In 1997, Russia’s economic growth was positive for the first time since the formation of the Russian Federation in 1991. Nevertheless, the situation was still very fragile. It could not be argued that a functioning market economy existed in Russia at this stage. Certainly, Western observers remained sceptical and their fears were increased by the events of 1998. The crisis that started in Asia and rocked the world’s financial markets immediately affected Russia. On 13 August 1998, the Russian stock, bond and currency markets collapsed as a result of fears of a rouble devaluation and a default on domestic debt. Annual yields on rouble-denominated bonds rose to more than 200%. There were sharp falls on the stock exchange.
This was followed by what can only be described as a financial and economic meltdown. In September of the same year the Russian central bank decided to allow the rouble to float freely. It sank like a stone. The immediate result of this sharp depreciation was huge price increases. Inflation rose to 27.6% in 1998 and 85.7% in 1999. As a result of food price increases, social unrest grew and people started to take to the streets in various cities. Russia was now bankrupt. In November, the Russian Deputy Minister of Finance Mikhail Kasyanov declared the country would be able to repay less than US$10bn of its US$17bn foreign debt. In the following weeks, there was a run on the banks as alarmed depositors queued up to withdraw their savings.
The Russian economy contracted by 5.3% in 1998. GDP per capita reached its lowest level since the formation of the Russian Federation in 1991. The IMF was piling on the pressure, pushing for faster movement in the direction of capitalism, while attempting to squeeze the Russian people for cash repayments. On June 23, the government presented the lower house of the Duma with an emergency anti-crisis plan to raise taxes, but the IMF remained implacable. It held up the payment of the next tranche of its loan to Russia, saying that the government was not doing enough to collect taxes.
The Russian government asked for an additional $10-$15bn from the IMF to stave off financial collapse, thus exposing to the whole world its humiliating dependence on imperialism and Western bankers. By their actions, the latter were pushing Russia towards the abyss. The result was a foregone conclusion. On August 25-26th, the rouble fell sharply, losing 40% of its value against the German mark. Trading in the currency had to be suspended.
In a statement, the US said that Washington appreciated the ‘difficult’ situation faced by Russia. But almost in the same breath, the United States government called on Russia to act swiftly to restore confidence and implement all economic reforms agreed with the International Monetary Fund (IMF), thus making a difficult situation more difficult still. In 1998, over a six-month period, the currency lost more than 70 per cent of its value. Inflation rocketed, incomes plummeted, banks and enterprises across the country collapsed, and Russians were left jobless.
Sovereign debt restructuring took place in 1999 and 2000. An IMF agreement of US$4.5bn concluded in July 1999 was meant to help Russia to regain access to the international financial markets. However, allegations of irregularities in the banking sector again had a negative impact on the country’s financial market access and government bond yields remained high. It was an unparalleled social and political catastrophe and led to a massive backlash against capitalism.