Russia » Economics
Author`s name Michael Simpson

1998 Default Was Inevitable, Expert Opinion

Russian population, unlike economists, still fear that another default may occur
A round-table discussion on the subjects "Lessons of the default: Five years later" was conducted on August 18; participants of the discussion arrived at a conclusion that the economic crisis that Russia experienced in 1998 was inevitable. The discussion was conducted with participation of Duma Budget and Taxation Committee Alexander Zhukov; Evgeny Yasin, the scientific leader of Russia's Higher Economy School; Sergey Dubinin, deputy chairman of board of Russia's RAO UES; Alexander Turbanov, the ARCO director general; Troika-Dialogue President Pavel Teplukhin and Alexander Shokhin, the chairman of the Renaissance Capital supervisory board.

Participants of the round-table discussion say that the 1998 had both internal and external preconditions. Among the external preconditions they named the unwillingness of the World Bank to keep a fluctuating rate. As for the internal preconditions, participants of the discussion admit that there was no mutual understanding between the government and the parliament at that moment; it resulted in rejection of extraordinary powers to the government especially for overcoming the crisis. Alexander Zhukov says it was important at that moment that the government was carrying out an unwise borrowing policy on the domestic and on the foreign markets; it didn't care about ways to pay the credits back. 

The discussion participants didn't go into details of the 1998 events, but all over them agreed with the statement that the 1998 default had an absolutely positive effect for recovery of the Russian economy. Evgeny Yasin says: "There is no use to find the guilty of that situation. It is important to realize that Russia carried out a stabilization program. At that moment, Russia experienced a deep transformation crisis; there was no other way to proceed from the planned to market economy."
 
At the same time, Alexander Shokhin pointed out at a very important fact saying that then-president Boris Yeltsin wouldn't listen to reasoning about ruble devaluation. "Measures taken in the sphere were inevitable; but the combination of the measures applied at that time was a pure Russian invention," Alexander Shokhin said in support of his opinion. He thinks that to overcome the 1998 economic problems only devaluation of the ruble was enough; he adds that the government could have come to an agreement with GKO holders and foreign creditors on partial write-off of the debts. He concluded his speech with the words: "The default was a surgical removal of an abscess."
 
As for the after-effects of the 1998 default, participants of the round-table discussion said the default entailed recovery of the economy; it increased the interest toward institutional reforms and made the authorities understand that the national economy and the national currency must be correlative. What is more, the crisis resulted in a 30 per cent reduction of the living standard; in a collapse of the banking system and in an ultimate disruption of the people's trust in the government.

At that, participants of the round-table discussion paid particular attention to the fact that the situation in Russia had much in common with the Argentinean variant; it is good that Russia avoided development of its economic crisis into a political one. The 1998 default taught Russia several important lessons. It is impossible to have a too high deficit of the budget; the country should have its weighted borrowing policy and have a clear idea of how it will settle the debts later. What is more, a country which economy depends upon the world conjuncture must have its important reserves.

Despite of the above mentioned facts, the people participating in the discussion characterized the activity of Sergey Kiriyenko on the prime minister position at that period as "extremely technocratic" where the human factor wasn't taken into consideration at all.

At the end of the meeting, the people made optimistic forecasts saying that nothing of the kind would happen in Russia within the next year or two, as for the time being the country is secured against crises of the kind.

However, the results of a survey conducted by the Public Opinion foundation unveil a different point of view among the Russian population. According to the results of the poll, the majority of Russians say that they and their families suffered as a result of the 1998 default. 41 per cent of the respondents say that the damage of the default was "strong"; 19 per cent of the questioned say the damage they suffered after the default was insignificant. People supporting the Communist party complain more often than other Russians that they seriously suffered as a result of the 1998 economic crisis. About one third of the respondents (30 per cent) say the default caused them no damage.

The respondents were also asked to say who was guilty of the financial crisis: 36 per cent of the people say it was President Boris Yeltsin, 25 per cent are sure that the government headed by Yegor Gaidar (that stopped working several years before the default) was guilty of the economic collapse. The government of Sergey Kiriyenko was rated third among the guilty of the default (16 per cent); the Cabinet headed by his predecessor Viktor Chernomyrdin was on the forth position (15 per cent). Some respondents said it was the RF Central Bank (9%), the Duma (7%), Russia's domestic or external enemies, commercial banks, the International Monetary Fund and other international organizations that were guilty of the 1998 default. 

Every second Russian (51%) thinks that the 1998 economic crisis had only negative consequences for the Russian economy. 20 per cent of the respondents have a different point of view; they say the default had both positive and negative consequences for the economy. 41 per cent of the questioned say that a financial crisis of this kind may repeat once again; 37 per cent rule this possibility out. It means that the Russian population doesn't share the optimism of economy experts.