**2.3 The 1998 Russian financial crisis3**

The Russian crisis took place in the first decade of Russia's 1991 transition from a centrally planned economy to a free market economy. During the first years of the transition, GDP declined sharply, poverty became widespread, and inflation reached hyperinflationary dimensions. Between 1994 and 1996, inflation was stabilized, fiscal policy was tightened, and there was a substantial reduction in GDP shrinkage. The willingness of the Russian government to enter negotiations about a payment rescheduling of the former Soviet debt in April 1996 along with some financial aid from the IMF and the World Bank Union signaled improving relations with the West and had a positive impact on investors' confidence and revived the Russian capital market. This was amplified by a recovery in the international price of oil—a major Russian export product.

However, in the fourth quarter of 1997, market sentiment deteriorated drastically as a result of the Asian financial crisis. In November 1977, the Russian ruble came under speculative attack. The CB of Russia (CBR) defended the fixed peg and lost in the process a quarter of its Foreign Exchange (Forex) reserves. The Asian crisis led to a decrease in the price of oil, delivering another blow to the Russian economy. As market sentiment deteriorated, investors became aware of Russia's domestic weaknesses. Poor tax collection, widespread tax evasion, and corruption raised the budget deficit and the balance of payments deficits. The first war in Chechnya imposed additional tax burdens.

By mid-1998, international liquidity was low and Russia's current account deteriorated further as oil prices continued to fall. In an attempt to support the ruble and reduce capital flight, the interest rate was hiked to 150% by the CBR. In July 1998, monthly interest payments on Russia's debt exceeded monthly tax collections. Parliamentary disapproval of an anti-crisis plan completely eroded investors' confidence, triggering runs on domestic banks. Many banks were closed and many depositors lost their savings. The crisis resulted in a renewed strong contraction of the economy and also affected investor confidence in emerging markets worldwide.

Thanks to the depreciation of the ruble, the banks restructuring, and the increase in international oil prices, the Russian economy recovered rather quickly.

<sup>3</sup> This subsection partially draws on Ref. [5].

*Current Challenges to World Financial Stability: To What Extent is the Past a Guide for the… DOI: http://dx.doi.org/10.5772/intechopen.107432*
