After the USSR ceased to exist, Russia almost constantly experienced financial problems. The state urgently needed foreign financing, while it could not guarantee the servicing of external debt. As a result of a huge number of not only external, but also internal loans, a large public debt was formed. This is precisely what became the prerequisite for a world-famous event that went down in history as 1998 Black Thursday.
Building public debt, or where it all began
According to the information provided by the Central Bank of the Russian Federation, by the time of the crisis, the country's antiemetic reserves amounted to $ 24 billion. At the same time, debt to non-residents of the GKO / OFZ market and the stock market amounted to $ 36 billion. The average annual debt to non-residents was approaching $ 10 billion a year. The situation was aggravated by a sharp drop in the cost of raw materials in the international market. The decrease affected oil, gas and metals. At the same time, a global financial crisis began in Asia. Russia's foreign exchange earnings declined several times, the dollar exchange rate updated its maximum in 1998, and foreign creditors began to have strong doubts and concerns regarding the provision of financial support to the state with an unstable economic situation.
Negative mood: it all started in July
Despite the critical situation in the country, Black Thursday 1998 brought closer the speech of Michel Camdessus, who was then the IMF Executive Director. Due to his words that even if the IMF fulfills all the conditions of the IMF, the fund will not be able to give out the loan of $ 15 billion requested by the state, worries about the devaluation of the national currency have become especially acute.
Already on July 7, the Central Bank of the Russian Federation completely stopped issuing pawnshop loans to financial institutions. Negotiations took place on July 9, as a result of which the state had every chance of obtaining a loan of $ 22.6 billion. The next day, the UN announced that the devaluation of the ruble could bring unprecedented benefits to the country, and it is a phenomenon that is essential for the economy.
Dummy mood swings
The events that took place in the country at the end of July gave hope that the 1998 default might not take place. So, on the 29th the first tranche of external emergency loans was allocated to the state. Its size was about 14 billion dollars. The threat of devaluation has receded. On the 24th of the same month, the Central Bank refinancing rate was reduced to 60%. The speech of Andrei Illarionov, who holds the post of director of the economic institute, slightly changed the positive mood. He officially criticized the government’s policies and insisted on accelerating the devaluation of the national currency.
Events of August 1998 - the approach of the crisis
The 1998 crisis in Russia began to worsen after a lull on August 5, when the government asked for an increase in the state’s borrowing limit from $ 6 billion to 14. This decision clearly indicated that the country was simply unable to finance its budget from domestic sources.
Already on August 6, the state was given the third tranche for the reconstruction of the economy in the amount of $ 1.5 billion. Russian debt in the global market fell to its lowest levels. Black Thursday 1998 was getting closer and closer.
Gradual collapse of the economy
The inevitable collapse of quotations of Russian securities took place on August 11. Shares in the RTS fell by 7.5% per day. This is what caused the trading to stop. During the day, banks non-stop continued to buy foreign currency. Already in the evening of the same day, when the dollar exchange rate of 1998 reached its climax, most of the largest banks in the country stopped all their operations.
On August 12, a sharp interest in the currency became a prerequisite for a complete halt in the interbank credit market. A liquidity crisis has begun. Banks that needed large amounts of funds to fulfill their forward contract obligations faced difficulties in repaying loans. The Central Bank initiated a reduction in limits on the sale of currency to the largest commercial banks, which significantly reduced its costs to maintain the ruble exchange rate. Agencies Moody`s and Standard & Poor`s on August 13 announced a sharp decrease in the long-term credit rating of the state. The Minister of Finance and the Deputy Director of the Central Bank reported in the press that from this moment the foreign exchange market and the government bond market will be supported by the bankers themselves. On August 14, one could see on the streets near banks entire lines of depositors who were trying to get their money back.
Black Thursday 1998
A black spot on the history of Russia called Black Thursday denoted the country's technical default, its inability to pay its obligations — neither external nor internal. On August 17, after a speech by Sergei Kiriyenko, who holds the post of head of government, it became clear that the devaluation took place. He spoke about measures aimed at stabilizing and normalizing both financial and budgetary policies.
For 90 days, the fulfillment of obligations to foreign citizens on loans, on transactions in the derivatives market and on collateral manipulations was suspended. GKO trading was completely stopped. Russia switched to a floating exchange rate. After expanding the corridor from 6 to 9.3 rubles per dollar, the government was not able to control the situation. The 1998 dollar exchange rate increased several times in just two months and already in October amounted to 15.9 rubles per dollar, compared with 6 rubles at the beginning of the summer of 1998.
What happened in the country after the default announcement?
After the default of 1998 was officially announced, banks instantly stopped issuing deposits. The situation was explained by the fact that the liabilities of financial institutions were expressed in dollars, and assets in rubles. If you start issuing deposits in the presence of devaluation, holes will form in the balance sheet, which could jeopardize the entire banking system of the state.
International organization Visa Int. blocked the acceptance of cards by Imperial, the largest bank in the country. All other financial institutions were advised to refrain from issuing cash on cards. The high dollar exchange rate in 1998 became the basis for the ban on establishing a difference between buying and selling foreign currency of more than 15%. Natural selection of financial institutions took place, only the strongest remained. A refusal to introduce provisional administrations was given. Lending to financial administrations took place on the basis of their transfer of blocks of shares to the government. Then there was a decree on the removal of powers from the Cabinet of Ministers and on removal from office of the head of state.
