Currency crisis on the example of russia currency crisis 1998 and 2014

Currency crisis on the example of russia currency crisis 1998 and 2014 A currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt. Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserve

Currency crisis on the example of Russia currency crisis 1998 and 2014 Content 1.Introduction 2.Currency crisis definition and reasons 3.Russian currency crisis 1998 3.1Crisis background and main reasons 3.2Chronology of events and default 3.3Impacts of crises on the economy 3.4Recovery process and lessons from the crisis 3.5 LTCM bankruptcy Russian currency crisis 2014 4.1Chronology of events 4.2Main reasons 4.3 The Impact on Finance, Economics, and Society 4.4 Recovery Activities The Impact of crises on the Former Soviet States Common and different features in crises 6.1 Common features in crises 6.2 Different features in crises Summary Introduction A currency crisis can be defined as a speculative attack on a country’s currency that can result in a forced devaluation and possible debt default One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves Currency crisis sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis themselves In this paper, we examine and review the two currency crises in Russia, paying particular attention to the events, including analysis of the currency crisis in Russia, we discuss the impacts and the main reasons In addition, we review the recovery process that was undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation The following section reviews two Russian currency crisis models, and compares their common and different features The six section summarize effect of the both crises on the Russian and world economy Currency crisis definition and reasons 2.1 Currency crisis definition A currency crisis, which is also called a balance of payment crisis, is a speculative attack in the foreign exchange market It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange rate A currency crisis is a type of financial crisis, and is often associated with a real economic crisis Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country’s own currency reserves or its foreign reserves (usually in the United States dollar, Euro or Pound sterling) A currency crisis is brought on by a decline in the value of a country's currency This decline in value negatively affects an economy by creating instabilities in exchange rates, meaning that one unit of the currency no longer buys as much as it used to in another To simplify the matter, we can say that crises develop as an interaction between investor expectations and what those expectations cause to happen Currency crises, which many economists define as a swift decline of more than 20 percent of a local currency against the dollar, have hit dozens of emerging markets over the past three decades, and have occasionally triggered regional recessions like the Latin American debt crises in 1982 and the Asian financial crisis in 1997–98 The United States has augmented aid packages arranged by the International Monetary Fund (IMF) in the past to help stabilize important trading partners and limit contagion, recognizing that tremors even in small economies far away could hurt domestic growth Drawing on lessons from previous crises, the IMF has developed new tools and a revised approach to avert the quick collapse of currencies Still, few economists are convinced the world has seen its last currency or financial crisis 2.2 Currency crisis reasons With the development of market economy and the acceleration of globalization, stagnation of economic growth is no longer the main reason of the currency crisis A large number of economists’ studies show that overvalued exchange rates, current account deficits, falling exports and economic activities’ slowing are the indication of a coming currency crisis During the actual running, currency crisis usually triggered by the bursting of the bubble economy, the banks’ non-performing debts increasing, the serious imbalance of payments, too massive external debt, financial crisis, political instability, the distrust to the government and so on If investors' confidence in the stability of an economy is eroded, then they will try to get their money out of the country This is referred to as capital flight Once investors have sold their domestic-currency denominated investments, they convert those investments into foreign currency This causes the exchange rate to get even worse, resulting in a run on the currency, which can then make it nearly impossible for the country to finance its capital spending Predicting when a country will run into a currency crisis involves the analysis of a diverse and complex set of variables There are a couple of common factors linking the more recent crises: most of the countries borrowed heavily (current account deficits); in some countries currency values increased rapidly; uncertainty over the government's actions made investors panic 3 Russian currency crisis 1998 3.1 Crisis background and main reasons After the collapse of the USSR, Russia in the 1990s, almost constantly was experiencing financial difficulties Therefore, it was in desperate need of foreign loans, but could not reliably guarantee the debt repayment A huge government debt became a consequence of the large external and internal debts According to the Central Bank, at the time of crisis, the Central Bank reserves were $ 24 billion, liabilities to non-residents in the STL / FLB (state short-term liabilities / federal loan bonds) market and the stock market - more than $ 36 billion The total amount of payments to non-residents by the state was approaching 10 billion dollars a year The situation with financial difficulties was compounded with the political struggle taking place between the Government appointed by Boris Yeltsin who adhered to liberal values, and the State Duma, which at that time was controlled by the Communist Party The imbalance in the relationship of the State Duma and the Cabinet was reflected in the growth of the state debt of the Russian Federation The fact that Duma voted for unbalanced budgets, therefore increasing fiscal spending of the Government, Government was looking for ways to close the budget hole, increasing the national debt by issuing state treasury bonds (T-bills) "Black Tuesday" in October 1994 was one of the dates after which Government decided to finance budget deficit not through currency emission, but through so called non-inflationary sources, which actually meant external and internal borrowing Mass process of issuing T-bills started after the re-election of President Yeltsin If in 1995 the volume of T-bills issue was estimated at 160 billion dollars, in 1997, this number rose to 502 billion rubles Buyers of state treasury bonds were offered high interest rates, so demand for T-bills was impressive Making it simple, for every ruble borrowed for one year, State promised to return 5-7 rubles of budget money So actually the system turned into a pyramid - the old obligations of the Russian Federation could be covered only due to the issues of new ones In the 90th the Bank of Russia introduced so called "Currency corridor" in order to support the national currency exchange rate in the desired range, and ensure the profitability of T-bills in dollar terms At the same time, the Government allowed foreigners to invest in treasury bonds 1997 was the year when Tbills market became liberalized, and number of non-residents, who owned T-Bills counted as much as 30% of the whole market Non-residents were happy to receive a high profit, and take their money out of the country while paying a modest 15 per cent tax Very soon, economists understood that this is an alarm, arguing that the payments for T-bills are twice as big as the tax revenue of the state It became obvious that the bubble will soon burst At the time of the default CBR reserves were only $ 24 billion, while Russia's obligations in the STL / FLB market and the stock market exceeded $ 36 billion, according to the Bank of Russia One more reason of the currency crisis was that the situation was exacerbated by decline in world commodity prices (especially oil, gas, metals) and the Asian financial crisis, that began in spring 1998 Because of these events, government revenues in foreign currency declined, while private foreign lenders became extremely reluctant in giving loans to countries with unstable economies Besides starting from early 1992, when the so called liberalization of prices was made, and hyperinflation of 356% occurred people start disbelieve the Government, and prefer not to invest their money anywhere So, to sum it up we can see that the main reasons of the Russian financial and currency crises were low Government reserves, as Government spent much more than it could earn from the tax revenues; no plan of economic development and local production; over issue of T-bills; external factors such as Asian Crisis and low prices on commodities (Oil) 3.2 Chronology of events Black august and default According to experts, the alarm about a possible devaluation of the ruble and default sharply increased on 3rd of July 1998 after the statement of the Executive Director of the IMF, Michel Camdessus, who said, that even in the case of Moscow will fulfill all the requirements of the fund, the organization is unlikely to arrange a loan of 15 billion dollars, which is Russia requested The chronology of events that preceded default can be seen as following: July 7, 1998 Bank of Russia stopped issuing Lombard loans to banks July 9, 1988 negotiations with the IMF were completed, the result was an agreement, that Russia will receive 22.6 billion dollar loans within years July 20, 1988, IMF decided to allocate the first tranche of Russian recovery loan in the amount of 14 billion dollars Ruble devaluation threat reduced July 24,1988 the Central Bank of Russia lowered the refinancing rate to 60% July 29, 1988 Director of the Institute of Economic Analysis Andrei Illarionov harshly criticized the policy of the CBR( Central Bank of Russia) and called for the early ruble devaluation by Government August 5, 1998 the government decided increase the limit of foreign borrowings sharply - from to 14 billion dollars In fact, this decision meant the impossibility of Government financing the budget from domestic sources August 6,1998 IBRD decided to provide Russia a third loan for economic restructuring in the amount of $ 1.5 billion Russian foreign debt liabilities rating reached the minimum values in the world market August 11,1998 Russian securities on the stock market exchange fell down The fall in share prices on the RTS exceeded 7.5%, after which trading was stopped All day banks were actively buying up the currency, and in the evening a number of the largest banks declared about suspension of the operations August 12,1998 a sharp increase in demand for foreign currency has led to a halt of interbank credit market and liquidity crisis CBR has reduced the limits on currency sale by large commercial banks, reducing its costs to maintain the ruble exchange rate August 13, 1998 Moody's and Standard & Poor`s downgraded the credit rating of Russia An emergency meeting of the Finance Minister Mikhail Zadornov and Central Bank Deputy Chairman Sergei Aleksashenko with representatives of the largest Russian banks was held The Government stated that the maintenance of the foreign exchange market and the market of state short-term bonds is the responsibility of the commercial banks August 14, 1998 Firs lines of people, who requested to return their deposits appeared in front of the banks August 15,1998 President Boris Yeltsin, interrupted his vacation and returned to Moscow Prime Minister Sergei Kiriyenko held a meeting with the heads of the Central Bank, the Finance Ministry and the Kremlin's special representatives in international financial institutions The Prime Minister instructed to develop measures to stabilize the situation August 17, 1998 Prime Minister Sergei Kiriyenko announced the introduction of "a set of measures aimed at the normalization of financial and fiscal policy," which actually meant a default and devaluation of the ruble Repayment of the loans to non-residents, transactions in the money market and collateral operations were suspended for 90 days Purchase and sale of T-bills was also stopped Along with the suspension of payments on T-bills, CBR moves to a floating exchange rate within the boundaries of the currency corridor of to 9.5 rubles to the dollar The ruble fell against the dollar immediately in half The same day, the banks stopped returning deposits Streets were full with anxious depositors Central Bank of the Russian Federation made a statement in which explained the situation in a following way: "The problem of the Russian banking system is that the majority of banks, especially large ones, have liabilities denominated in foreign currency and assets - in rubles In the case of devaluation they expect a very large hole in the balance sheet that not comparable with the volume of forward liabilities " August 18, 1998 Alexander Livshits has resigned from the post of deputy head of the presidential administration The international system Visa Int blocked "Imperial" bank cards and recommended other Russian banks to suspend issuing cash by the cards Central Bank announced a ban to banks to make a spread of foreign currency exchange more than 15% August 19,1998 Government announced decision to postpone restructuring of the STL August 20, 1998 deputy chairman Sergei Aleksashenko announced a refusal of the temporary administration in commercial banks The new measures included providing bank with loans on condition of collateral of the shares of the bank August 21 Visa Int sent announcements to all foreign banks, recommending not to issue cash for a number of Russian banks` cards As a result of devaluation, falling production and tax collection in 1998, gross domestic product decreased three times - up to $ 150 billion - and became smaller than the GDP of Belgium Russia has become one of the largest debtors in the world Its external debt rose up to 220 billion dollars (165 billion US dollars amounted to state debt, 30 billion - banks debt $ 25 billion – companies` debt) The amount was five times as big as the entire annual budget revenues and accounted for almost 147% of GDP Taking into account the domestic debt of the various authorities to state employees and enterprises on wages and general obligations on the government projects it exceeded $ 300 billion, or 200% of GDP In August 1998, all fiscal and monetary system collapsed simultaneously in Russia Tax collection rates fell as low as possible Inflation accelerated three times, and altogether with the fourfold devaluation of the ruble treasury, citizens and businesses` incomes all felt down tremendously A number of Russian banks could not survive the default Thus, the Bank of Russia revoked the license of Inkom bank, that was among the five largest banks in Russia 3.3 Impacts of crises on the economy Though financial and currency crisis is always a tragedy for a nation, which is followed by long recovery process, we can actually distinguish both negative and positive impacts of the 1998 Russian financial and currency crisis First of all we need remember that this was the first financial crisis in history, when government also defaulted on the debt in local currency As a rule state would emit more currency and in such way repay its debts But on August 17, 1998 Russian Government announced default both on external and internal debts Logically such actions resulted in a loss of confidence by both foreign and domestic investors in the solvency and competitiveness of the financial system in Russia This also resulted in a sharp decline in the credit rating of Russia and all Russian companies A sharp outflow of capital from Russia began rapidly Ratings of Russian commercial banks were also lowered, which led to the loss of opportunities to attract foreign investment and foreign loans Being cut of both internal and external sources of financing the deficit of the state budget meant that Government was left with only one method of covering budget deficit - emission financing This has increased the rate of inflation and growth of consumer prices There were serious violations in the work of the banking system and the implementation of payments Direct losses of commercial banks due to the Government's failure to service its debt obligations estimated at $ 45 bln rubles The total losses of the Russian banking system caused by decisions of 17th of August were estimated at 100-150 bln rubles As a result, many banks became insolvent A significant part of commercial banks went bankrupt Due to the failure of many large banks to perform their obligations to depositors, under the reason of force majeure, the whole banking system of the country has lost the trust of the population, which has negative long-term implications not only for the domestic banks, but also for the country's economic system as a whole Unmanaged devaluation of the ruble led to a sharp contraction of the money supply in real terms, worsening liquidity crisis and rising defaults To overcome these effects, as well as to stabilize the banking system in times of a massive outflow of deposits Government had to use currency emission heavily, which in its turn could lead to a inflationary spiral with long-term negative effects of macroeconomic instability Reduced real income and savings of the citizens in Russia, increased the number of people with income below the poverty line, high unemployment numbers all these were the consequences of default This situation happened due to harsh increase in domestic consumer prices, which was caused by depreciation of the ruble income and savings, as well as the loss of people`s savings in banks that went bankrupt As a result of the decisions taken on August 17, real income of the population decreased by 31.1 percent in one month Lost savings in bank deposits were estimated by the International Confederation of Consumer Societies in the tens of billions of rubles Companies were also seriously affected by the crisis, their deposits in troubled banks have been frozen In 1998, the entire Russian industry got struck in a payment crisis If we want to mention positive consequence of the crisis of 1998 we should agree that due to the devaluation of the ruble prices for imported goods in the country increased, while prices of domestic goods abroad fell, which allowed to increase export This gave new opportunities for domestic industry to gain profitability, cut off from its imports and increase export opportunities Small businesses realized their strength and began to develop into a larger enterprises New types of businesses that were not common to countries with resource economics, like Russia start to develop at the time Since 1999, food processing, light industry, service industries, began to grow and consumer demand was also growing subsequently The main positive result of the crisis of 1998 can be called abolishment of the raw model of the economy and development of the other sectors of economy, which were replaced by imports before the currency crisis 3.4 Recovery process and lessons from the crisis The post-crisis decline in Russia was short and soon gave way to a large-scale growth A significant role in this growth played a change in the macroeconomic policy of the Russian Government and the Central Bank Overvalued exchange rate of the ruble was considered not useful as an anti-inflation measure and ruble has become almost completely floating currency Although this led to a short-term surge in prices, in most way this measure made a positive impact on the Russian economy Russian companies carrying costs in rubles, became more competitive both on global and domestic markets In addition, free formation of the ruble value eased the accumulation of foreign exchange reserves of the Central Bank of the Russian Federation, which increased the stability of the financial system of the country Monetary regulations were also relaxed Government completely abandoned the practice of restricting money supply by non-payment of salaries, pensions, and defaulting on government contracts This has contributed to the normalization of the situation in the financial sector and the growth of confidence in the actions of the state In the post-default years fiscal discipline improved a lot The federal budget for 1999 was adopted with a deficit of 2.5% of GDP (for the budget for 1998, the same indicator amounted to 4.7% of GDP) It was also decided not to fund the budget deficit at the expense loans, because this measure on the one hand did not give the desired anti-inflationary effect, on the other hand was undermining the stability of the economy The result was a decline in the profitability of investing in securities and, accordingly, increasing the attractiveness of investments in the real sector of the economy, which contributed to growth of production An effective anti-crisis measure that was conducted by the Russian government in the early days after the default was the containment of the growth of prices for the products of natural monopolies (electric power, transportation, and so on) As a result, the rate of increase in these prices was twice less than the rate of inflation in the economy as a whole It was an additional impetus for the economic growth and it also contributed to the inflation slowdown 3.5 LTCM bankruptcy In 1996 and 1997, the hedge fund managed by Long-Term Capital Management (LTCM) had an outstanding series of success and has earned an unrivaled reputation in the management of financial risk However, in August 1998, Russia defaulted on its debt and a chain of unprecedented market movements began This brought a terrible outcome for LTCM Some say that the moral of the story is that the management of risk in the fund was insufficient, although partners (participants) of the Fund were experts in this field on Wall Street The collapse of the hedge fund in 1998 was a stunning event Approximately half of the LTCM partners had PhD in Financial Sciences, most of them were from the Massachusetts Institute of Technology (the famous MIT) Two of the partners, Robert Merton and Myron Scholes received the Nobel Prize for their research, which has become a cornerstone in the hedge derivative risks LTCM also included a group of traders with considerable experience in the markets and the leader of the "Dream Team" was a trader with an outstanding reputation However, just a few months the fund has lost more than $ billion, and LTCM was accused of a serious threat to the security of the global financial system Many argued that this collapse shows that modern financial risk management techniques did not work Russian Currency Crisis 2014 4.1 Chronology of Events In 2014,Russian currency crisis was about the collapse of the Russian ruble and sharp economic slowdown in Russia The decline in the Russian ruble has increased the costs for Russian companies, they had to make interest payments on debt that issued in U.S dollar or other foreign currencies that have strengthened against the ruble; thus Russian companies need cost more ruble to repay their debt holders in dollars or other foreign currencies Investors decline confidence in the Russian economy and sell off their Russian assets, which led to a decline in the value of the Russian ruble and sparked fears of a Russian financial crisis The crisis has affected the Russian economy, consumers and companies, and regional financial markets, as well as Putin's ambitions regarding the Eurasian Economic Union The Russian stock market has experienced large declines, with a 30% drop in the RTS Index from the 16 December in 2014 The following graph shows events how to affect Russian ruble Timetable of collapse of the Russian Affair Time Dollar/Ruble Annexation of Crimea 18 March 2014 36.2477 Minsk Protocol September 2014 37.0028 Donbas general elections November 2014 43.0072 Central Bank intervention 16 December 2014 68.4910 4.2 Main Reasons The main causes of Russian currency crisis in 2014 are the fall in the price of oil in 2014 and international economic sanctions 4.2.1 Fall in oil prices Crude oil is a major export of Russia, it declined in price by nearly 50% between its yearly high in June 2014 and 16 December 2014.The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in December 2014 The drop in the oil prices was caused by a drop in the demand for oil across the world, as well as increased oil production in the United States.International Energy Agency release the latest Oil Market Report provides this telling figure - showing a gulf opening between levels of global oil supply and global demand to consume that oil: From this diagram we can see that the supply of oil is higher than the demand of oil from 2013 The IEA also goes into great depth about which countries are creating these imbalances Even though production is way up in the United States, and the OPEC nations are keeping production steady, the demand is slack or less than expected in Europe, Japan, and China It also point out the biggest fall happened in Russia According to the report a "severe downgrade" is forecasted for Russian oil demand Combined with the fact that economic activity is expected to decline markedly in the country and revenues of oil export are decreasing with oil prices slumped, as well as international economic sanctions created hardship for many companies Because roughly half of the Russian Federation's governmental revenue comes from the sale of oil and gas, this fall in oil prices hit Russia hard Russia needed an oil price of $100 per barrel to have a balanced budget As the price of oil falls, and Russia doesn’t have the ability to dramatically increase oil production to compensate for the lower price, thus due to the reduced profit from selling oil, the government has substantially lower income Russia's economy suffers from Dutch disease, a term economists use to describe a situation in which a country focuses on developing its natural resources, and damage other economic activity 4.2.2 International economic sanctions Because Russia's annexation of Crimea and the Russian military intervention in Ukraine, Russia experienced international economic sanctions Due to Russia's military intervention to Ukraine in 2014,any international aid to Russia is considered unlikely In 2014, Russia made several incursions into Ukrainian territory Beginning with Crimea, Russian soldiers control the strategic positions and infrastructure within the Ukrainian territory of Crimea, which Russia annexed after a disputed referendum Subsequently, demonstrations by pro-Russian groups in the Donbass area of Ukraine escalated into an armed conflict between the Ukrainian government and separatist forces of the self-declared Donetsk and Lugansk People's Republics The majority of members of the international community and organizations have condemned Russia for its actions in post-revolutionary Ukraine,they accuse Russian break international law and violate Ukrainian sovereignty Many countries implemented economic sanctions against Russia Officials in the U.S government have also said that despite the financial crisis, the United States and the European Union will not ease economic sanctions imposed on Russia due to Russia's annexation of Crimea and Russian assistance to separatists fighting Ukraine in the War in Donbass The United States and the European Union start economic sanctions from March 2014 On March 17, the result of Ukraine's Crimean autonomous region referendum shows that more than ninety percent of the voters decided to join the Russian federation, the European Union agreed to freeze 21 Russian and Ukrainian officials personal assets, and it is forbidden to issue a tourist visa to them Shortly thereafter, Mr Obama has decided freeze assets and banned enter the United States to related 11 Russian and Ukrainian officials in Ukraine and Crimea pro-Russian leaders, On March 20, the United States announced expand the scope of sanctions against Russia officials, and the Russian Banks were sanctioned The European Union decided to increase the intensity of sanctions against Russia, including increase sanction to 12 officers and cancel scheduled EU-Russia summit in June 2014 On March 24, members except Russia decided not to participate in scheduled summit in Sochi On July 16, U.S President Mr Obama announced a new round of economic sanctions on Russia, the targets were major institutions, such as the Russian natural gas industrial bank and Russian oil companies, and other energy and defense companies EU leaders also had intentions to sanction Russian companies that damaged or threat Ukraine's sovereignty, territorial integrity and independence by material or financial means Because MH17 was shot down on July 29, the United States and the European Union announced expanded sanctions against Russia in the Russia's energy, finance, defense sectors It is the most severe sanctions against Russia until now American announced three Russian Banks were under sanction, they are VTB (VTB), agricultural bank of Russia, and bank of Moscow In addition, because OCK has contract with Russia's military, it has also been included in the sanctions list The United States will suspend export some goods to Russia's energy sector The European Union limit Russia's state-owned financial institutions enter the EU financial market The international economic sanctions demonstrate the effectiveness of the joint U.S and European campaign to force Putin to pull back from Ukraine, like sanctions against Iran forced the Islamic state to negotiate over its nuclear program The U.S believes the sanctions have negatively affected Russian economy so far and also expects the economic sanctions to lead to the further decline of the Russian economy It’s clear that the U.S orchestrated sanctions in order to contain the Russian economy becoming stronger and that would only be eased as a result of Russia living up to commitments to end support for Ukraine separatists, Economic sanctions have also contributed to the decline of the ruble since Russian companies have been prevented from rolling over debt, forcing companies to exchange their rubles for U.S dollars or other foreign currencies on the open market to meet their interest payment obligations on their existing debt Some other possible causes also lead to the currency crisis Russia was already near a recession before the Crimean crisis, and Russia ranks low on the World Economic Forum's rankings of road quality, technological adaptation, and burden of government regulation Russia's already weak economy made it difficult to withstand the challenges imposed by low oil prices and international sanctions The Russian Central Bank's "erratic response" to the falling ruble was also blamed for deepening the crisis 4.3 The Impact on Finance, Economic, and Society 4.3.1 The impact on Russia The first impact on agricultural and sideline products As it was banned imports from the U.S and Europe ,the inflation increased in Russia, the cost of Russian people's life was increased At present, Russia is negotiating with China, Argentina, Ecuador, Brazil for looking for new import channels of food The second impact on economy On 16 December 2014，the RTS’s price index was declined 12%, it was the greatest fall of the global financial crisis since November 2008, and the Micex index declined 8.1% before ending the day Until 16 December, nearly 30% was declined In response to rising interest rates and international economic sanctions , the interest rate of inter bank loans rose to 28.3% in months, it was higher than any time in 2008 Because the high volatility and decline of the Russian ruble, many Russians have chosen to purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and change their pensions and savings from rubles to US dollars or euros Some foreign companies have stopped their business activities in Russia, such as Volvo car dealerships, the online stores of Apple, and Ikea temporarily stopped sales of certain goods in Russian In order to protect the Western firms from the high volatility of the ruble, many Western financial institutions, including Goldman Sachs, have started cutting the flow of cash to Russian companies since they have restricted some longer-term ruble-denominated repurchase agreements (repos) Repos had allowed Russian companies to exchange securities for cash with Western financial institutions, so the restrictions are likely to add pressure to the Russian financial system If capital control or currency control is implemented by Russia, Russia may also be excluded from the MSCI Emerging Markets Index composed of 26 countries Since such measures would make foreign entities to access Russian securities markets more difficult, Russia would be reclassified as an independent market The third impact on energy The oil and gas resources development of the Arctic Ocean relying too heavily on technical equipment from Europe and the United States Sanctions make halt of corresponding production and oil and gas resources development Europe and the United States are clear about Russia's fiscal dependence on oil prices Therefore, the current international market price of crude oil decrease is the European and American countries work together through various means to influence the outcome of the global oil market Especially United States cancel the crude oil export and decrease a large number of crude oil inventories, Saudi Arabia and other producers continue to increase production, these make Russian’s export of oil more difficult 4.3.2 The Impact to Global Financial Markets Other global financial markets were affected by the financial crisis in Russia U.S financial markets also declined, Dow Jones Industrial Average declined nearly 3% in business days, in part due to the Russian financial crisis Financial institutions that hold relatively high amounts of Russian debt or other assets have been affected by the Russian financial crisis The PIMCO Emerging Markets Bond Fund hold 21% of Russian corporate and sovereign debt,it has declined about 7.9% from about 16 November 2014 to 16 December 2014 Companies from North America and Europe that heavily relied on Russian economy have been affected by the crisis Such as American car company Ford Motor Company,German engineering company Siemens and so on 4.4 Recovery Activities To prevent Russian rubles decline in value, Russia's central bank raised interest rates times, from 5.5% to 17%, and the government also started to regulate and intervene foreign exchange market Russia's central bank had spent about $68 billion to intervene foreign exchange market, but it did not contain the fall of ruble, and exacerbate the massive capital outflows, increase the pressure on Russia's foreign exchange reserves Russia imposed ban on import of fruits, vegetables, meat, fish, milk and dairy products from the U.S And European Union According to the statistics, Russian imported fruits and vegetables from EU were about billion euros every year, and imports food and agricultural products from the United States around billion euros Russia's import ban has a certain influence to agricultural and sideline products of Europe and the United States The Impact of crises on the Former Soviet States The financial crisis for the former Soviet Union states in 1998 explains the significant macroeconomic imbalances The irresponsible fiscal policies and lack of structural reforms led to unsustainable internal and external economic situation In the absence of rapid policy adjustments, this situation lead to a financial crisis For other CIS countries, the spread of "infection" from Russia (both trade and financial channels) led to crisis in economies with similar problems Among these the most obvious problem was a serious budget deficit The fiscal imbalance permanently remained very significant in Russia, Moldova, Georgia and Kyrgyzstan If you include the cost of the payment of the debt, the imbalance was even greater Exchange rate stability in most countries was achieved by central bank intervention (especially in Russia and Ukraine), while foreign exchange reserves in these two countries replenished through payments of IMF Proceeds from the reserves sales, in turn, served as a source of financing the budget deficit Moldova, Georgia and Kyrgyzstan have relied mainly on government transfers, and to support a stable exchange rate and reduce the budget deficit reduced the external debt After a sharp weakening of the ruble at the end of 2014 - 2015, devaluation of the other currencies of the CIS countries was only a matter of time At the end of 2014, the rate of the Armenian dram has fallen sharply against other major currencies, the Belarusian ruble has been the de facto devalued by 30% (formally the Belarusian ruble has not been reduced, but it was introduced 30% tax on the purchase of foreign currency) In the late spring - early summer of 2015 the Russian ruble has entered a period of strengthening and seemed to stop the new wave of devaluation in the countries of the Commonwealth But the unfavorable situation in the energy market made ruble weaker (plus the Russian authorities in order to fill in the budget, considered weak ruble to be beneficial) And a new wave of devaluation of currencies of post-Soviet countries continued as well The National Bank of Kazakhstan, which, according to the World Bank, only in 2015 spent on maintaining the national currency rate of $ 17 billion, has decided to release the Tenge to float freely Experts also talk about the possibility of new devaluation of Azerbajan manat and Ukrainian hryvnia CBA after the start of a sharp drop in oil prices in late February this year, has already held a devaluation for manat Then the rate of the manat to the US dollar was reduced immediately by more than 33% The current Kiev authorities are likely to talk about the stability of the hryvnia (though the rate of Ukrainian currency since the change of power in the country in February 2014 fell from 8,6- 8.9 hryvnia to the dollar to about 24) But the current external stability of hryvnia is only a matter of time And there are two main reasons: firstly, the majority of Ukrainian citizens have no more money to buy the currency, all money is spent on current consumption Second is a huge decrease in Ukraine export Common and different features in crises 6.1 Common features in crisis 6.1.1 Lower oil price led to the outbreak of the crisis Crude oil is a major export of Russia, roughly half of the Russian Federation's governmental revenue comes from the sale of oil and gas, so the fall in oil prices hit Russia hard Oil and natural gas prices fell sharply on the international market in 1997.The world market prices of oil dropped below $100 from nearly $200 a barrel from the middle of the second half of 1997 to 1997.Due to the international energy prices dropped, the Russia lost more than $70 in revenue In June 2014 and 16 December 2014,it was declined in price by nearly 50% The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in December 2014 As the price of oil falls, and Russia don’t have the ability to dramatically increase oil production to compensate for the lower price, thus due to the reduced profit from selling oil, the government has substantially lower income 6.1.2 Serious influence on Russia's economy and society caused by sharp ruble devaluation Two currency crises seriously impact the Russian economy and society.2 currency crisis leaded to the collapse of the Russian ruble and sharp economic slowdown in Russia The decline in the Russian ruble has increased the costs for Russian companies, they have to make interest payments on debt that issued in U.S dollar or other foreign currencies that have strengthened against the ruble; currency crises also has increased the living cost of Russian citizens, currency crisis result in general increases in prices, and caused damage to total household deposits 6.1.3 Serious influence on Global Financial Markets Two currency crises affected other global financial markets U.S and European Union financial markets also declined American hedging fund affected by financial market of Russia, suffered huge losses in 1998 Foreign speculators lost about of $33 billion in the Russian financial crisis In 2014,Financial institutions that hold relatively high amounts of Russian debt or other assets have been affected by the Russian financial crisis, companies from North America and Europe that heavily relied on Russian economy have been affected by the crisis as well 6.2 Different features in crises 6.2.1 Different political background of the currency crisis In 1998, turbulent political scene in Russia made aggravate mistrust of the public and foreign capital to the Russian market In March 1998, the Russian President nominated Sergei Kiriyenko as prime minister, but it was strongly opposed by the House of Commons, the political struggle between the government and parliament was intensified At the moment of a new political fight, economic reforms presented by the government were strong opposed by the parliament The financial crisis and the political crisis were intertwined, Russian economy became more unstable and vulnerable International economic sanction is a background of the currency crisis in 2014 Because Russia's annexation of Crimea and the Russian military intervention in Ukraine, Russia experienced international economic sanctions.Russia made several incursions into Ukrainian territory in 2014,The majority of members of the international community and organizations have condemned Russia for its actions in post-revolutionary Ukraine, they accuse Russian break international law and violate Ukrainian sovereignty Many countries implemented economic sanctions against Russia Summary Currency crisis is always a great shock for economy Both crises in 1998 and 2014 decreased real output in Russia, increased inflation, and made number of companies go bankrupt Foreign investors lost their confidence in Russian market, which also had a bad effect for the economy overall As we already mentioned before, one of the main reasons why Russia had faced both currency crises is a strong dependence on oil price Government revenue is almost 50 percent made by oil and gas export, and a deep decline in price of any of those is a hard attack on Russian budget Of course, Russia took lesson from 1998 crises, and other industries such as chemical, car manufacturing, food and light industries start developing, but they are still not even fully satisfying domestic market, and we shouldn’t be talking about export Sanctions against Russia also played some role in bringing down activities on the financial markets and developing problems of many companies debt refinancing, but government is helping those companies and CBR is also taking some measures in order to stabilize situation and create a new impulse for economy 1998 was a year when Russian Government was living in a debt, it was issuing T-bills continuously to cover a hole in the budget and wasn’t thinking about consequences Many people lost a lot of money during the period when Government announced default on T-bills, so they lost confidence in both Government and banking sectors Though these days there was no default or bank bankruptcy still a lot of people lost their money in means of foreign currency, that’s why banks might incur even bigger outflow of deposits in national currency now also The lessons Russia learned from both of these crises is that government and public debt control is very important, that country should develop some other industries that could both supply fully domestic market and can be exported to raise government revenues and increase foreign reserves Besides it is very important to gain people confidence in government and banking sector thus make them desire to invest money in state`s economy Russia is still on its way recovering from the 2014 currency crisis, but we can be sure that this recovery will be faster and more efficient than those occurred 16 years ago References： https://www.washingtonpost.com/news/wonk/wp/2014/12/12/the-basic-reason-oil-keeps-getting-cheaperand-cheaper/ http://www.nytimes.com/2014/12/17/business/russia-ruble-interest-rates.html?_r=1 http://www.wsj.com/articles/world-markets-roiled-by-continued-oil-slump-but-u-s-stocks-resilient1418743632 Abbigail J Chiodo and Michael T Owyang (2002) “A Case Study of a Currency Crisis: The Russian Default of 1998”, Review, November/December 2002, pp.7-18 Brian Pinto, Evsey Gurvich, and Sergei Ulatov (2004) “Lessons from the Russian Crisis of 1998 and Recovery”, Managing Volatility and Crises, A Practitioner’s Guide, The World Bank, February 2004 URL : Nigel Gould-Davies and Ngaire Woods (1999) “Russia and the IMF”, International Affairs, 75(1), pp 1-22, January 1999 URL:< http://www3.interscience.wiley.com/cgi-bin/fulltext/119063327/PDFSTART> URL: http://ria.ru/history_spravki/20110824/422807796.html URL: http://ria.ru/spravka/20130816/956675756.html Кризис банковской системы России 1998 года, его причины и последствия, Грибовская Надежда Васильевна, Москва 2000 Росстат Цены: [электронный ресурс] // Федеральная служба государственной статистики – база данных / www.gks.ru Гилман, М Дефолт, которого могло не быть / М Гилман – М.: Время, 2009 [...]... presented by the government were strong opposed by the parliament The financial crisis and the political crisis were intertwined, Russian economy became more unstable and vulnerable International economic sanction is a background of the currency crisis in 2014 Because Russia' s annexation of Crimea and the Russian military intervention in Ukraine, Russia experienced international economic sanctions .Russia. .. Russia Officials in the U.S government have also said that despite the financial crisis, the United States and the European Union will not ease economic sanctions imposed on Russia due to Russia' s annexation of Crimea and Russian assistance to separatists fighting Ukraine in the War in Donbass The United States and the European Union start economic sanctions from March 2014 On March 17, the result of Ukraine's... program The U.S believes the sanctions have negatively affected Russian economy so far and also expects the economic sanctions to lead to the further decline of the Russian economy It’s clear that the U.S orchestrated sanctions in order to contain the Russian economy becoming stronger and that would only be eased as a result of Russia living up to commitments to end support for Ukraine separatists, Economic... officials in Ukraine and Crimea pro-Russian leaders, On March 20, the United States announced expand the scope of sanctions against Russia officials, and the Russian Banks were sanctioned The European Union decided to increase the intensity of sanctions against Russia, including increase sanction to 12 officers and cancel scheduled EU -Russia summit in June 2014 On March 24, 8 members except Russia decided... entered a period of strengthening and seemed to stop the new wave of devaluation in the countries of the Commonwealth But the unfavorable situation in the energy market made ruble weaker (plus the Russian authorities in order to fill in the budget, considered weak ruble to be beneficial) And a new wave of devaluation of currencies of post-Soviet countries continued as well The National Bank of Kazakhstan,... buy the currency, all money is spent on current consumption Second is a huge decrease in Ukraine export 6 Common and different features in 2 crises 6.1 Common features in 2 crisis 6.1.1 Lower oil price led to the outbreak of the crisis Crude oil is a major export of Russia, roughly half of the Russian Federation's governmental revenue comes from the sale of oil and gas, so the fall in oil prices hit Russia. .. crisis, and Russia ranks low on the World Economic Forum's rankings of road quality, technological adaptation, and burden of government regulation Russia' s already weak economy made it difficult to withstand the challenges imposed by low oil prices and international sanctions The Russian Central Bank's "erratic response" to the falling ruble was also blamed for deepening the crisis 4.3 The Impact on. .. armed conflict between the Ukrainian government and separatist forces of the self-declared Donetsk and Lugansk People's Republics The majority of members of the international community and organizations have condemned Russia for its actions in post-revolutionary Ukraine,they accuse Russian break international law and violate Ukrainian sovereignty Many countries implemented economic sanctions against Russia. .. incursions into Ukrainian territory in 2014 ,The majority of members of the international community and organizations have condemned Russia for its actions in post-revolutionary Ukraine, they accuse Russian break international law and violate Ukrainian sovereignty Many countries implemented economic sanctions against Russia 7 Summary Currency crisis is always a great shock for economy Both crises in 1998 and. .. Economic, and Society 4.3.1 The impact on Russia The first impact on agricultural and sideline products As it was banned imports from the U.S and Europe ,the inflation increased in Russia, the cost of Russian people's life was increased At present, Russia is negotiating with China, Argentina, Ecuador, Brazil for looking for new import channels of food The second impact on economy On 16 December 2014 the ... pensions, and defaulting on government contracts This has contributed to the normalization of the situation in the financial sector and the growth of confidence in the actions of the state In the. .. a sharp weakening of the ruble at the end of 2014 - 2015, devaluation of the other currencies of the CIS countries was only a matter of time At the end of 2014, the rate of the Armenian dram... the devaluation The following section reviews two Russian currency crisis models, and compares their common and different features The six section summarize effect of the both crises on the Russian