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1998 Banking Crisis

 

The government’s resolve to tackling the budgetary problems was further weakened by a string of factors, including the president’s ill health, repeated government reshuffles, an increasingly hostile stand-off between the president and the communist-dominated Duma, and a serious weakening of the federal government’s enforcement power, especially with major industrial and energy-sector taxpayers and regional governments. 

 
Photo: ITAR-TASS

In 1998 the Asian financial crisis resulted in the collapse of fuel and energy prices and slashed Russia’s revenues from the oil and natural gas exports. In August 1998 the rouble collapsed, ruining millions of people including those who worked in the most promising sectors of the “new” economy, such as the financial and services sectors, the advertising business and the like.

The Russian banking system that had come to depend on buying and selling the highly profitable GKOs found itself in the grip of a severe crisis as the GKO pyramid collapsed. Russia declared a default on its debts, the Russian commercial banks went broke, and the rouble was devalued three-fold.

The months following the crisis were quite chaotic, bringing forth gloomy predictions of an end to Russia’s great experiment with market economics. As in the aftermath of other financial crises around the world, economic output declined, the prices of goods, including those of basic commodities, increased sharply, and many millions of families, vulnerable to these changes, fell back into poverty.

The banking crisis of August 1998 and his deteriorating health made Yeltsin distance himself from control over socioeconomic policies. He concentrated on overseeing the so-called power ministries (such as Defense, Interior; and the Federal Security Service) and on key international policy issues.

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