The crisis of August 1998 — in the memories of an active participant in those events
Twenty-five years ago, on August 17, 1998, Russia for the first time in modern history announced the suspension of payments to creditors on debts. This was the actual default. In less than a month, the dollar exchange rate from the now hard-to-imagined 6.3 rubles has more than tripled — to 20.8 rubles by September 9, 1998. However, the main loss of that crisis was the complete loss of confidence by the people in market reforms and the government that carried them out. Pavel Medvedev, Doctor of Economics, financial ombudsman of the Association of Russian Banks, who held the post of chairman of the State Duma subcommittee on banking legislation a quarter of a century ago, told MK about the events of those years and their lessons of today.
— Very active. All power structures were then very active in the political, economic and social sense of the word — they quickly responded to events. In particular, after the default was announced, a commission was created that was supposed to save the situation. I was part of it. She requested a report from the government. To report on the real state of affairs, a high-ranking official came to us, I will not give his name now, because at that moment he showed incredible naivety. He was asked what happened, what are the prospects. In his report, this official stated quite confidently that there would be no devaluation of the ruble, that the dollar exchange rate would not exceed 7 rubles. Let me remind you that at the beginning of August 1998, the unit of the American currency was trading somewhere at the level of 6.3 rubles, after the default was announced, its rate went up and a week later it was above 7 rubles. Less than a month later, on September 9, almost 21 rubles per dollar were given, then there was a rebound to 15-16 rubles, but by December 1998, the dollar won back positions to the September maximum. For most members of our commission, the statements of this high-ranking official were obviously implausible already in August.
— No, of course, many showed this quality to a much greater extent. But there were also many rational proposals for overcoming the crisis. In particular, our commission, in my opinion, expressed reasonable thoughts. However, these ideas are unlikely to have had a noticeable impact on the further development of events. The Primakov government, which soon came to lead the economy, developed its policy more or less independently, and, conversely, it significantly influenced the parliament, prompting it to take the necessary decisions.
— Not only. The problem was much deeper. I would say that its name is power populism in general. The fact that Russia is moving towards default has been clear to attentive specialists since 1996, when the cost of preparing for the election of Boris Yeltsin became obvious. In order to win, he and his team made many different populist promises. To fulfill at least some of them, money was needed. They were mined in a barbaric way. At that time, the so-called GKOs (state short-term obligations. — “MK”) were widely sold. They were bought willingly, since the government constantly increased the percentage of payments on them. At some point, the yield of these securities has become more than 300% per annum. At the same time, in parallel, for populist reasons, the government did not want the dollar to grow strongly. For the American currency, a so-called inclined corridor was then established. To keep the dollar from rising in value too quickly, huge quantities of it had to be sold to meet the demand for American currency. The reserves of the government and the Central Bank were small, and everything ended naturally: in the end, the last dollar was sold.
< p>Some understood, some didn't. But those who were important for momentary effects, for example, victory in the next elections, dominated. For this, the medium-term perspective was sacrificed. Among the financial and economic bosses there were many who not only understood the perniciousness of such a policy, but also tried to oppose it, but the main levers of control were not in their hands.
By the way, the activities of Sergei Dubinin can serve as a vivid example of professionalism , who at that time held the post of head of the Central Bank of Russia.
— Dubinin saw everything perfectly and did everything in his power to save the situation. I must say that he even managed to achieve some success: a sharp decline in inflation. But just imagine the position he is in. After all, he worked under the conditions of populism of the country's top leadership, which was supposed to show the people that everything is going well: look, even the dollar is hardly growing. Dubinin tried to somehow contain the flow of excess unsecured rubles in the economy with the help of a prudent monetary policy, but the government's catastrophic borrowings devalued his efforts.
— The hole in the budget was so big that the government, with the help of GKOs, needed to borrow amounts that were completely incomparable with the ability to repay the debt. They paid for the previous issue with the help of the next one. To attract buyers, it was necessary to make papers more and more profitable. Since the dollar rose in price very slowly, the yield in foreign currency differed little from the yield in rubles. Consequently, T-bills turned out to be attractive to foreigners, which lengthened the life of this pyramid, but also made it more cumbersome and unbearable for the Russian budget, for its economy, which ultimately led to financial collapse.
— «Annushka spilled oil» back in 1995, and they took up the cleaning only at the end of 1998. In this sense, the crisis was inevitable.
“I think we've all learned a lot. In particular, that naive boss who assured us in August 1998 that the dollar would not appreciate more than 7 rubles became an excellent and successful economic leader. In addition, the country was lucky with the chairman of the government. Yevgeny Primakov was an amazingly mentally stable person: in such an environment in which he had to take the reins of power in his hands, it was just right to go crazy. There was nothing like it. Even then I had the idea that he was similar to Kutuzov in the interpretation of Leo Tolstoy. Most importantly, Primakov did not interfere until the last moment in the rational movements of the economy, in the sound decisions of its agents. This behavior of Primakov quickly became apparent to these same agents. This gave active people the confidence and courage that is so necessary to get out of the economic hole.
— Yes, the “scrambling out” immediately began. The collapse of the ruble led to the fact that the then-known «Bush legs» (the so-called chicken meat supplied from the United States to the Russian market. — «MK») became unaffordable for people at a price. At 6 rubles per dollar, buying «Bush legs» was simply a blessing, but at 18-20 rubles per unit of US currency, they became gold. And in Russia, meanwhile, there were chicken production facilities that were not used, because it was impossible to produce Russian chicken at a price that could compete with Bush's legs. But after the cosmic rise in prices for foreign chicken meat, domestic poultry production became profitable. And Primakov, by his very appearance, guaranteed the absence of bureaucratic sticks in the wheels of those enthusiasts who dared to compete with Bush himself. Of course, Bush's legs are just one small example of the trends that took shape in 1998-1999.
— History does not know the subjunctive mood. I met Boris Yeltsin in 1989. He invited me and several other comrades, whom he considered potential economic reformers, for a talk. We talked to him for three days. It all started with the fact that he did not understand the essence of the matter, but learned new ideas for him right on the fly. As a result, we were able to sketch out a plan for future economic reforms, which, at least in theory, made it possible to avoid painful crises. However, soon short-term political problems came to the fore, which came into irresolvable conflict with economic laws and the interests of the majority of the population.
Populism is a terribly contagious disease. And now we have not completely recovered from it. And now, sometimes, we can't resist adjusting some prices. Fortunately, it is much more delicate than the price of the dollar in the second half of the 90s, and therefore not so painful for the citizens benefited by this regulation, but still clearly to their detriment. In particular, the price of borrowings is regulated. At first glance, this seems to be a boon for borrowers: you have to pay less for a loan. And as soon as you recalculate the «markups» as a percentage, you are immediately convinced that the classics of economic science were right: populism goes sideways to borrowers.
— Of course, although it — culture — still did not win a complete victory. And today we regularly hear criticism of the policy of the Central Bank, to put it mildly, from extremely naive positions. However, the support for Elvira Nabiullina's rational actions is incomparably higher than that which Sergey Dubinin could count on in his time.
— This is an important question, the answer to which, unfortunately, I do not know. However, regulators — the Bank of Russia and the Ministry of Finance, the entire financial bloc of the government — inspire hope. Not only do they behave rationally. I admire the composure shown by the leadership of the Central Bank of the Russian Federation, continuing to pursue a sound policy in the face of unfair and often illiterate criticism.
— No, it's completely different. The word used is the same — default, but in fact the situation is completely different. In 1998, we had nothing to pay, but in 2022 we had money. They could not be paid because creditors would not accept them. For such circumstances, it is necessary to come up with another word that is different from the term «default».
— With the team that I see today in key positions in the economy, yes, it is impossible. But I don't know what will happen tomorrow. May God give the members of the financial and economic block of the country's leadership health and spiritual strength to withstand the heat of undeserved criticism that is periodically heard against them.
The government of President Boris Yeltsin declared a technical default (a situation in which a country cannot pay its debts to external and internal creditors) on August 17, 1998, for which this day was dubbed «Black Monday» in the press. Russia's public debt at the time of the default was $200 billion, which corresponded to 44% of the country's GDP. The dollar began to strengthen and almost tripled in three weeks. Inflation accelerated from 11% to 84.5%, while Russia's GDP fell by half. Unable to cope with the economic shocks, several large banks, where the savings of citizens were kept, declared bankruptcy at once. The deposit insurance system did not work then, so their withdrawal from the market meant a complete loss of their money for people. For many companies, because of all these problems, the only way out was bankruptcy. The money supply of the country depreciated several times. The total economic losses of Russia in that period amounted to about $96 billion. After the default, President Boris Yeltsin dissolved the government and appointed a new prime minister, who became Yevgeny Primakov.