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Russia's 1998 debt crisis couldn't happen again — economists

August 17, 17:26 UTC+3 MOSCOW
The Moscow banking union says Russia lost a total of $96 bln during the August 1998 meltdown, the country’s GDP shrank threefold, its debt burden exceeded $200 bln while inflation tripled
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© Sergei Konkov/TASS

MOSCOW, August 17. /TASS/. The 1998 crisis couldn’t happen in Russia again, according to economists and the Finance Ministry’s official quizzed by TASS.

On this day 18 years ago - on August 17, 1998 - Russia declared a technical default on its main government debt instruments valued at around $72.7 bln in total. In addition, oil prices halving to $9.1 per barrel was another spark that set off the collapse. The Moscow banking union said the Russian economy lost a total of $96 bln during the August 1998 meltdown. The country’s GDP shrank threefold in 1998 to $150 bln, its debt burden exceeded $200 bln while inflation tripled.

Then and now: the difference is like night and day

The current state of the Russian economy is a far cry from the end of 1990s. As of now, Russia’s national debt comes to roughly 15% of GDP, while the volume of the Central Bank’s international reserves stood at $393.9 bln as of August 1, 2016. By comparison, in 1998 the country’s public debt amounted to around 68% of GDP, with international reserves totaling $12.2 bln as of January 1, 1999. Also, experts say, today the ruble’s floating rate and an efficient financial market are shielding the Russian economy from external shocks.

"The recurrence of the 1998 crisis is next to impossible as the default on government’s sovereign liabilities is declared in an unprecedented situation," Deputy Finance Minister Alexei Moiseev. The whole banking system ran short of liquidity in 1998, he said, stressing that this "is not possible now." "In December 2014, the needed liquidity was effectively provided and this serves as a case in point, another example is the fourth quarter of 2008 and the first quarter of 2009," Moiseev emphasized.

In the period from June to December of 2014, the ruble dropped 2.2 times versus the dollar. At the end of 2014 and the beginning of 2015, the Bank of Russia seriously increased liquidity provision to the banking sector. According to the Central Bank’s data, as of December 11, 2014 banks received a total of 3.8 trillion rubles through REPO transactions.

Russia’s low public debt is the key factor upholding the country’s economy, head of debt markets department at Uralsib Capital Dmitry Dudkin says. "There are secondary factors that the national debt is chiefly internal and not foreign debt. Around $40 bln worth of foreign debt is a very small sum, which may be repaid using oil revenues almost independently of crude prices. Plus the government’s reserves, which total 10% of GDP. The Central Bank’s reserves are bigger, they account for around 30% of GDP," Dudkin stressed, adding that "a crisis similar to that of 1998 is impossible now."

Now that 18 years has passed, the Russian economy is entirely different from that time, Head of Macroeconomic Division at the Center for Strategic Research Pavel Trunin told TASS. "This concerns the sustainability of financial markets as they were in their infancy back then. Public debt, huge and short-term then, is very low now. Companies are gradually restructuring and repaying their external debts," he noted. Also, he added, the current floating exchange rate of the ruble extenuates external fluctuations. "That is why it is unlikely that those events will return now, even if we speak about default and a five-fold exchange rate plunge in one year that happened back then," Trunin explained.

Russia developed the knack of tackling crises

Apart from a more favorable macroeconomic situation, the level of public administration and anti-crisis management has improved in Russia. "Now the operational quality of key Russian institutions is different. The Bank of Russia and the Finance Ministry are now institutions of an entirely different quality and on a different level than back in 1998. This concerns both budget policy and a much more efficient system tied to rates and the Central Bank’s policy. Now we can raise the rate and see the result while back then the efficiency of those mechanisms was way lower," Renaissance Capital’s Chief Economist for Russia and CIS Oleg Kuzmin states.

According to Deputy Finance Minister Alexei Moiseev, a more responsible budget policy is one of the factors that will prevent default in current environment. "The government has taken measures to ensure a balanced budget amid a similar international background - falling revenues and plunging oil prices," he said.

Budget deficit on agenda

The budget deficit is the key challenge for the Russian economy now. This year’s budget deficit stands at 3% of GDP while next year’s may rise to 3.2% of GDP, the Finance Ministry said. Record drops in crude prices are the main reason behind the trend, as oil revenues make the biggest inflows into Russian coffers. By now, oil prices have slumped 57% to $49 per barrel from the highs seen back in June 2014.

A gradual shift to an economic growth trajectory is the main mechanism to tackle a budget deficit, Uralsib Capital’s Dudkin says, as it is only necessary to reach a 1-1.5% of the GDP increase in 2017 to see the budget deficit halving to 1.5% of GDP. "Fundamentally, this is the only way out. Obviously, the fiscal issue exists but it is more long-term in nature. But the situation is so much more comfortable now that it cannot be compared to the 1998 collapse, that of course is from the viewpoint of debt burden and the Central Bank’s reserves," he noted.

Since 2014 when anti-Russia sanctions were imposed, foreign investors’ appetite for Russian securities has substantially declined. However, the impact of those restrictions has notably weakened recently. According to the data provided by the Bank of Russia, foreign direct investment (FDI) went from $6 bln to $15 bln per quarter before sanctions in 2014. After sanctions were imposed they dove to zero starting from the third quarter of 2014. However, in the second quarter of 2016 companies attracted a total of $6 bln worth of FDI. Also, on May 24, the Finance Ministry issued sovereign Eurobonds for the first time since 2013 despite the sanctions. The yield of the first post-sanctions Eurobonds stood at 4.75% per annum.

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