• Relations with the West were promising:

• The World Bank was prepared to provide expanded assistance of $2 to $3 billion per year and the International Monetary Fund (IMF) continued to meet with Russian officials and provide aid.

• Inflation had fallen from 131 percent in 1995 to 22 percent in 1996 and 11 percent in 1997

• Output was recovering slightly.

“What led to Russian financial crisis?”

1) The failure to restructure the economy

Russia’s economic situation was bleak for a long time. Even before it was to be made a sovereign state, the USSR economy was in decline. The transition in Russia did not get rid of the macroeconomic legacy of the socialist era. After the crash of communism, the combination of both soft budget and administrative reforms led to undesirable results in the economy. The inadequacy of market mechanism led to a persistent decrease in tax collection and increase in borrowings of Russia. Russia had to rely on its exports especially “OIL” but it was on fragile situation as the world prices of oil were fluctuating thus this may to Russia industry being weak. On the other hand, increasing borrowing requirement forced Russia to pick up dollar-denominated debt, leaving the country vulnerable to the swings in the exchange rates.

2) High government debt and over-valued currency

The main causes of Russia’s crisis included unsustainable public debt dynamics and the overvalued real exchange rate. Russia was unable to raise high tax amount and IMF also prohibited borrowing from Central Bank of Russia during period of 1995 to 1997 as a result Russia had to increase GKO’s (short-term bills) and OFZ’s (long-term bonds). In order to attract more funds, the annual interest rate on Russia’s government securities was much higher than the other countries, approximately 30 percent. The high interest rate dried up Russia’s limited revenue. Whereas these high-cost debts were never implemented to restructure weakness in economy.