Collapse of the Russian Ruble

The Russian ruble collapsed in 1998 during the Russian Financial crisis, shortly after Asian Financial crises. It started with reduction of   global prices of commodities such as petroleum that affected Russia because its economy was dependent on oil export. This turn of events affected foreign exchange rates in that the Ruble weakened against foreign currencies. The government supported the ruble by dictating a fixed rate of exchange between the ruble and other foreign currencies.

Internal loans failed to grow due to lack of inflow of external capital, so the government raised the interest rate to 150% to attract it. This only worsened the debt situation that already existed due to internal debts on wages. The World Bank and International Monetary Fund gave    funding of $ 22.6 billion that aided conversion of the short-term bills of GKO into long-term Eurobonds. The process was successful, but it did not strengthen the ruble because the government continued to support it. The government decided to float the ruble; hence, it was subject to control y the Central Bank, it would spend foreign reserves it failed to stabilize.

The collapse of the ruble had various effects on various sectors of the economy, at the domestic level workers declined to work due to the large wages that the government owed them. The deteriorating economy scared away investors who sold their Russian assets and Rubles for fear of further reduction of their value. This further devalued the ruble, so the Central Bank had to defend it using its foreign reserves; hence, weakening it more and losing more investors.

Russian ruble recovered from its collapse in August 1998 mainly because the world’s oil price rose rapidly; hence, Russia made surplus sales. Development of local industries also contributed, they grew due to increase in prices of exported goods; hence, consumers preferred local products. The fact that the economy was operating on non-monetary instruments and not dependent on the banking system was beneficial. This is mainly because the hike of prices did not affect the producers.