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17 Aug, 2007 11:58

9th anniversary of 1998 crash in Russia

The instability in global markets this week coincides with the 9th anniversary of Russia’s 1998 debt crisis. However, unlike 9 years ago, when a debt default by the Russian government sent the economy into freefall, 2007 sees the Russian economy far more

The ongoing problems of the US sub-prime mortgage market have spilled over into equities around the world this week with the Dow falling nearly 2%, Europe’s bourses losing up to 4% and Asian markets down by as much as 7%.  

Russia too has experienced its sharpest drop in a year. With Friday being the anniversary of the 1998 crash in Russia, analysts say there are big differences between now and then.

“It is ironic, actually, it is exactly the opposite of what happened nine years ago. Nine years ago there were a lot of credits and debts extending to the emerging and developing markets. And those markets, for once, passed on problems to the rest of the world. Nine years later we have the exact opposite situation, namely the debts and credits given to the developed markets, particularly to the U.S. This situation is causing problems to the rest of the world,” commented Peter Halloran, the president of Pharos Financial Group.

Russia’s economy is far stronger. Last year the country’s GDP reached almost $US 1 TRLN, 4 times more than 9 years ago, with the average salary 5 times higher.

As the world second largest oil exporter, Russia has benefited from a seven-fold increase in global crude prices over the period.

The country has accumulated reserves estimated at $US 420 BLN. This is more than 40 times what they were in 1998 and are currently the world's third largest. This also sees Russia as a net global creditor rather than a debtor. This doesn’t mean that there is no work to do, particularly if there were to be a sudden drop in energy prices.

“The worst case scenario is that the sub-prime mortgage crisis in the U.S. would create  dissension in the U.S. and in Europe. This would drive down resource prices, first of all oil and natural gas. That would hurt the Russian economy a lot. Even if oil prices went down to $US 30 per barrel, that would entail a painful restructuring and we will see a lot of budget cuts, a lot of restructuring in the public sector as well as in the private sector. But it is not going to be the way it was nine years ago,” assured Sergey Guriev, the Rector of the New Economic School, Moscow.

Russia is not exposed to the trigger for this week,s instability, the U.S. sub-prime market, so there won’t be any direct fallout locally. But if a global liquidity crunch comes, then this will affect Russian businesses.  

Experts say that currently the key impact on Russia is investor nervousness about risk and  exposure to emerging markets. However, the underlying economic strength of Russia should see it weather this storm.