The Russian Crisis

Setting the scene

The Russian Crisis of 1998, also known as the ruble crisis, hit the country on August 17th, 1998, against the backdrop of the collapse of the Soviet Union, which broke down into 15 independent countries. With Mikhail Gorbachev resigning from his post as the president of the Soviet Union, Russia was coming out from a post-Soviet period into a market economy which led to a massive drop in living standards and inflation rising to a massive 300%.

As is common with many highly inflated currencies, people usually switch to a barter system rather than choosing to transact in the inflated currency. The massive inflation could be attributed to the fact that the Russian Government had huge deficits in their budget, which was financed by the Central Bank of Russia. This article attempts to discuss the crisis in detail, to know the extent of the damage and to pinpoint the effects it had on the Russian economy so that future mishaps are steered clear off.

Visualizing the fall

The chart below shows the year-wise per capita GDP and the growth rate for the same period. According to the chart, the highest per capita GDP was achieved during the year 2013 when it almost touched US$ 16,000, and the lowest point was in the year 2000 with a GDP per capita of only US$ 1331

Exhibit-1 (GDP Per Capita and Growth % over the years- 1988 to 2019)

In the table below, the negative growth rates are highlighted in red and in the year 1998, the fall in Per Capita GDP fell down by almost a third (33%) which was followed by another big fall of more than 27% in the year 1999.

Exhibit -2 (Table of data showing the information for the graph above)

Surprisingly, the highest negative growth was not in the crisis of 1998 but in the 2014-16 Russian financial crisis in which the fall in per capita GDP was almost 34%, higher than that of 1998. The sharp dips in the growth percentage graph shown above will generally coincide with an economic crisis of epic proportions.

Delving Deeper

There is a need to dive deeper into the heart of the story in order to analyze and dissect the lesson out of it.

  • There was some amount of effort, albeit feeble in nature, to attempt to cut the deficit in the year 1995, before the crisis set in. The Government basically wanted to control the growth of money in inflation by maintaining the prices of Rubel vis-à-vis the dollar
Exhibit -3 (Comparing Rubles with Dollars for the stock market)
  • This helped in a way as the inflation was lowered to less than 50% in 1996 and as Russia had access to strong international markets. Foreigners acquired Russian bonds, which helped in the appreciation of exchange rates. A rise in international reserves, a strong external current account and the appreciation of exchange rates helped cover the debt servicing costs for the country
  • The sudden onset of the Asian crisis in 1997 helped deteriorate Russia’s position and terms of trade. There was a net 25% fall in the total exports
  • There were lower inflows from international markets, and the cost of access to foreign capital also rose steadily. Faced with a massive US$ 20 Bn debt repayment directive, the Central Bank of Russia intervened and sold foreign exchange reserves to defend the exchange rate
Exhibit-4 (Semi-log representation of Rubles per US$)
  • All these uncertainties were beginning to pile up on top of each other. To make matters much worse, there was no effective macroeconomic policy to counter the disastrous effects of the crisis for the initial 6 months
  • One of the key reasons for the fall was the contemporary Asian crisis which pushed the Russian crisis on its worst path

Timeline of events

Impact on the Russian Economy

The financial crisis served as a wake-up call for the entire country and, besides having an immediate reaction, had long term consequences too (especially towards Russia’s efforts in becoming a market economy).

  • The depreciation of the Ruble caused a rise in the prices of imported goods which again led to greater inflation. On the other hand, a devalued currency is more competitive for exports and aids in increasing the GDP of the country
  • Unpaid wages and pensions are another glaring issue that needed to be addressed with an estimated 30 Bn Rubles (US$ 1.7 Bn by the end of 1998), still unpaid
Exhibit-4 (Effects of Depreciation on the net exports and output of a country)
  • Investor confidence was also ruined because of the crisis; Russia had around US$ 40 Bn in debt to both domestic and foreign investors, with foreign investors holding about US$ 17 Bn of the debt share. The Central Bank of Russia announced that it wanted to pay back these investors using a combination of short-term zero-coupon bonds, cash, four-five-year-old coupon bonds paying variable interest rates (beginning with 30%)
Exhibit-5 (Effect of the exchange rate change on Forex)
  • As shown by the picture above, the payments deficit for exchange rate r2 is AB and a depreciation in the exchange rates from r2 to r1 results in the reduction of export proceeds by an amount of AA1. This also reduces the payments for imports by BB1

Finding positives in negatives

Finding good in bad requires a lot of introspection, a positive outlook and courage. But there were clearly some positives in the financial crisis-

  • The imports being highly priced (because of the devaluation of the currency) gave an opportunity to local industries (like food processing) to manufacture goods and flourish, thereby setting up a strong domestic manufacturing system 
  • The crisis taught the Banking system of the country to diversify its assets into a well-built portfolio
  • Exports now became competitive, and Russia now had the ability to sell oil at extremely competitive prices


There was bound to be some amount of friction as Russia essentially changed everything that it was defined by until that point in time. Ever since the country embarked upon reforms in the year 1991, towards being a market-driven economy, there has been a continuous fall in per capita GDP, as shown by the graph and image at the beginning of the article. The Ruble crisis further aggravated Russia’s journey towards a market-driven economy, and there has been a common consensus on this topic. However, history is not without invaluable lessons and the lessons learned. In fact, Russia could quickly recover from the crisis largely because of its dependence on oil prices which increased during the 1999-2000, leading to large trade surpluses with countries.

In this case, maintaining a sturdy monetary policy by the Central Bank of the country is extremely important. The primary lesson from this article, in my opinion, would be the fact that the central bank of a country should anticipate threats before their arrival and prepare the economy to absorb any harmful shocks whatsoever.


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