The Russian Financial Crisis of 1998: An Analysis of Trends, Causes, and Implications

Since May of 1998, Russia has been caught in the latest, and likely the most serious, in a series of economic crises. The crisis came to a head on August 17, 1998, when the government of then- Premier Sergei Kiriyenko abandoned its defense of a strong ruble exchange rate against the dollar, defaulted on government domestic debt forcing its restructuring, and placed a 90-day moratorium on commercial external debt payments. Those actions led to Yeltsin's dismissal of Kiriyenko on August 23, replaced, after a political standoff with the Duma, by a more leftward-leaning government led by Premier Yevgennij Primakov. The August crisis also lowered Russians' standard of living and has seriously set back Russia's efforts toward establishing a market economy, perhaps for years to come. The direct cause of crisis has been the Russian government's failure to address fiscal imbalances. Less direct but more fundamental causes have been structural problems. The government has an inefficient tax regime that fails to generate sufficient revenues to meet fiscal obligations. More fundamentally, incomplete economic restructuring has left an economy, much of which is run on barter, that masks inefficient and even "value-subtracting" economic activities, and that makes attaining fiscal balances even more arduous. The crisis (and Russian policymakers' efforts to manage it) has already had an immediate economic impact on Russia and will have longer term implications for the Russian economy and Russia's efforts to become a market economy. As the crisis continues, the impact on the Russian economy will become more severe. The Russian economy requires new investment, both foreign and domestic, to replace outdated and worn-out capital assets and to build new infrastructure. But the crisis has undermined investor confidence, setting back prospects for economic growth. Russia remains a focal point of U.S. national interests. It is formidable country whose political and economic stability are critical for the rest of the former Soviet Union, Eastern and Central Europe and the areas these regions border. Russia is a nuclear superpower, has large supplies of some of the world's most important natural resources, including oil, natural gas, and strategic metals. The report will be not be updated but will remain available to meet congressional needs.