1998 Russian Financial Crisis - Crisis and Effects

Crisis and Effects

On 17 August 1998, the Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on payment to foreign creditors. On that day the Russian government and the Central Bank of Russia issued a "Joint Statement" announcing, in essence, that:

1. the ruble/dollar trading band would expand from 5.3–7.1 RUR/USD to 6.0–9.5 RUR/USD;
2. Russia's ruble-denominated debt would be restructured in a manner to be announced at a later date; and, to prevent mass Russian bank default,
3. a temporary 90-day moratorium would be imposed on the payment of some bank obligations, including certain debts and forward currency contracts.

On 17 August 1998 the government declared in the Joint Statement of the Government of the Russian Federation and the Central Bank of the Russian Federation that the state securities (GKOs and OFZs), with due dates through 31 December 1999, would be transformed into new securities. The terms of the GKO/OFZ restructuring were also determined in the following acts:

• Decree of the Government of the Russian Federation №1007 of 25 August 1998
• Decree of the President of the Russian Federation №888 of 25 August 1998
• Decree №1787-р of 12 December 1998 on novation of state securities
• Federal Law on Top-Priority Measures in the Field of Budget and Tax Policy

GKO bondholders made few attempts to pursue litigation in domestic courts.

At the same time, in addition to widening the currency band, authorities also announced that they intended to allow the RUR/USD rate to move more freely within the wider band.

At the time, the Moscow Interbank Currency Exchange (or "MICEX") set a daily "official" exchange rate through a series of iteractive auctions based on written bids submitted by buyers and sellers. When the buy and sell prices matched, this "fixed" or "settled" the official MICEX exchange rate, which would then be published by Reuters. The MICEX rate was (and is) commonly used by banks and currency dealers worldwide as the reference exchange rate for transactions involving the Russian ruble and foreign currencies.

From 17 to 25 August 1998, the ruble steadily depreciated on the MICEX, moving from 6.43 to 7.86 RUR/USD. On 26 August 1998, the Central Bank terminated ruble-dollar trading on the MICEX, and the MICEX did not fix a ruble-dollar rate that day.

On 2 September 1998 the Central Bank of the Russian Federation decided to abandon the "floating peg" policy and float the ruble freely. By 21 September 1998 the exchange rate had reached 21 rubles for one US dollar, meaning it had lost two thirds of its value of less than a month earlier.

On 28 September 1998 Boris Fyodorov was discharged from the position of the Head of the State Tax Service.

The moratorium imposed by the Joint Statement expired on 15 November 1998, and the Russian government and Central Bank did not renew it.