Economic crisis in Russia (Российский кризис 1998 года)

ESSAY.

FINAL DRAFT.

By Anton Matiukhin.

24, NOVEMBER 1998.

Международный Институт Экономики и Финансов, 1 курс, Высшая Школа

Экономики.

ICEF, gr. 2.

It is obvious almost to everyone, that 1/6 of the land is now in deep

economical and political crisis and the whole world is waiting to see how

the country will emerge from it. Russia’s chaos was caused by economic

turmoil and political upheaval. Economic slump on the stock market,

devaluation of the ruble, a default on foreign debt by banks and government

are parts of a climax and the general instability of Russia is worsen by

them. These things sometimes happen in the process of transforming a

country from a command into a market economy.[1]

There was a sharp increase in the inflation level after it has been brought

down to as little as 5.6% a year in July. The prices began to rise fast and

a lot of people were thrown far beyond the poverty level.

The anatomy of the financial crisis consists of several causes. The first

cause is the so-called “Asian factor”. There was economic turmoil in

Thailand first and then it spread all over Asia: South Korea, Hong Kong,

Singapore and Malaysia in 1996- 1997. "All these countries and more have

seen their economies wrecked over the last couple of years. Now Russia has

its currency heading for the basement and is basically defaulting on its

national debt". [2]It has scared foreign investors. “This cooled their

enthusiasm for investment in riskier economies” (Russia today) and they

start taking their money out of its stocks and converting their rubles into

dollars. It will take a lot of time for them to gain confidence in Russian

“emerging” market again.[3]

Although the Russian government was insisting it would not devalue the

currency, it had to float the ruble three days later. For propping it up

the Central Bank drained its reserves- $1 billion a week for ruble’s

defense. This also increased the devaluation.

Poor tax collections forced Russian authorities to raise funds to cover its

expenses. It has been floating GKOs (short-term treasury bonds) which

provided as high as 240 percent interest. Although the state attracted

billions of dollars, it needed to borrow more to pay off the short-term

bonds. But without tax revenue, the government would not be able either to

pay the international bills or maintain essential services. It cannot

afford to pay state workers and without their wages, they cannot pump money

back into the economy. Large fiscal deficit makes Russia highly unprotected

from swings in market sentiment.

Another thing, which sank the crisis, was a drop in world oil prices.

Russia is the world’s third-largest oil producing country and oil is the

great hope of its economy, because unfortunately its production level is

not good enough not to let Russian huge natural resources to be sold out.

All these above-mentioned problems seem to be very complicated and, of

course, there are no quick fixes available. But, from my point of view, the

solution key word is not “help” but “self- help”. "Currently institutions

such as the world bank and the IMF have been formed to be the lenders of

last resort to governments who themselves control the various central banks

which are the lenders of last resort for people within their countries."[4]

However, these institutions are no longer really in effective control.

There are people at the top of this pyramid, those who are really making

money from it, who are more concerned about their relative power and wealth

than with the overall damage that is being caused by this current chain

reaction of a collapse. A fundamental reform of the world financial system

needs to happen to clear up this mess.[5]

The World Bank should not help the countries with “emerging” markets only

with money and then make itself richer from loans, but it must be

restructured into the knowledge bank. It must provide these countries with

specialists, teaching how to act themselves in critical situations. World

Bank must also exchange its experience with them to prevent them from

“inventing the bicycle” once more. It must teach these states how to help

themselves.

I do not know, whether it is possible, but it would be good if the IMF and

the World Bank cancel all loans given to developing countries with

“emerging” economies for the sake of the world’s safety. Otherwise their

economies would be doomed to be destroyed because of the short-term debts,

which these countries need to pay back. But on the other hand, if it have

had cancelled, no organisation including the IMF would have been looking

forward to further negotiations with such countries and provided them with

credits.

But the worst thing is that the economic crisis entailed the political

crisis. Because, as one of the most famous writers, philosophers and

politicians of the Renaissance Niccolт Machiavelli said, "the only way to

reach prosperity of the country is to have a firm, determined and

intelligent leader, who will be an avatar of the majority's interests, and

who will have a great estimation among the people". And the Russian

president Boris Yeltsin has already lost all the consideration, and the

things were getting worse and worse after the beginning of the crisis. The

recent ordered murder of the famous deputy and democrat Galina Starovoytova

was a signal that lawlessness in Russia has reached its apogee. She was

among those few people, who performed real action. As a peacemaker she went

to many "hot spots" and tried to stop the bloodshed. But she was a real

obstacle for people who did not want human rights and laws to be the most

precious thing. After this incident, all democratic parties have realised

the necessity of joining their forces against their common enemies-

communists and fascists. It may seem unbelievable, but at the end of XX-th

century there is a serious threat of turning Russia into a nationalistic

and fascist country, because the number of people (especially young)

joining different nationalistic organisations. The opposition, which is

always very active, would not hesitate a second if there would be a little

chance to overtake the power.

I think that in the case with Russia, despite the IMF wants our authorities

to provide it with their economic program first and then they will be able

to give Russia credit, giving a loan now will prevent the country from a

possible revolution. And this is the urgent measure to be taken. For a

great amount of people the crisis was a proof of an insolvency of market

economy, at least they think it was. This caused the act of protest on the

7-th of October. Fortunately it has not such scale as it was expected to.

But, in my opinion, it was not a failure of market economy itself but of a

present inefficient and weak government. The important thing is that the

politicians stop playing politics and dividing the power and entrust

together to the serious and urgent measures that Russia needs. Although I

do not like the new government and the Prime Minister very much, I hope

they will be firm enough and well disciplined to continue working on

restructuring country’s economy.

Sources:

Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr. Aug.

21 1998.

Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.

Global Capitalism. The Economist. Sept. 12 1998.

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[1] Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr.

Aug. 21 1998.

[2] Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.

[3] Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr.

Aug. 21 1998.

[4] Global Capitalism. The Economist. Sept. 12 1998.

[5] Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.

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