Russian Crisis: Causes, Developments, Contagion and Prospects

Abstract

The 1998 Russian crisis could have been predicted.ⁱ Though there were conflicting opinions about the speed and the depth of the Russian transformation, there was no doubt that public support for the policies pursued had been eroding and that political and economic disequilibria had been developing that could hardly have been resolved without an economic and political crisis erupting. Not only was the crisis predictable, but the immediate outcome could also have been anticipated. What was and is still more difficult to assess are the prospects that Russia is facing. This is because the crisis has opened up a whole series of difficult and fundamental questions that present a serious challenge to the Russian government and to the outside world as well. The timing of the crisis has been most unfortunate, because it came at the time of the Asian crisis and amidst worsening financial and economic prospects in the world as a whole. The policy decisions taken in mid-August 1998, especially the default on ruble denominated government debt and the ensuing de facto,i.e., non-declared but creeping, default on a large part of external debt, were very damaging. Thus, though the Russian economy is not very large (Russia’s GDP was 1.9% of the world’s GDP in 1997) and is not very integrated into the global economy (though, Russia is quite an open economy for a country of its size, exports plus imports being about one third of Russia’s GDP in 1997), the collapse in Russia has had a much more serious effect on the global economy than it might have had otherwise, under more stable international circumstances.