US Move On Russian Debt Could Trigger Unforeseen Consequences

The United States Department of Treasury announces that it will not renew the sanctions exemption which permits Russia to service its sovereign debt to American investors. Allowing the exemption to expire increases the likelihood that Russia will default on that debt this summer.

The Russian financial crisis (also called ruble crisis or the Russian flu) hit Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. The crisis had severe impacts on the economies of many neighboring countries.

Declining productivity, a high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, fatal financial imprudence, and a chronic fiscal deficit led to the crisis. The economic cost of the first war in Chechnya took a significant toll on the Russian economy. In early 1995, it was estimated that the war was costing Russia close to $30 million per day. Following the cessation of hostilities in 1996, it was estimated that the war in Chechnya cost Russia $5.5 billion, close to 10% of their GDP. In the first half of 1997, the Russian economy showed some signs of improvement. However, soon after this, the problems began to gradually intensify. Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, severely impacted Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet on 23 March 1998. Yeltsin named Energy Minister Sergei Kiriyenko, then 35 years old, as acting prime minister.

Based on historic events, the present debt crisis has the potential to turn uglier than previous ones for Russia. The question remains whether Putin has allowed for the economic repercussions of the Ukraine conflict.