin government has been criticized for lack of balance between liberal market
policies and its positive stance toward stronger state intervention («Segodnya»
2000) and for the absence of government-led industrial policy that would bring
an increase of private investment (Abalkin 2000).
However,
even if these recommendations are translated into concrete economic policies,
the basic structures and mechanisms that have caused the 1998 financial crisis
would not magically disappear overnight.
The
cozy ties between financial institutions and governments, representing a kind
of state-led corporatism, will most likely continue shaping the course of banking
sector reforms.
Findings.
Crisis prevention requires
-
minimizing
balance sheet vulnerabilities
-
and
avoiding crisis triggers (good macro policies, insulation from contagion by
differentiating through adherence to standards, data transparency).
The IMF can contribute to crisis prevention through surveillance, technical
assistance, and programs - by providing liquidity, inducing stronger policies,
enhancing credibility and discipline, and signaling markets.
In the process of the post-crisis
-
bank
restructuring,
-
networks,
-
political
interests,
-
bargaining
among governments and other economic and political actors have played a much
stronger role than market institutions (like bankruptcy).
After
the financial crisis,
(1)
the improvement of banks’ market adaptability must go hand in hand with
(2)
the strengthening
of government intervention.
Banking
sector reorganization must be not only market-led but also state-driven. In
particular, the increases of bank profits and long-term loans are regarded as
the most important measures in anti crisis banking sector reforms.
conclusion
Hypothesis of research stating that political genesis in complex with
macroeconomical factors of financial crisis in Russia of 1998 was proved. This
study analyzed the causes of the Russian Financial Crisis of 1998. It estimated
a probit model spanning the period 1988:1 –1998:8.
The results turned out to be as expected. Strong evidence emerged
suggesting that the significant variable s are foreign direct investment/GDP, inflation,
world oil prices, real interest rates, current account/GDP, GDP per capita,
foreign exchange reserves, stock prices, real exchange rate, and export growth.
Signs of the variables were mostly in line with what one would have expected, except
public debt, bank reserves/bank assets, real interest rates, and lending and
deposit rate spread.
Really, in the third quarter of 1998, Russia experienced what seemed a classical
financial crisis, combining a currency crisis, a debt crisis and a banking
crisis.
The Russian crisis was also evidently connected with the earlier Asian
crisis, and sent shock waves across global financial markets.
This study analyzed the causes of the Russian Financial Crisis of 1998.
It estimated a probit model spanning the period 1988:1 –1998:8. The results
turned out to be as expected. Strong evidence emerged suggesting that the
significant variables are foreign direct investment/GDP, inflation, world oil
prices, real interest rates, current account/GDP, GDP per capita, foreign exchange
reserves, stock prices, real exchange rate, and export growth. Signs of the
variables were mostly in line with what one would have expected, except public
debt, bank reserves/bank assets, real interest rates, and lending and deposit
rate spread.
Still, a closer look shows that the Russian crisis was mostly home made,
typically caused by excessive public sector debt, and the mechanisms of crisis
can not be understood without an understanding of the peculiarities of the
Russian economic system, including demonetization and insider ownership. Such
factors also go a long way in explaining the emergence of Russia from the crisis.
Powerful business interests, fearing another round of reforms that might
cause leading concerns to fail, welcomed Kiriyenko's fall, as did the Russian
financial institutions have developed, generally speaking, through speculative
activities rather than by playing the role of intermediaries.
In particular, the following characteristics of the transition in
the banking sector could be observed.
1. Path-dependence and rent
seeking have marked the development of Russian banks. Government intervention
and striving to get access to the resulting rents have been strong.
2. Economic liberalization
has opened many speculative opportunities for banks.
3. Banks’ moral hazard has
been caused by cozy ties between banks and governments as well as by the possibilities
to gain speculative profit.
4. Although banks do not play
their traditional role of financial intermediaries, they have served as channel
through which the government kept pumping subsidies to firms.
Findings.
Resuming all the written above, in this paper we investigated the events
that lead up to a currency crisis and debt default and the policies intended to
avert it.
Three types of models exist to explain currency crises. Each model
explains some factor that has been hypothesized to cause a crisis. After
reviewing the three generations of currency crisis models, we conclude that
four key ingredients can trigger a crisis:
-
a
fixed exchange rate,
-
fiscal
deficits and debt,
-
the
conduct of monetary policy,
-
and
expectations of impending default.
Three components fueled the expectations of Russia’s impending devaluation
and default.
First, the Asian crisis made investors more conscious of the possibility
of a Russian default.
Second, public relations errors, such as the publicized statement to
government ministers by the CBR and Kiriyenko’s refusal to grant Lawrence
Summers an audience, perpetuated agents’ perceptions of a political crisis
within the Russian government.
Third, the revenue shortfall signaled the possible reduction of the
public debt burden via an increase in the money supply. This monetization of
the debt can be associated with a depreciation either indirectly through an increase
in expected inflation or directly in order to reduce the burden of
ruble-denominated debt.
Each of these three components acted to push the Russian economy from a
stable equilibrium to one vulnerable to speculative attack.
Using the example of the Russian default of 1998, we show that the
prescription of contractionary monetary policy in the face of a currency crisis
can, under certain conditions, accelerate devaluation.
We conclude that the modern currency crisis is a symptom of an ailing
domestic economy. In that light, it is inappropriate to attribute a single
prescription as the prophylactic or cure for a currency crisis.
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Taimur,
B. and Goldfajn, I. (2000) The Russian Default and the Contagion to Brazil // IMF Working Paper WP/00/160, October 2000.
resources
28.
Bank
system of Russia per 1996-2000: models of functioning, the tendency, prospect
of development: the Analytical report / the Center of the macroeconomic
analysis and short-term forecasting institute of economic forecasting of the Russian Academy of Science // [E-resource] - Access: www.forecast.ru
29.
IMF
World Economic Outlook, 1998 // [E-resource] Access:www.imf.org
30.
Financial
Stability Review Financial Crisis Management Articles
1998 // Issue 5, Autumn 1999.
31.
Russia’s Economic and Financial position in 1998 // The annual
report of the Central Bank of Russia (1998) [E-recource] - Access: www.cbr.ru
Statistics and materials of periodicals
32.
Abalkin
L.’s interview // «Nezavisimaya Gazeta»,18 August of 2000.
33.
An
overview of Economic Policy in Russia in 1999 (2000) // Ch. 7,8. Bureau of Economic
Analysis, Мoscow.
34.
Bogomolov’s
Oleg interview [E-resource] – Access: www.vor.ru
35.
Jhagel.
Scandalous collapse of ruble. " Black Tuesday " // Izvestiya, 13
October, 1994.
36.
Fischer,
Stanley. “The Russian Economy at the Start of 1998.” U.S.-Russian Investment Symposium, Harvard University, Cambridge, MA, 9 January 1998.
37.
«Segodnya»,
29 June of 2000.
38.
The
dollar has heard the president and has fallen. Game is over? // Izvestiya, 15
October, 1994.
39.
Wall
Street Journal - Aug. 24, 1998.
40.
Why
does the government need in crash of national currency?// Izvestiya, 15 October
1994.
Appendix 1
Figure 1 The state of affairs at crisis historical periods
Table 1 Interrelating indicators under a stress classification
|
Macroeconomic stress
|
External stress
|
Financial stress
|
|
Fiscal deficit
|
International reserves
|
Composition of foreign capital
flows
|
|
Inflation rate
|
Foreign investment
|
Interest rates
|
|
Real GDP growth or level
|
Exchange rate
|
Credit growth
|
|
Savings-investment gap
|
Trade balance
|
Money supply
|
|
Employment/unemployment
|
Terms of trade
|
M2/international reserves
|
|
Financial market indices
|
|
Parallel financial market premium
|
|
Government consumption
|
OECD growth
|
Central bank credit to banks/public
sector
|
|
|
Private sector debt
|
Figure
2-4 Exchange Rate 1995-2000.
CPI Inflation.
Russian Merchandise Trade Balance
Table 2 Probit Model Results
|
Variable
|
Coefficient
|
Z-statistic
|
Variable
|
Coefficient
|
Z-statistic
|
|
Inflation
|
42.14
|
1.74*
|
US interest rates
|
3.12
|
0.442
|
|
Real exchange rate
|
-29.12
|
1.68*
|
FDI / GDP
|
-9.12
|
1.873*
|
|
Export growth
|
-1.34
|
-1.69*
|
World Oil Prices
|
-13.21
|
1.678*
|
|
Import growth
|
0.23
|
-0.22
|
Real interest rate
|
-11.14
|
1.681*
|
|
M1
|
0.34
|
9.83
|
Public debt / GDP
|
-6.43
|
0.56
|
|
Domestic credit / GDP
|
11.35
|
0.71
|
Current account/GDP
|
-6.51
|
1.67*
|
|
Stock prices
|
-24.83
|
-1.67*
|
GDP per capita
|
-21.12
|
1.66*
|
|
Terms of trade
|
-11.83
|
-0.11
|
Fiscal balance / GDP
|
36.98
|
0.27
|
|
Lending and deposit rate spread
|
-0.14
|
0.09
|
M2 / foreign exchange reserves
|
20.92
|
0.62
|
|
Bank reserves / bank assets
|
-0.01
|
0.12
|
Foreign exchange reserves
|
-22.95
|
2.86***
|
|
*Significant at the 10% level. ** Significant at the
5% level, *** Significant at the 1% level.
|
Table 3 Regression Summary
|
Variable
|
Expect-ed Sign
|
Found Sign
|
(3)
|
Variable
|
Expect-ed Sign
|
Found Sign
|
(6)
|
|
Inflation
|
+
|
+
|
*
|
US interest rates
|
+
|
+
|
|
|
Real Exchange Rate
|
_
|
_
|
*
|
FDI / GDP
|
_
|
_
|
*
|
|
Export Growth
|
_
|
_
|
*
|
World Oil Prices
|
_
|
_
|
*
|
|
Import Growth
|
+
|
+
|
|
Real interest rate
|
+
|
_
|
*
|
|
M1
|
+
|
+
|
|
Public debt / GDP
|
+
|
_
|
|
|
Domestic Credit/GDP
|
+
|
+
|
|
Current account/GDP
|
_
|
_
|
*
|
|
Stock Prices
|
_
|
_
|
*
|
GDP per capita
|
_
|
_
|
*
|
|
Terms of Trade
|
_
|
_
|
|
Fiscal balance / GDP
|
+
|
+
|
|
|
Lending and deposit rate spread
|
+
|
_
|
|
M2 / foreign exchange reserves
|
+
|
+
|
|
|
Bank reserves / bank assets
|
+
|
_
|
|
Foreign exchange reserves
|
_
|
_
|
***
|
|
Columns (3) and (6): *
Significant at the 10% level.** Significant at the 5% level.*** Significant at
the 1% level.
|
Figure 5 Rate deviations of ruble
|
Figure 6 Unemployment rate and inflation rate
|
(%)
|
|
Diagram 1 Development of NBS foreign
exchange
reserves
|
(US$
millions)
|
Table 4 Dynamics of Russian Federation
Macroeconomic Indicators during 1993-97
|
Russian Federation Macroeconomic
Indicators, 1993-97
|
|
|
|
|
|
|
|
1993
|
1994
|
1995
|
1996
|
1997
Actual/
Estimated
|
|
|
|
|
|
|
|
|
(Annual percentage
changes unless otherwise indicated)
|
|
Production and prices
|
|
|
|
|
|
|
|
Real GDP
|
-8.7
|
-12.6
|
-4.0
|
-2.8
|
0.3
|
|
|
Change in consumer prices
|
|
|
|
|
|
|
|
Annual average
|
895.9
|
302.0
|
190.2
|
47.8
|
14.7
|
|
|
12-month
|
841.6
|
202.7
|
131.4
|
21.8
|
11.4
|
|
|
|
|
|
|
|
|
|
(In percent of GDP)
|
|
Gross national saving
|
26.6
|
29.7
|
25.2
|
22.4
|
22.2
|
|
|
Federal Government
|
-3.9
|
-8.4
|
-3.8
|
-6.8
|
-6.0
|
|
|
Other
|
30.5
|
38.1
|
29.0
|
29.2
|
28.2
|
|
|
|
|
|
|
|
|
|
Foreign saving
|
-1.4
|
-3.8
|
-1.3
|
-0.5
|
-0.8
|
|
|
|
|
|
|
|
|
|
Gross domestic investment1
|
25.2
|
26.0
|
23.9
|
21.9
|
21.4
|
|
|
|
|
|
|
|
|
|
Enlarged government deficit
|
7.4
|
10.4
|
5.7
|
8.2
|
...
|
|
|
Federal government (cash basis)
|
|
|
|
|
|
|
|
Fiscal deficit
|
6.5
|
11.4
|
5.4
|
8.0
|
6.5
|
|
|
Domestic financing2
|
6.6
|
11.4
|
5.6
|
7.4
|
5.1
|
|
|
External financing3
|
-0.1
|
0.0
|
-0.2
|
0.6
|
1.4
|
|
|
|
|
|
|
|
|
|
(Percent change)
|
|
Money and credit (end-period
change)4
|
|
|
|
|
|
|
|
Base money, narrow definition
|
647.1
|
185.7
|
117.6
|
26.2
|
28.0
|
|
|
Net domestic
credit of the banking system
|
358.0
|
263.1
|
141.5
|
54.8
|
...
|
|
|
Ruble broad money
|
429.0
|
197.7
|
127.4
|
33.6
|
30.0
|
|
|
Ruble money velocity, level
|
11.1
|
11.0
|
12.1
|
11.2
|
8.2
|
|
|
|
|
|
|
|
|
|
Interest rates, percent per annum
|
|
|
|
|
|
|
|
Deposit
|
...
|
...
|
86.9
|
48.6
|
15.05
|
|
|
Credit
|
...
|
...
|
160.3
|
103.0
|
32.05
|
|
|
Interbank rate
|
...
|
...
|
171.8
|
101.7
|
19.05
|
|
|
Central Bank of Russia refinance rate
|
210.0
|
180.0
|
160.0
|
48.0
|
21.05
|
|
|
Treasury bill rate
|
...
|
...
|
176.0
|
102.0
|
40.46
|
|
|
|
|
|
|
|
|
|
(In billions of U.S.
dollars)
|
|
Total exports, fob
|
58.3
|
69.6
|
81.5
|
90.2
|
88.8
|
|
|
Total imports, fob
|
44.2
|
48.5
|
64.0
|
73.9
|
72.2
|
|
|
External current account (deficit -)
|
2.6
|
10.4
|
4.5
|
2.2
|
3.9
|
|
|
Public external debt service due
|
19.3
|
19.2
|
18.4
|
14.8
|
10.4
|
|
|
Public external debt service after
rescheduling
|
2.8
|
3.7
|
6.4
|
9.5
|
6.3
|
|
|
|
|
|
|
|
|
|
(In percent of exports
of goods and nonfactor services)
|
|
Public external debt service due
|
29.6
|
24.4
|
19.6
|
14.5
|
10.2
|
|
|
Public external debt service after
rescheduling7
|
4.3
|
4.7
|
6.8
|
9.3
|
6.2
|
|
|
|
|
|
|
|
|
|
(In months of imports of
goods and nonfactor services)
|
|
Gross reserves coverage
|
1.7
|
1.2
|
2.4
|
2.0
|
2.2
|
|
|
|
|
|
|
|
|
|
Memorandum items:
|
|
|
|
|
|
|
|
GDP in trillions of rubles
|
172
|
611
|
1,630
|
2,256
|
2,678
|
|
|
Exchange rate rubles per US$1 (pd.
average)
|
933
|
2,205
|
4,557
|
5,123
|
5,780
|
|
|
GDP in billions of U.S. dollars
|
184
|
277
|
358
|
440
|
463
|
|
(Sources:
Russian authorities; and Fund staff estimates and projections)
1Investment includes both
capital formation and capital repair, as consistent with the methodology of
Russian Goskomstat.
2Includes domestic bank
financing, change in the stock of government securities held with the private
sector, proceeds from privatization and the sale of gold and other precious
metals, principal repayments to domestic nonbanks, and other financing.
3Includes rescheduling of
principal and interest plus (net) disbursements.
4Monetary data calculated
as percent change for same month in preceding year.
5September data.
6Data as of December 16.
7During the period 1992-96,
cash payments fell significantly short of amounts falling due, with the remaining
debt service obligations either being rescheduled or falling into arrears pending
discussions on debt rescheduling with various creditors.
Appendix
2
Interviews
1. "Скандальный обвал рубля" ("Черный вторник") // Известия 13 октября 1994 г. И. Жагель: «После того, как в понедельник курс доллара на Московской валютной бирже перевалил за трехтысячную отметку, многие эксперты высказали предположение, что падение рубля достигло максимума и можно ожидать финансовой стабилизации. И то, что произошло во вторник 11 октября не могло присниться в самом кошмарном сне - курс рухнул и составил 3926 рублей за доллар... Заместитель генерального директора МВБ считает, что... "причины скандального обвала курса носят чисто ажиотажный характер, никакого логического объяснения ситуации найти нельзя"... Тем временем в коммерческих ларьках и крупных магазинах началась массовая замена ценников, особенно на импортные товары...».
2. Известия 14 октября 1994 г. «Сообщается, что Ельцин подписал Указ об освобождении от занимаемой должности Министра финансов С. Дубинина и направил предложение в Думу о снятии В. Геращенко с поста председателя правления Центрального банка. Назначена комиссия для расследования причин случившегося».
3."Доллар услышал президента и упал. Игра окончена?" // Известия 15 октября 1994 г. «13 октября на торгах МВБ курс доллара упал с 3736 до 2994 рубля за доллар...».
4. А. Илларионов, М. Дмитриев "Третья попытка Виктора Геращенко" // Известия 13 октября 1994 г. «...Все, что случилось на валютной бирже, произошло не в результате "недочетов" и "тактических ошибок" ЦБ и правительства, как об этом поспешили заявить их высшие руководители, а в результате их собственной целенаправленной и настойчивой политики по "опусканию" национальной валюты. Обоим Викторам - Геращенко и Черномырдину - позарез нужен был курс, как минимум, 4 тысячи рублей за доллар».
5. Зачем правительству крах
национальной валюты? // Лев Остерман. Интеллигенция и власть в России. – М Издательство: Монолит, 2000.
«К осени текущего года дефицит бюджета так разросся (в частности в результате категорических распоряжений президента и премьера профинансировать дополнительные требования АПК и ВПК), что надо было добыть порядка 15 триллионов рублей для его покрытия. К сентябрю правительство накопило свыше 4 миллиардов долларов. Их продажа по старому курсу могла дать не более 8 триллионов рублей -- мало! Надо было вздуть курс до 4 тысяч за доллар, чтобы заработать на валютном резерве Минфина порядка 16 триллионов».
6. Как была
организована валютная паника? // Лев Остерман. Интеллигенция и
власть в России. – М Издательство: Монолит, 2000.
«11 октября ЦБ совершил рублевую интервенцию (скупая доллары) и тем взвинтил курс доллара. 11 октября Геращенко улыбался, а Черномырдин не собирался прерывать свой отдых в Сочи. Его вызвала оттуда акция президента по смещению Геращенко. Чтобы его оставить на посту, пришлось обещать Ельцину возвращения курса в норму, что тот же Геращенко и исполнил путем долларовой интервенции...».
7. Stanley Fischer, the First Deputy
Managing Director of the International Monetary Fund / Report at the U.S. -
Russian Investment Symposium, at Harvard University, on January 9, 1998.
«The Russian reform of the tax code and increased revenue collection are
on one side of the equation; on the other side, increasing the efficiency of
government spending and strengthening expenditure management deserve no less
attention.
Equally important for future growth is continued progress with structural
reforms, whose implementation had for some years lagged until recently - but it
must be noted and emphasized that the structural components of the Russian
reform program moved ahead as agreed with the IMF (indeed even a little faster)
during 1997».
8. ACADEMICIAN BOGOMOLOV
ON ECONOMIC SITUATION IN RUSSIA // The voice of Russia [E-resource] - Access:www.vor.ru
«On
August 17, 1998 a financial crisis erupted in Russia. Many experts believe that
its consequences are felt to this day.
The
well-known economist sees the date as a moment of truth for Russia's reformers. The bold but unsuccessful step toward a market economy, excessive hopes
for aid from Western businessmen and financiers, difficulties in the process of
privatization and a lack of reliable control over the activity of Russian
bankers deprived the federal budget of all revenues and turned the state into a
bankrupt overnight. Such was the sad result of August 1998 for Russia, said Oleg Bogomolov. But its lessons have been learned, and therefore there is no
need to expect a repetition of such developments, he pointed out. The Russian
economy is no longer considered a sick one...
We
have managed to substantially lower the rates of inflation, though they are
still higher than the government planned, the academician said. The Cabinet of
Ministers has given up the dubious methods of financing expressed in issuing
short-term government bonds at high interest rates. There are no financial
pyramids of the 1998 kind today. Since that time the government and Central
Bank have formed a system to monitor the activity of banks. Besides, in the
past few years the state has received substantial revenues as a result of high
fuel prices in the world market. This has made it possible for the Central Bank
to accumulate considerable gold and hard-currency reserves in an amount of 37
billion dollars. The devaluation of the ruble has also been an asset. It made
imports inaccessible to the people, and the domestic industries managed to fill
the gap with good-quality goods. All these factors have made it possible for
the Russian economy to reach the trajectory of growth. Today Russia, unlike many countries, has a well-balanced budget and taxes that are the lowest in Europe.
Now
the government must stimulate investment to develop the real sector of the
economy and do all in its power to regain the Russian people's trust in
economic reforms which was undermined by the 1998 crisis», said Oleg
Bogomolov.