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Financial Crisis in Russia in the 1990s and Lessons for Today

Introduction

The word ‘Financial Crisis’ is a term that many economies, large or small, are in fear of. It is a situation which occurs when a country which was once doing well in the financial sector is suddenly faced with huge amounts of debts as well as inflation due to ignorance of the managerial teams in financial matters (Baker 1998).

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Analysis

Financial crises are bound to hit major economies at one time or the other. Countries which thought they would never face financial challenges often make a mistake along the way and plunge the whole country’s economy into mayhem (Neave, 1998). Such can be said of Russia. Of the Soviet Union, Russia was among the largest republic consisting of 60% and above Gross Domestic Product (GDP).

With the development of financial crisis all over the world, there have been major shifts which have created huge impacts on Russia’s economy in the world market (Carr, 1966). This has in turn led to loss of confidence of Kremlin leaders who held the belief that despite having suffered devastation as well as chaos during post-Soviet years, Russia was slowly recovering and had to some extent achieved economic invincibility (Gaïdar 2003). Russia’s financial crisis also revealed the nature of class held by the existing Russian government. The population was not even provided with relevant answers as to whom this burden of financial crisis would be laid upon (Smith & Ingo, 1997).

Russia’s financial collapse was not a mere accident. It was caused by a distortion of the economy which was as a result of neo-liberalism produced in Russia (Carr, 1966). Neo-liberalism is the modern manifestation of an old belief that affirms the superiority of the free market system (Ibid, 1966). For several years, Russia had financed its budget insufficiency through the sale of short-term bonds. But after a while it was no longer able to do so and an increase in the deficit occurred (Baker, 1998). Collection of tax also followed suit and rapidly declined. Russia was now forced to depend on borrowed funds which led to a 40% rise on its monthly interest debt payment (Steve & Lars, 1993).

In 1998, Russia suffered a meltdown which led to several consequences. These included the spreading of panic all over financial systems. It created doubt all around the world as to whether neo-liberalism model actually worked (Twigg & Schecter, 2003). Russia’s meltdown also caused a major slip of the U.S. stock market which was experiencing accelerated and rapid increases over the decade. Investors panicked and left all kinds of private corporate bonds as well as stocks and turned to the United States government securities for safety (Geisst, 1995). This move made it even more difficult for corporations to rely on borrowed funds.

Russia’s financial crisis in the 1990s was so severe that it brought down the government of former Prime Minister, Mr. Sergei Kiriyenko, as well as shook financial markets all around the world including Wall Street (Steve & Lars, 1993).

Soviet’s downfall in 1991 was viewed as a final vindication of neoliberalism (Carr 1966). Analysts argued that Soviet’s downfall only further proved that it was almost impossible to form a more just economy by application of collective action since this would only result in the stagnation and eventual collapse of the economy (Twigg & Schecter, 2003).

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Due to its massive size, Russia had come to inherit quite a number of regional economies from the Soviet. But when the Soviet Union collapsed and economic ties which it had acquire broke, there was a rapid decline in production that was almost 50% (Aslund, 1995). This in turn led to corporations laying off employees thus creating an issue of under-employment as well as much unemployment in the population.

In addition, Russia had not had the priviledge of inheriting a system of state welfare as well as social security from the Union of Soviet Socialist Republics (USSR) (Carr, 1966). Thus it was largely dependent on companies for functions such as management of health, provision of educational facilities, building and maintenance of workforce houses as well as provision of recreational facilities (Neave, 1998). Employers became heavily reliant on their companies and this made it difficult for maintenance of the social welfare. Local governments could no longer take up the responsibility for the various functions (Ibid, 1998).

The population of the former Soviet Union possessed some degree of literacy and its state enterprise managers had acquired skills to cope with demands of production targets laid upon them (Baker, 1998). However, the motivation system formed within industries as well as state institutions emphasised on skills to cope with the planned economy which was run by the state rather than concentrating more on the behaviour of the risk-and-reward free enterprise (Steve & Lars, 1993). Among the Soviet enterprise managers, efficiency as well as profitability was not considered as major priorities. Hence, no manager or employee possessed skilled experience of decision-making when it came to matters of the economy of the market (Baker, 1998).

In terms of the Gross Domestic Product (GDP), Russia’s economic decline was much worse. The financial crisis led to rates of increased economic imbalances as well as poverty among its population. Surveys conducted reveal that in the year 1993, the percentage of Russia’s population living in sheer poverty was between 39% and 50% (Gaïdar, 2003). By the year 1998, per capita earnings of the Russian economy declined by a further 15% (Ibid 2003). Russia’s financial crisis not only led to poverty and economic imbalances but also to a rapid decline in public health.

In 1990, the life expectancy of Russia’s population was 64 years for men and 74 years for women (Greenbaum & Anjan 1995). But by the year 1994, those figures sharply declined to become 57 years for men and 71 years for women (Aslund 1995). Cases of unnatural deaths amongst majority of young people have also been responsible for the decline in public health as well as mortality rate of the population. Due to poverty caused by the financial crisis, deaths as a result of parasitic diseases and infections rose up to 100% while deaths caused by alcoholism rose by about 60% (Gaïdar, 2003). This is because people could no longer afford proper medical care, medicines and/or afford to go for counselling due to their state of poverty.

In addition, even though Yeltsin era stores were fully stocked, those Russians who were on fixed incomes, that is, the work force, did not have the purchasing power and could therefore only afford to buy something little, if any (Carr, 1966).

In the 1990s structural reforms not only formed political oppositions but also lowered the living standards of most individuals of Russia’s population (Neave, 1998). With the ability to vote for parties of the opposition, Russian voters instead rejected economic reforms quite often and desired for personal security as well as stability which was present in the Soviet era. The theme most constant concerning the history of Russia in the 1990s is that of the conflict between individuals viewed as hostile towards new free enterprise and the economic reformers (Smith & Ingo 1997). Those individuals who were literate and possessed a level of education, occupying jobs which had potential in growth and lived comfortable lives having steady incomes were greatly affected by the financial crisis in Russian economy (Twigg & Schecter, 2003).

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Due to increased financial debts by the country, lack of savings as well as credit was a resulting factor. Most citizens of Russia lost the trust they had on the country’s banking system hence less investments were made (Steve & Lars, 1993). The middle-class Russian population was the one adversely affected by the 1990s financial crisis in that there were enormous layoffs as well as unemployment, collapse of banks due to debts incurred, lack of compensation from fund-raising schemes which were government-sponsored and shortages in food and supply (Ibid, 1993). Russia failed to pay up its debts, devaluing the ruble (Russian currency) and as a result causing the collapse of banks while in the process wiping out private citizens’ savings (Geisst, 1995). White-collar employees thus lost their pensions, jobs as well as their hard-earned savings.

On the other hand, Russia’s government hiked the tariffs charged on automobile imports so as to try curbing with and preventing layoffs of the auto-industry employees (Greenbaum & Anjan, 1995). Declining oil prices greatly affected the ruble which was once considered a currency resistant to financial chaos.

In a span of 500 years, Russia has been seen to fall apart into pieces and surveys show that about 39% of Russians claim not to be satisfied with the government (Gaïdar 2003). In addition, when the value was lost on the Russian stock market, Russian authorities showed little or no concern whatsoever on the issue. They were soon to realise that they had made a wrong assumption that would cost the Russian economy (Steve & Lars, 1993). In 2008, the Russian ruble had devalued to a staggering 15% as related to the U.S. dollar (Ibid, 1993). Citizens of Russia thus began to withdraw their savings from the private banks and deposited them in state banks which were considered more reliable (Aslund 2003). But still some of these resources have since been converted into cash and are being put aside.

Russia’s financial crisis was revealed to be one of the main reasons as to why the date of the speech to be made by recently elected Russian President, Mr. Dimitri Medvedev, was moved before both parliament houses (Neave, 1998). It was to take place on November 5th, 2008 but instead was given on October 23rd, 2008 (Ibid, 1998).

In the 1990s, the International Monetary Fund (IMF) came to Russia’s rescue by giving advice on how to pursue a strict financial polity as well as fight inflation. But the Russian government were not so keen or as consistent in carrying out the advice (Smith & Ingo, 1997). Former president, Mr. Vladimir Putin, even tried to convince individuals to accept the drastic measures meant for inflation moderation but Russian consumer prices refused to heed to his advice. Thus in 2007, the rates of inflation further accelerated as compared to those of the previous years (Aslund, 1995). Milk, grain crops and food prices also shot up as a result.

Many countries started paying more attention to their economies as a result of Russia’s financial crisis. Despite it being too early to draw numerous lessons for today from the financial crisis, solutions can be found so as to prevent similar circumstances both at home and globally from occurring in future (Gaïdar, 2003).

Inventors ought to be encouraged so as to lend high-quality borrowers loans and in the process carefully monitor loan performance (Smith & Ingo, 1997). The regulators of the federal bank of the United States have given out more strict guidelines as to how mortgage borrowers who are willing to take higher risks ought to be considered for loans. Since risk managers do not deal with the sale of products, are not profit centers as well as concerned with writing trading tickets, they tend to be in most cases ignored when profits shoot up (Baker, 1998). Therefore, top management should be made to listen to them and choose the risk-return mergence which represents the risk appetite well (Neave, 1998).

Another lesson that ought to be learnt from the financial crisis of Russia is that investors need to be alert and careful as well as ask the appropriate questions concerning the risks involved due to purchase of securities (Greenbaum & Anjan, 1995). In the public sector, there is need to improve the regulatory structure so as to avoid distortion of incentives. Companies should be provided with resources as well as incentives to investigate deeper any possible errors in the risk management systems of the financial institutions they run (Neave, 1998).

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In addition, the decisions made by the banks as well as deposit-insurance structures ought to be made stronger so as to cope with issues which arise from financial crisis. Tools which are outdated have with time been replaced with those whose aim is to fix the low volumes within bank markets and give them a boost (Steve & Lars, 1993).

The success gained after the financial crisis will in the end be determined by how the crisis is handled when it happens. Those market governments that are currently emerging have made the decision to become more engaged in the global economy as well as global capital markets, which in turn places much responsibility on the international organizations to ensure improvement of the system (Smith & Ingo, 1997). This will prevent unavoidable financial crises occurring in the future and having a bad impact as the one which occurred in Russia in the 1900s.

Governments should pay more attention to structural reforms. In Russia, during the financial crisis, economic imbalances showed insufficient reform as well as industrial restructuring hence the inability on the side of the government (Aslund, 1995). Therefore, to avoid such situations, a country needs to move quickly and try attempting structural transformations. This will ensure the economy of a country becoming a process of growth that is sustainable (Ibid, 1995).

Additionally, another lesson learnt from the financial crisis of Russia during the 1990s and is applied today is that countries are considering the adoption of flexible systems of exchange rates to enable them handle financial pressures caused by crises that arise (Twigg & Schecter, 2003). Another important factor that is being considered is that of ownership in the terminology of international financial organizations. A country possessing ownership of its economic program has higher chances of successful reforms (Geisst, 1995). International agencies as well as governments should do all they can via financial support and designing programs to make good policies stronger.

Governments need to form stronger institutions capable of lasting for a long time as well as be able to discharge of purposes as to why they were created in the first place (Neave, 1998). There is also need to form a global structure which includes both financial and economic relations and does not only cater to the needs of a number of large economies but cater to all economies as a whole.

Today’s global financial crisis provides individuals with a renewed chance to act for long-term benefits rather than act selectively for a short time (Gaïdar, 2003). Countries ought to consider working with global financial institutions such as the IMF and the G-20 so as to try and formulate action plans which ought to be urgently and comprehensively implemented (Smith & Ingo 1997). Governance frameworks that are global should also be considered to meet the needs of all stakeholders.

Special attention should be paid to Russia’s financial crisis as to its causes, priority measures to be implemented inorder to avoid financial and economic collapse, the method of interaction between Russia’s financial and economic aspects as well as long-term end results of a withdrawal from the financial crisis (Greenbaum & Anjan, 1995). From 1991 to 1994, Russia’s Gross Domestic Product had fallen by about 40% and its inflation reached a shocking 1500% in 1992 (Geisst, 1995). This prompted its government to try finding ways of overcoming inflation as well as regaining financial stability.

Those countries which possess upcoming markets need special attention also since they face totally different problems from those of developed economies.

On observing Russia plunge into financial crisis, countries took up various measures to avoid suffering the same fate. These measures included buying out of a number of banks by the state, provision of liquidity as well as insistent lowering of discount rates (Gaïdar, 2003). In addition, governments of countries worldwide agreed to cut down the rates of exchange of their respective national currencies against the U.S. dollar (Ibid, 2003). The measure was taken so as to provide an additional factor for the stimulation of domestic production as well as for the preservation of international reserves.

After Russia’s 1998 financial crisis, banks were given extensive financial resources meant to overcome the liquidity crisis. This would ensure the banking system’s stability which was responsible for the maintenance of political as well as social stability in Russia (Geisst, 1995). Banks worldwide need to be taught on risk management in case of financial crisis and the financial sector should reconsider its motivational framework. There is also need for credit rating systems which its users can once again have great confidence in (Baker, 1998).

Conclusion

The financial crisis in Russia which occurred in the 1990s was not only a blow to Russians themselves but also to other major economies. Panic was rampant leading to withdrawal of savings from many private banking institutions by the citizens of Russia.

Despite the crisis, Russia has been a lesson to other countries worldwide and has made them more cautious and alert when it comes to financial matters. Government agencies as well as international financial institutions have implemented various programs to maintain financial stability and reduce rates of inflation in economies. Russia, together with other countries are currently better equipped and well informed to face, handle as well as overcome future financial crisis.

References

  1. Aslund, Anders 1995, How Russia Became a Market Economy, Washington D.C.,: Brookings Institution, pp. 378
  2. Baker, James C. 1998, International Finance: Management, Markets and Institutions, London: Prentice-Hall, pp. 233 – 234
  3. Carr, E.H. 1966, A History of Soviet Russia: The Bolshevik Revolution, 1917 – 1223, London
  4. Gaïdar, Yegor, ed 2003, The Economics of Transition, Cambridge, Mass.,: MIT Press, pp. 1030
  5. Geisst, Charles R. 1995, Investment Banking in the Financial System, London: MacMillan
  6. Greenbaum, Stuart I. and Anjan V. Thakor 1995, Contemporary Financial Intermediation, Fort Worth: The Dryden Press
  7. J. L., Twigg and K. Schecter 2003, The Role of International Financial Organizations during the Transition in Russia, Social Capital and Social Cohesion in Post-Soviet Russia, M. E. Sharpe
  8. Neave, Edwin H. 1998, Financial Systems: Principles and Organisation, London: Routledge
  9. Smith, Roy C. and Ingo Walter 1997, Global Banking, Oxford: Oxford University Press
  10. Steve, H. Hanke and Lars, Jonung 1993, Russian Currency and Finance: A Currency Board Approach to Reform, London: Routledge, pp. 222

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StudyCorgi. 2022. "Financial Crisis in Russia in the 1990s and Lessons for Today." July 23, 2022. https://studycorgi.com/financial-crisis-in-russia-in-the-1990s-and-lessons-for-today/.

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