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                                FINAL DRAFT.

                             By Anton Matiukhin.

                             24, NOVEMBER 1998.
      Международный Институт Экономики и Финансов, 1 курс, Высшая Школа

                                ICEF, gr. 2.

It is obvious almost to everyone, that 1/6  of  the  land  is  now  in  deep
economical and political crisis and the whole world is waiting  to  see  how
the country will emerge from it.  Russia’s  chaos  was  caused  by  economic
turmoil  and  political  upheaval.  Economic  slump  on  the  stock  market,
devaluation of the ruble, a default on foreign debt by banks and  government
are parts of a climax and the general instability of  Russia  is  worsen  by
them. These things  sometimes  happen  in  the  process  of  transforming  a
country from a command into a market economy.[1]

There was a sharp increase in the inflation level after it has been  brought
down to as little as 5.6% a year in July. The prices began to rise fast  and
a lot of people were thrown far beyond the poverty level.

The anatomy of the financial crisis consists of several  causes.  The  first
cause is the so-called   “Asian  factor”.  There  was  economic  turmoil  in
Thailand first and then it spread all over Asia:  South  Korea,  Hong  Kong,
Singapore and Malaysia in 1996- 1997. "All these  countries  and  more  have
seen their economies wrecked over the last couple of years. Now  Russia  has
its currency heading for the basement and is  basically  defaulting  on  its
national debt". [2]It has  scared  foreign  investors.  “This  cooled  their
enthusiasm for investment in riskier  economies”  (Russia  today)  and  they
start taking their money out of its stocks and converting their rubles  into
dollars. It will take a lot of time for them to gain confidence  in  Russian
“emerging” market again.[3]

Although the Russian government was  insisting  it  would  not  devalue  the
currency, it had to float the ruble three days later.  For  propping  it  up
the Central Bank drained  its  reserves-  $1  billion  a  week  for  ruble’s
defense. This also increased the devaluation.

Poor tax collections forced Russian authorities to raise funds to cover  its
expenses. It has  been  floating  GKOs  (short-term  treasury  bonds)  which
provided as high as 240  percent  interest.  Although  the  state  attracted
billions of dollars, it needed to borrow more  to  pay  off  the  short-term
bonds. But without tax revenue, the government would not be able  either  to
pay the international  bills  or  maintain  essential  services.  It  cannot
afford to pay state workers and without their wages, they cannot pump  money
back into the economy. Large fiscal deficit makes Russia highly  unprotected
from swings in market sentiment.

Another thing, which sank the crisis,  was  a  drop  in  world  oil  prices.
Russia is the world’s third-largest oil producing country  and  oil  is  the
great hope of its economy, because unfortunately  its  production  level  is
not good enough not to let Russian huge natural resources to be sold out.

All these above-mentioned problems seem  to  be  very  complicated  and,  of
course, there are no quick fixes available. But, from my point of view,  the
solution key word is not “help” but “self-  help”.  "Currently  institutions
such as the world bank and the IMF have been formed to  be  the  lenders  of
last resort to governments who themselves control the various central  banks
which are the lenders of last resort for people within their  countries."[4]
However, these institutions are  no  longer  really  in  effective  control.
There are people at the top of this pyramid, those  who  are  really  making
money from it, who are more concerned about their relative power and  wealth
than with the overall damage that is being  caused  by  this  current  chain
reaction of a collapse. A fundamental reform of the world  financial  system
needs to happen to clear up this mess.[5]

The World Bank should not help the countries with  “emerging”  markets  only
with money  and  then  make  itself  richer  from  loans,  but  it  must  be
restructured into the knowledge bank. It must provide these  countries  with
specialists, teaching how to act themselves in  critical  situations.  World
Bank must also exchange its  experience  with  them  to  prevent  them  from
“inventing the bicycle” once more. It must teach these states  how  to  help

I do not know, whether it is possible, but it would be good if the  IMF  and
the  World  Bank  cancel  all  loans  given  to  developing  countries  with
“emerging” economies for the sake of the  world’s  safety.  Otherwise  their
economies would be doomed to be destroyed because of the  short-term  debts,
which these countries need to pay back. But on the other hand,  if  it  have
had cancelled, no organisation including the IMF  would  have  been  looking
forward to further negotiations with such countries and provided  them  with

But the worst thing is that  the  economic  crisis  entailed  the  political
crisis. Because, as  one  of  the  most  famous  writers,  philosophers  and
politicians of the Renaissance Niccolт Machiavelli said, "the  only  way  to
reach  prosperity  of  the  country  is  to  have  a  firm,  determined  and
intelligent leader, who will be an avatar of the majority's  interests,  and
who will have  a  great  estimation  among  the  people".  And  the  Russian
president Boris Yeltsin has already lost  all  the  consideration,  and  the
things were getting worse and worse after the beginning of the  crisis.  The
recent ordered murder of the famous deputy and democrat Galina  Starovoytova
was a signal that lawlessness in Russia has  reached  its  apogee.  She  was
among those few people, who performed real action. As a peacemaker she  went
to many "hot spots" and tried to stop the bloodshed.  But  she  was  a  real
obstacle for people who did not want human rights and laws to  be  the  most
precious thing. After this incident, all democratic  parties  have  realised
the  necessity  of  joining  their  forces  against  their  common  enemies-
communists and fascists. It may seem unbelievable, but at the end  of  XX-th
century there is a serious threat of turning  Russia  into  a  nationalistic
and fascist  country,  because  the  number  of  people  (especially  young)
joining different nationalistic  organisations.  The  opposition,  which  is
always very active, would not hesitate a second if there would be  a  little
chance to overtake the power.

I think that in the case with Russia, despite the IMF wants our  authorities
to provide it with their economic program first and then they will  be  able
to give Russia credit, giving a loan now will prevent  the  country  from  a
possible revolution. And this is the urgent  measure  to  be  taken.  For  a
great amount of people the crisis was a proof of  an  insolvency  of  market
economy, at least they think it was. This caused the act of protest  on  the
7-th of October. Fortunately it has not such scale as it  was  expected  to.
But, in my opinion, it was not a failure of market economy itself but  of  a
present inefficient and weak government. The important  thing  is  that  the
politicians stop  playing  politics  and  dividing  the  power  and  entrust
together to the serious and urgent measures that Russia  needs.  Although  I
do not like the new government and the Prime  Minister  very  much,  I  hope
they will be firm  enough  and  well  disciplined  to  continue  working  on
restructuring country’s economy.


Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr. Aug.
21 1998.

Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.

Global Capitalism. The Economist. Sept. 12 1998.

[1] Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr.
Aug. 21 1998.
[2] Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.
[3] Anatomy of a Financial Crisis. Russia Today; www.russiatoday.com; Fr.
Aug. 21 1998.
[4] Global Capitalism. The Economist. Sept. 12 1998.
[5] Russian Financial Crisis. http://www.islamic.org.uk Aug. 39 1998.



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