Question

Describe in as much detail as possible, the recovery process of the Russia Financial Crisis of 1998.

Answer 1

The Russian financial crisis hit Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the rubleand defaulting on its debt.

When we talk about Russia's recovery from the crisis, it was at a great speed. Main reason behind a quick recovery was that the world oil prices rapidly rose during 1999–2000 so that Russia ran a large trade surplus in 1999 and 2000. Another important reason was though financial crisis was not good for the economy as a whole but the domestic industries like food processing had benefited from the devaluation, which caused a steep increase in the prices of imported goods. Depreciation of the Ruble Improved Exporters’ Balance Sheets

Another reason which helped Russia move out of the crisis pretty soon was that Russia's economy was operating to such a large extent on barter and other non-monetary instruments of exchange. The financial collapse had far less of an impact on many producers than it would had the economy been dependent on a banking system. Finally, the economy had been helped by an infusion of cash. As enterprises were able to pay off debts in back wages and taxes, in turn consumer demand for goods and services produced by the Russian industry began to rise. During the recovery process, level of Barter Declined. There was a significant decline in barter as a share of industrial sales in Russia since the August 1998 crisis. Also the tax payments paid in cash increased and from the economy's point of view they are considered as healthy signs on the part of manufacturers.

Another important point to note for Russia's recovery was receover in Consumption and Investment. Though most of the recovery from crisis in 1999 was attributed to depreciation of the ruble. The high cost of imports led to increased consumption of domestic goods and the most important positive sign during 2000 has been the recovery in consumption and investment.

Important point to note here is that apart from the baove mechanisms, given a certain recovery of production in the second half of 1998-1999, structural reforms were implemented to create an enabling institutional and regulatory environment for companies and reduce administrative risks and transaction costs. These structural reforms were focus on the following:

1. Privatization, corporate governance, shareholder and investor right protection were given importance. Development of the bankruptcy procedures happened and developement of efficient business incentives.

2. Tax reforms were implemented to reduce tax burden on companies by establishing a more “fair” and “businessfriendly” tax system which encouraged official business development.

3. Bank restructuring ahppened to establish a sustainable bank system capable to meet the real sector needs in terms of payments and credits.

4. International trade policy was implemented to address encouraging exports and protecting domestic market.

5. Natural monopoly policy was taken up to create a competitive environment in the natural monopoly sectors with a view to a more efficient cost and price control.