The Asian Crisis and the oil price The Asian Crisis brought speculative attack to Ruble on November 1997. The decrease of oil and nonferrous metal prices also hit Russian economy heavily. The Asian crisis seemed to be the “last straw” to Russian economy and began to cut off the capital inflow of Russia. When the contagion of Asian Crisis spread to other Asian “tigers” known as “Singapore, Thailand, South Korea and Taiwan” and South America, Korean and Brazilian investors primarily exited their domestic currency assets. The first bout of instability coincided with the decision of IMF that its loans would hold up disbursements at the end of October in 1997. With liquidity pressures at home and high interest rate, enormous investment began exiting the GKOs (short-term government bills) .This marked the ruble start to under speculative attacks. Meanwhile, non-resident holders of the GKOs signed forward contracts with the CBR for foreign currency, because they anticipated that the ruble, like the other Asian currencies, would lose value. On the one hand, these forward contracts enabled the investors to hedge exchange rate risk. On the other hand, Russian commercial banks had to burden much more currency risk in the future. A substantial amount of liabilities of these banks were consisted of forward contracts.
“What were the ‘Consequences’ of the event?”
On 17 August 1998, the Russian government defaulted on its GKO Treasury Bonds, imposed a 90-day moratorium on foreign debt payments, and abandoned the ruble exchange rate corridor. Within the next couple of weeks, the Russian Central Bank announced that it would stop selling U.S. dollars, suspend trading of the ruble on main exchanges, abandon the exchange rate band, and allow the ruble to float.
These events led Russia’s international reserves to fall by $13.5 billion and to the dissolution of the government. One month later, the value of ruble fall to its lowest point. These events signaled the onset of the Russian financial crisis, which had its roots in the fundamental problems in the Russian economy but was triggered in part by the continuing financial crises in emerging markets in Asia and around the world.
The Russian economy has severe structural problems that were the primary cause of the crisis: fiscal deficit, banking sector problems. the IMF and the problems with the internationa
