Cause of Russian Crises
This crisis must be seen in the context of policy failures and abortive reform efforts during the 1990s
Its unfolding reflected mismanagement of the country's financial markets' opening to foreign lenders
and investors, leaving the country vulnerable to the risk that domestic financial difficulties which
transformed into a full-fledged currency crisis.
Weak Financial System
Between 1989 and 1996, seven years of continuous decline resulted in a loss in GDP of more than 40%.
To tackle this IMF came up with a supported stabilization programme. Which was ineffective, and very
little was done to improve the functioning of Russian public administration, which is well recognised
for its lack of transparency and irregular practices. All of this caused investors to lose confidence, and
the sharp decline in investment in productive assets continued, further decapitalizing the economy and
undercutting the sources of future growth.
Wage arrears continued to accumulate not only in the public sector, but also in the private sector, which
was responsible for almost 85 percent of outstanding wage arrears in 1996-1997.
Currency crises
1n 1996 Russia made marked progress towards price and exchange rate stability however this created
a lot of pressure on Rubal A number of factors contributed to the government's choice to maintain a
fixed exchange rate, but its main goals were to prevent public turmoil and maintain economic
confidence. But ultimately, this tactic proved to be unworkable and increased the severity of the
situation.
Political Imbalance
On March 23, 1998, Russian President Boris Yeltsin abruptly dismissed Prime Minister Viktor
Chernomyrdin and his entire Cabinet, creating a political crisis.
Decline in Oil Prices and External Factors
Russia's economy is heavily reliant on the export of energy resources and other primary commodities,
which account for 80 percent of its merchandise exports, and the weakening of global demand and the
unprecedented drop in their prices in the aftermath of the Asian crisis had a significant negative impact.
The substantial drop in export revenues (down 11% year on year in the first half of 1998) had a
significant impact on Russia's external and fiscal balances
Fiscal Imbalances
The Russian government had persistent fiscal deficits and had to borrow significantly to fund
its expenses High government spending, combined with a tax collection system that was
inefficient and prone to evasion, contributed to fiscal imbalances.
Capital Flight
As the crisis unfolded, investors and businesses rushed to withdraw their capital from Russia,
seeking safer assets abroad. This capital flight weakened the country's banking system and
currency.
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