1998 and 2014: Russian crisis in perspective

Russian banks have warned against hysterically jumping to the conclusion that the current ruble crisis will follow the trajectory of 1998, when the country was forced to default.

The ruble’s spectacular 22 percent plunge on Monday and Tuesday has prompted investors to liken the crisis to 1998, when the ruble lost 27 percent on August 17, 1998. However, these days, Russia’s balance sheet is strong enough to weather the ruble sell-off.

On Tuesday, the ruble grazed the 80 ruble to the US dollar benchmark. Compared to its price of 32.9 to the dollar on January 1, 2014, it signaled a 58 percent loss in value.


In 1998, over a six month period, the currency lost more than 70 percent of its value. Inflation skyrocketed, banks and enterprises across the country collapsed, and Russians were left jobless.

Russia’s GDP took 7 quarters to recover to pre-crisis levels after 1998.

Black Tuesday of 2014, as it’s called, has brought back many similar memories, but the situation has changed greatly, according to experts.

“If you compare this crisis to 1998, the Russian economy is like night and day. In those days we had an eight percent deficit, the economy wasn’t growing, and the country had no reserves. Today, it is running a triple trade surplus and a budget surplus of two percent, and it has more than two years of currency reserves,” Ben Aris, Editor and Publisher of Business New Europe, told RT.

Customers at an Auchan store 12/09/2014 (RIA Novosti)

At the start of December, Russia’s foreign exchange reserves stood at $418 billion, which far exceeds the $16 billion Russia had saved up ahead of the 1998 default.

“Our previous crises were absolutely different. Now we have more than enough reserves to provide the necessary tools needed to fully extinguish the crisis,” Aleksey Devyatov, an analyst at UralSib Capital in Moscow, told RT.

In 1998, the Central Bank performed currency interventions to prop up the ruble, but eventually exhausted them to a point they couldn’t meet its key debt obligations.

“In 1998 we were in shambles, now we are in pretty good shape,” Sberbank CIB analyst Vladimir Pantyushin told RT.

“I think we should consider default a risk, but reserves are certainly high enough to withstand current pressure,” he said, adding that the free floating ruble gives the Bank more flexibility.

“The danger now is that Russian people will panic and rush to the banks and withdraw their money, and that will destabilize the banking and financial sector. This would be a full-blown financial crisis,” Aris said.

After meeting with Central Bank ministers and government officials on Tuesday Prime Minister Dmitry Medvedev also concluded Russia will have enough reserves to ride out the crisis.

READ MORE: Russia has enough resources to reverse ruble crisis – Medvedev

The Central Bank has worked out a new strategy to stabilize the financial market including measures to increase foreign exchange refinancing and selling off foreign currency if necessary.

Devyatov says another option the Central Bank has is to make funds available to Russian companies, possibly $20-30 billion of credit, so they can meet their financial obligations. This move would act as a temporary internal ‘bailout’, but the banks would be expected to return the loans, it wouldn’t be a free pass. The Central Bank outlined this in their strategy, but didn't list specific figures.

The bank will also continue to exercise its REPO option which allows it to balance the Russian ruble, but will not use reserve currencies.

The attempt to quell the ruble crisis by increasing interest rates backfired, causing more panic, forcing the currency to drop 20 percent.

“The rate hike was ineffective and now the Central Bank has to follow through with big currency interventions,” Aris said.

Reuters / Jonathan Alcorn

Oil or ruble collapse?

The 1998 ruble crisis, like today, was driven by falling oil prices, which went as low as $18 in August 1998. At the time of publication, Brent crude was trading at $59.19 per barrel, a more than 50 percent decrease since June 2014.

The Russian government originally based its budget plan on $100 barrel oil, and later revised it to $80.

Aris still sees a strong correlation between the two, and says we are seeing an oil, not ruble collapse.

“This is more of an oil collapse than a ruble collapse, because the Russian federal budget is heavily dependent on oil prices," he said.

Falling oil has pushed the ruble, since traders and investors have created trends and algorithms where the two move together. Russia needs a reversal of this trend in order for the ruble to stabilize, according to Vladimir Pantyushin.

“There is no magical link between oil and the ruble. Even though they move together in trade, if you look deeper, it hasn’t always been this way,” Pantyushin said.

As of late, the ruble has been falling faster than oil, signaling Russia is facing more serious economic challenges ahead besides oil.

In the last six months, the ruble has been in rapid descent congruent with falling oil prices, which accelerated in November and December. Investors have been pulling capital out of Russia over geopolitics, and the US and EU sanctions have made it difficult for Russia to borrow from Western capital markets.