The Russian economy recovered relatively quickly from the 1998 crisis, growing by 6.4% in 1999 and 10% in 2000. This led to substantial spillover effects in international markets ( Dungey et al, 2002). Russia’s sovereign default was the largest in history at the time and contributed to the collapse of the LTCM (Long Term Capital Management) hedge fund in the United States, which required a $3.6 billion bailout. The crisis also had a significant effect on financial markets globally. In August 1999, within a year of the crisis, Vladimir Putin became the fifth prime minister in 12 months. Increased political instability followed: both the prime minister and central bank governor were replaced the new prime minister’s first budget was rejected and the president’s popularity collapsed ( Desai, 2000). Workers staged strikes and large scale protests, including demonstrations in front of the Russian White House. Inflation in 1998 was 84% because of rouble depreciation, contributing to a dramatic fall in real wages and social unrest. The currency crisis and associated financial market turmoil contributed to a recession and contraction of the Russian economy by 5.3% in 1998, with GDP per capita reaching its lowest level since the formation of the Russian Federation in 1991. There were significant domestic and international consequences of these events. In three weeks, the currency had lost about two-thirds of its value ( Kharas et al, 2010). Two weeks later, on 2 September, the Bank of Russia abandoned its efforts to maintain a fixed exchange rate and allowed the rouble to float freely. Then on 17 August, the government announced a devaluation of the rouble’s pegged exchange rate, a default on its domestic debt and a 90-day suspension on payments by commercial banks to foreign creditors. Trading on the stock market was suspended for 35 minutes due to sharp falls in prices. In early August 1998, driven by fears of a default on domestic debt and a rouble devaluation, the Russian stock, bond and currency markets all came under severe pressure. This had the effect of further eroding investor confidence and creating downward pressure on the currency. In an attempt to encourage investors to hold rouble-denominated assets and support the fixed exchange rate, the Bank of Russia increased interest rates to 150%.But this meant that by July 1998, interest payments on Russia’s debt were 40% higher than the country’s tax collection. This increase in default and exchange rate risk made capital flight from Russia and a devaluation of the rouble more likely. This led to fiscal imbalances and raised questions about the government’s ability to pay its sovereign debts and maintain a fixed exchange rate ( Desai, 2000 Kharas et al, 2010). These weaknesses were highlighted and exacerbated by the financial crisis in Asia.Ī global recession and a fall in commodity prices compounded weak tax enforcement in Russia and an expensive war in Chechnya. This crisis quickly spread to other Asian currencies and by November, the rouble also came under attack by speculators ( Chiodo and Owyang, 2002).ĭespite the reforms introduced since 1991, fundamental institutional weaknesses remained in Russia ( Sutela, 1999 Chiodo and Owyang, 2002). But investor expectations soon changed following the Asian financial crisis, which began with the collapse of the Thai baht in July 1997. In the first quarter of 1997, foreign investment in Russia rose sharply with the relaxation of restrictions on foreign portfolio investment.

The Russian economy was also supported by financial aid from the World Bank and the International Monetary Fund (IMF), while negotiations to repay foreign debt inherited from the Soviet Union improved investor confidence ( Chiodo and Owyang, 2002 ). The Bank of Russia would intervene by buying and selling the rouble as necessary to maintain the exchange rate. This meant that the value of the rouble relative to the dollar was constant and only allowed to fluctuate within a narrow band. A central element of this was the adoption of a currency peg – a type of exchange rate regime in which a currency's value is fixed against the value of another currency. The fall of the Soviet Union in 1991 preceded several years of economic reform, privatisation and macroeconomic stabilisation policies in Russia. Source: Bloomberg Background and causes of the 1998 rouble crisis

Russian currency rates