Three years ago Russia devalued its currency and announced it could not pay its foreign bank debt, triggering a financial crash that reverberated around the world. Since then, thanks largely to high oil prices, the economy has recovered, though incomes are still 20 percent lower than they were three years ago. RFE/RL correspondent Kathleen Knox looks back at the August 1998 crisis and asks what the likelihood is of a repeat.
Prague, 20 August 2001 (RFE/RL) -- The August 1998 Russian financial crisis came like a sudden downpour for many people, but ominous black clouds had been gathering for months. The financial turmoil in Asia the previous summer had sent shockwaves through other economies, and many investors began to pull out of the Russian stock market in the spring. After a particularly sharp fall in the markets in May, the central bank tripled its key interest rate to 150 percent.
Meanwhile, the Russian government was getting caught in a debt trap. It had promised to spend more than its income, so it had to borrow to cover the shortfall. But paying that debt back was adding more and more to its spending burden, so it had to borrow more money -- at an ever-higher price as interest rates soared.
Then-President Boris Yeltsin signed an austerity package to stabilize the state budget and cut spending by billions of dollars.
Foreigners were also less keen to buy Russian companies. Not long before, investors had been queuing up to bid on lucrative slices of Russian industry. But in May 1998, no one bid on a 75 percent stake in Rosneft -- the last big oil company still in state hands.
In the summer the crisis seemed to ease, as interest rates dropped and the International Monetary Fund and other international lenders agreed to extend the country more than $20 billion in loans.
But in August the markets fell further and banks had trouble meeting payments to each other.
The crash finally came 17 August, when the authorities announced they were defaulting on foreign bank loans and the ruble was allowed to devalue.
Panic set in with many people frantically trying to exchange their rapidly eroding savings into increasingly scarce dollars. There were runs on consumer goods as Russians tried to get the most for their rubles.
The fall-out was political too: Yeltsin fired Sergei Kiryenko's government and brought back Viktor Chernomyrdin as prime minister.
But the crisis also had a positive effect on the economy. The devaluation made Russian goods cheaper, so exports boomed and businesses were suddenly more competitive at home as foreign goods became increasingly expensive. And the default freed Russia's companies and banks of foreign debt.
Higher oil and gas prices in the meantime flooded the economy with cash, and have now piled the country's hard-currency reserves to some $35 billion.
But three years on, this "helping hand" effect from the devaluation has worn off, says Anais Faraj, an analyst at the Nomura investment house in London.
"We're back at ground zero. The initial devaluation spread a huge rebound in industrial production because foreign goods were priced out of the market. It also multiplied the impact of oil revenues because they were coming in in dollars. That provided a huge stimulus to the local economy. It built up resources that will hopefully be used for investment instead of the capital flight of recent years."
Faraj says the Russian economy today is a lot different from what it was in 1998, making a similar crisis unlikely. The economy is purring along and expected to grow by 4-5 percent this year. He says the state's finances are posting a healthy surplus, so there should be no need for the government to borrow large sums.
And the central bank no longer tries to keep the ruble to a fixed exchange rate -- a policy that can be expensive to maintain if pressure on the currency builds. Faraj says this means that any devaluation should be gradual, rather than a sudden shock.
Chris Weafer is head of research at Troika-Dialog, a Moscow bank. He says the problems ahead include the so-called "2003 problem," when Russia will have to pay back around $18 billion of foreign debt, up from around $14 billion due this year. And if the U.S. slumps into a recession, or Japan's economic woes spill over into China, major problems could be triggered in Russia.
Weafer says the biggest risk to the economy would be a slump in the price of Urals oil to below $10 a barrel, from around $25 today. Gas and oil, together with metals, make up some 75 percent of Russia's exports, so each dollar on a barrel of oil can add or subtract half a percent to the value of the economy's total output in one year.
But Weafer says there is little risk of a repeat of the 1998 crisis happening in the foreseeable future. The reason? What he calls the success of President Vladimir Putin's administration in curbing the influence of the "oligarchs" -- the business tycoons who bought up large chunks of industry in the 1990s and who held sway over government policy under former President Boris Yeltsin.
"Effectively, up to the point of crisis, or up to the end of 1999, we didn't have a government, or we certainly didn't have a government in control of the economy or even had the best interests of the economy behind its actions. You had a president in Yeltsin who was only interested in and only understood the issue of democracy, but did not have any interest or understanding or control of the economy that was largely being run by the oligarchs. What's changed is that we have a proper government in the country. There's a team of professionals in place under an effective leader."
He says he believes the government is unlikely to avoid problems until they grow into crises, as happened in 1998.
"In 1998, nobody did anything about it until three or four days before it was inevitable. There was no planning, no recognition of the problem and the oligarchs didn't care, they were still acquiring assets themselves. Now, any problem developing -- for example if the price of oil were to weaken substantially -- I think the government would start taking action at a much earlier stage, so you wouldn't get into a crisis situation of having to make a quick decision on default or go running for money at the last minute. I think these things would be negotiated in advance."
Weafer says Putin and the government have made much progress in reforms important for the economy -- such as tax cuts, a bill to combat money laundering, and efforts to cut red tape.
But he says there are many challenges ahead, not least the reform of the country's judicial system. As he says, it's hard to attract investment if people don't feel their rights will be protected and the laws enforced.