Рефераты. Default in Russia in 1998

The government formed and advertised an anticrisis plan, requested assistance from the West, and began bankruptcy processes against three companies with large debts from back taxes. Kiriyenko met with foreign investors to reassure them. Yeltsin made nightly appearances on Russian television, calling the nation's financial elite to a meeting at the Kremlin where he urged them to invest in Russia. In June the CBR defended the ruble, losing $5 billion in reserves. Despite all of the government efforts being made, there was widespread knowledge of $2. 5 to $3 billion in loans from foreign investors to Russian corporations and banks that were to come due by the end of September. In addition, billions of dollars in ruble futures were to mature in the fall. In July the IMF approved additional assistance of $11. 2 billion, of which $4. 8 billion was to be disbursed immediately. Yet between May and August, approximately $4 billion had left Russia in capital flight, and in 1998 Russia lost around $4 billion in revenue due to sagging oil prices. After losing so much liquidity, the IMF assistance did not provide much relief.

The Duma, in an effort to protect natural monopolies from stricter regulations, eliminated crucial parts of the IMF-endorsed anti-crisis program before adjourning for vacation. The government had hoped that the anti-crisis plan would bring in an additional 71 billion rubles in revenue. The parts that the Duma actually passed would have increased it by only 3 billion rubles. In vain, lawmakers requested that the Duma reconvene, lowering investors' confidence even further. Default and Devaluation. On August 13, 1998, the Russian stock, bond, and currency markets collapsed as a result of investor fears that the government would devalue the ruble, default on domestic debt, or both. Annual yields on rubledenominated bonds were more than 200 percent. The stock market had to be closed for 35 minutes as prices plummeted. When the market closed, it was down 65 percent with a small number of shares actually traded. From January to August the stock market had lost more than 75 percent of its value, 39 percent in the month of May alone.

Russian officials were left with little choice. On August 17 the government floated the exchange rate, devalued the ruble, defaulted on its domestic debt, halted payment on ruble-denominated debt (primarily GKOs), and declared a 90-day moratorium on payment by commercial banks to foreign creditors. The Aftermath Russia ended 1998 with a decrease in real output of 4. 9 percent for the year instead of the small growth that was expected. The collapse of the ruble created an increase in Russia's exports while imports remained low.

Since then, direct investments into Russia have been inconsistent at best. Summarized best by Shleifer and Treisman (2000), “the crisis of August 1998 did not only undermine Russia's currency and force the last reformers from office…it also seemed to erase any remaining Western hope that Russia could successfully reform its economy. ” Some optimism, however, still persists. Imports trended up in the first half of 2001, helping to create a trade balance. At the same time, consumer prices grew 20. 9 percent and 21. 6 percent in 2000 and 2001, respectively, compared with a 92. 6 percent increase in 1999. Most of the recovery so far can be attributed to the import substitution effect after the devaluation; the increase in world prices for Russia's oil, gas, and commodity exports; monetary policies; and fiscal policies that have led to the first federal budget surplus (in 2000) since the formation of the Russian Federation.

As discussed earlier, four major factors influence the onset and success of a speculative attack. These key ingredients are (i) an exchange rate peg and a central bank willing or obligated to defend it with a reserve of foreign currency, (ii) rising fiscal deficits that the government cannot control and therefore is likely to monetize (print money to cover the deficit), (iii) central bank control of the interest rate in a fragile credit market, and (iv) expectations of devaluation and/or rising inflation. In this section we discuss these aspects in the context of the Russian devaluation. We argue that an understanding of all three generations of models is necessary to evaluate the Russian devaluation. Krugman's (1979) firstgeneration model explains the factors that made Russia susceptible to a crisis. The second-generation models show how contagion and other factors can change expectations to trigger the crisis. The thirdgeneration models show how the central bank can act to prevent or mitigate the crisis.

The Exchange Rate and the Peg When the ruble came under attack in November 1997 and June 1998, policymakers defended the ruble instead of letting it float. The real exchange rate did not vary much during 1997. Clearly a primary component of a currency crisis in the models described here is the central bank's willingness to defend an exchange rate peg. Prior to August 1998, the Russian ruble was subject to two speculative attacks. The CBR made efforts both times to defend the ruble. The defense was successful in November 1997 but fell short in the summer of 1998. Defending the ruble depleted Russia's foreign reserves. Once depleted, the Russian government had no choice but to devalue on August 17, 1998.

Revenue, Deficits, and Fiscal Policy Russia's high government debt and falling revenue contributed significantly to its susceptibility to a speculative attack. Russia's federal tax revenues were low because of both low output and the opportunistic practice of local governments helping firms conceal profits. The decrease in the price of oil also lowered output, further reducing Russia's ability to generate tax revenue. Consequently, Russia's revenue was lower than expected, making the ruble ripe for a speculative attack. In addition, a large amount of short-term foreign debt was coming due in 1998, making Russia's deficit problem even more serious. Krugman's first-generation model suggests that a government finances its deficit by printing money (seigniorage) or depleting its reserves of foreign currency. Under the exchange rate peg, however, Russia was unable to finance through seigniorage. Russia's deficit, low revenue, and mounting interest payments put pressure on the exchange rate. Printing rubles would only have increased this pressure because the private sector would still have been able to trade rubles for foreign currency at the fixed rate. Thus, whether directly through intervention in the foreign currency market or indirectly by printing rubles, Russia's only alternative under the fixed exchange rate regime was to deplete its stock of foreign reserves. Monetary Policy, Financial Markets, and Interest Rates During the summer of 1998, the Russian economy was primed for the onset of a currency crisis. In an attempt to avert the crisis, the CBR intervened by decreasing the growth of the money supply and twice increasing the lending rate to banks, raising it from 30 to 150 percent. Both rate hikes occurred in May 1998, the same month in which the Russian stock market lost 39 percent of its value.

The rise in interest rates had two effects. First, it exacerbated Russia's revenue problems. Its debt grew rapidly as interest payments mounted. This put pressure on the exchange rate because investors feared that Russia would devalue to finance its non-denominated debt. Second, high government debt prevented firms from obtaining loans for new capital and increasing the interest rate did not increase the supply of lending capital available to firms. At the same time, for eign reserves held by the CBR were so low that the government could no longer defend the currency by buying rubles.

Three components fueled the expectations of Russia's impending devaluation and default. First, the Asian crisis made investors more conscious of the possibility of a Russian default. Second, public relations errors, such as the publicized statement to government ministers by the CBR and Kiriyenko's refusal to grant Lawrence Summers an audience, perpetuated agents' perceptions of a political crisis within the Russian government. Third, the revenue shortfall signaled the possible reduction of the public debt burden via an increase in the money supply. This monetization of the debt can be associated with a depreciation either indirectly through an increase in expected inflation or directly in order to reduce the burden of ruble-denominated debt. Each of these three components acted to push the Russian economy from a stable equilibrium to one vulnerable to speculative attack.

In this paper we investigate the events that lead up to a currency crisis and debt default and the policies intended to avert it. Three types of models exist to explain currency crises. Each model explains some factor that has been hypothesized to cause a crisis. After reviewing the three generations of currency crisis models, we conclude that four key ingredients can trigger a crisis: a fixed exchange rate, fiscal deficits and debt, the conduct of monetary policy, and expectations of impending default. Using the example of the Russian default of 1998, we show that the prescription of contractionary monetary policy in the face of a currency crisis can, under certain conditions, accelerate devaluation. While we believe that deficits and the Asian financial crisis contributed to Russia's default, the first-generation model proposed by Krugman (1979) and Flood and Garber (1984) and the second-generation models proposed by Obstfeld (1984) and Eichengreen, Rose, and Wyplosz (1997) do not capture every aspect of the crisis. Specifically, these models do not address the conduct of monetary policy. It is therefore necessary to incorporate both the first-generation model's phenomenon of increasing fiscal deficits and the third-generation model's financial sector fragility. We conclude that the modern currency crisis is a symptom of an ailing domestic economy. In that light, it is inappropriate to attribute a single prescription as the prophylactic or cure for a currency crisis.

Literature

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