Russian Financial Crisis (1998)

4161 WordsAug 31, 201217 Pages
Topic 3: Russian financial crisis (1998) 1.0 Introduction Affected by the Southeast Asian financial crisis, Russia suffered from the financial crisis in May 1998 followed the crisis in October 1997. The crisis initially reflected on currency market and security market. As a result, foreign capital about one-third of the total amount of Russian national debts faced large-scale capital flight; exchange rate depreciated and stock market suffered a large setback; re-lending interest rate once reached up to 150%. Stock market, bond market and currency market basically fell into halts, and banks were incapable to handle residents’ withdrawals. (Desai, 2000) In brief, the operation of the whole financial system and economy was almost…show more content…
Therefore, the Russian government planned to issue 6 billion of European bonds in 1998. On July 13 1998, the government borrowed 22.6 billion dollars from western financial institutions led by IMF. (Lucey and Voronkova, 2008) Thirdly, the government prolonged the redemption date of all the debts to relieve the repayment peak. The major problem for the Russian government was lack of debt paying ability to quick liabilities. However, most of debts at that time were short-term liabilities within one year. If the government couldn’t repay them in time, it would suffer from serious debt crisis in three years. Therefore, the government must change the term structure of repayment and repaid quick liabilities by borrowing funded debts. On August 1, the government published economic programs of stabilizing the finance, but investors had no confidence about whether the programs could have expected effects. (Shleifer and Treisman, 2000) Besides, the investors were not willing to buy Russian negotiable securities and even dumped the securities in their hands. Facing internal and external troubles, the government pushed three tough emergency measures such as enlarging the region of Rouble’s exchange rate fluctuations and turning the upper limit of Rouble’s exchange rate down to 9.5:1, delaying 90 days of repaying due external debts, and shifting the redemptions date of internal debts. Later, the Central bank straightforward announced to let
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