Russian financial crisis

            This took place in 1998. It is also known as the Russian flu. The case was similar Russian government actually devalued its currency that is Ruble that led to it defaulting its debt.  The government further also tried to make ruble a free floating currency but still things did’nt turned out to be in the favor of the economy. The free floating exchange rates led to ruble devaluating rapidly.  The inflation rate at that time rose to 84% and a number of banks like Tokobank closed down.  There was social unrest in the country. The affect was on the neighboring countries as well. But on the other side Russia learnt its lesson in a hard way that banks need to diversify its assets.

        The IMF agreed to provide Russia with $4.5 billion that helped the country to get involved in the international financial markets. The depreciation of the currency and increase in the prices of oil internationally made things fortunate for Russia. This is because it quickly recovered from the loss as its GDP rose from 6.4% in 1999 to 5.3% in 2001. Furthermore, the inflation rate felt from 85.7% in 1999 to 21.5% in 2001. The unemployment rate decreased too from 13% in 1999 to 9% in 2001. This shows that the economy took a positive turn and the overall living standards increased.  This Russian crisis mainly took place because of the preceding Asian crisis. This is because the investors lost confidence there and so the weaknesses of Russia became more visible. This too further affected the confidence of investors in emerging markets everywhere in the world. (Economics.rabobank.com, 2013)

Overall lessons learnt from currency crisis:

        The above mentioned currency crisis of Mexico, Asia and Russia can be used to derive some important lessons. Firstly, it should be understood that economies that are solvent can still be prone to such crisis. All economies should be careful as low amount of debt does not ensure that an economy would not face such crisis. Secondly, it is visible that a trade surplus of lower inflation rate may reduce the impact of currency crisis however; speculation may make things worse especially in the short run. Thirdly, government often provides short term debts to private banks but if the government gets too involved then it may run out of its reserves that lead to further worse conditions for the entire economy.

        Lastly, Central banks need to work with great care since investors look at the ability of the bank to maintain the policy. In the case of devaluation the bank needs to take this step in a manner that it still appears to be credible.

        It can be said that the major reason to why countries face currency crisis is that the investors’ expectations do not match the conditions of the economy. If we take the case of developing economies it can be seen that over there growth is usually taking place at a rapid rate. While this growth is of course quite desirable it can sometimes lead to instability. This instability is what leads to capital flights and depreciation in the exchange rates.

References of Russian Financial Crisis

Economics.rabobank.com. (2013, sEPTEMBER 16). The Russian Crisis 1998. Retrieved from https://economics.rabobank.com/publications/2013/september/the-russian-crisis-1998/