C o m m e n t a r y Russian default: four years later

Four years ago, on August 17th, 1998, a financial crisis broke out in Russia, which undermined the country's economy and questioned the achievements of reforms.

The soaring state debt compelled the government to introduce a 90-day moratorium on return of all foreign loans and announce the suspension of servicing the short-term ruble obligations. At the same time, the ruble's exchange rate corridor was expanded by over 50 percent.

That situation paralysed the Russian economic system for a certain period. The overwhelming majority of citizens from rank-and-file commercial bank investors to heads of major enterprises tried feverishly to save their funds suspended in the financial system which came to a halt.

All the government economic plans turned out to be good-for-nothing as a result of the started panic. The ruble began to fall impetuously. Price-lists of food markets underwent changes several times a day. After a relatively continuous period of price stability the country was flowed over by inflation wave. In a week's time the government was dismissed.

The foreign word "default" became for many Russians a synonym of not only a macroeconomic crisis but also a personal catastrophe. People were swiftly losing what they had reached for years. The middle class, a social bearing of reforms and the favourite child of Russian reformers, seemed to dissolve in tough environment of new economic realities.

When speaking in the U.S. Congress in September 1998, George Soros, the world's financial guru, stated that Russia had lived through a financial fiasco, which represented an extremely dreadful sight and would have numerous human and political consequences.

Four years ago Russia perceived these words as an axiom, as a sentence not subject to appeal. Few famous Russian economists, who analysed the then situation, predicted annual inflation less than 120 percent and the dollar's exchange rate lower than 60-80 rubles. However, no one predicted a soon economic growth.

Currently, when Russia has learned to live without foreign borrowings, but with a stable ruble and the growing economy, those forecasts seem a great exaggeration. An average Russian, whose incomes reached a pre-crisis level, currently contemplates a default as not so horrifying.

If we look at what had happened on a country-scale we see that the post-default standing of the Russian economy is more preferable than that before August 17, 1998.

Reforms are continuing in Russia, but this time they are sensible and well-grounded. The economic growth is not a problem any more, the problem is the growth rate, but this is a different story. Russian enterprises assimilate foreign markets. The USA has recognised the market status of the Russian economy and soon Europe will follow the suit. The middle class, without which real reforms are impossible, has not only regained its positions but also strengthened them.

In this connection the following question seems only logical: why did optimism of the reality cancel pessimistic forecasts?

Economists mainly refer to objective reasons - competitiveness of Russian commodities improved at the expense of post-default price reduction, good environment for import substitution, and quick loading of production capacities, which used to stand idle.

However, the main thing seems not to boil down to that.

Actually, a financial crisis cannot destroy the material potential accumulated by society. "Hot money" of foreign investors may come and go, but factories, plants, natural resources and infrastructure always stay. The only thing needed is people's wish to set all of this in motion. And no default can eliminate the wish, the ambition for growth, if there are any.

It seems that an ordinary scheme worked in Russia: if people's well-being falls sharply and it does not suit them, they begin working better.