Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Will the 1998 Russian Financial Meltdown Repeat Itself?

Stock-Markets / Russia Feb 10, 2015 - 12:48 PM GMT

By: Arkadiusz_Sieron

Stock-Markets

History never repeats itself exactly, but many similarities between the past and the current Russian crisis suggest that the eastern bear could significantly falter in the future:

  1. The collapse of the ruble and its scope (Graph 2). The ruble lost over two thirds of its value in 1998. In 2014 it has lost more than half of its value against the dollar. Also the ruble’s unusual one-day falls are similar: Russian currency plunged 22 percent December 15 and 16, 2014 -an echo of the 27 percent fall August 17, 1998.

Graph 2: The USD/RUB exchange rate from 1993 to 2015

Source: tradingeconomics.com

  1. The currency meltdown is again driven to a large extent by falling oil prices. The Brent crude oil prices dropped from $23 at the beginning of 1997 to $12 in August, 1998 –a plunge of almost 50% (and not very different from the recent dive).
  2. In both cases we witnessed a dramatic hike of interest rates. In December, 2014, the Central Bank of Russia lifted the interest rate from 10.5% to 17%, while in May, 1998 the CBR increased it twice: first from 30% to 50% and then from 50% to 150%.
  3. The change of investors’ sentiment towards emerging markets. In 1998, investors shifted their money from Russia because of the rise in risk aversion due to 1997 Asian financial crisis. As we pointed out in the last edition of the Market Overview, they also did so because of the strong dollar and the declining profitability of the carry trade. The same is happening right now. The firm greenback, anticipation of a U.S. Federal Reserve rate hike and falling commodity prices are responsible for pressure on emerging-market currencies.

On the other hand, some analysts point out a few significant differences between 1998 and the current crisis in Russia and argue that today’s financial troubles will not be as severe as in the past. Why do they think so and why are they wrong?

  1. The ruble is not pegged to the dollar as it was in 1998. External shocks may be absorbed in the exchange rate whereas the Central Bank of Russia is not obliged to defend the ruble. On the other hand, the floating regime in Russia is not pure, it is dirty (managed), which means that the CBR may still be willing to support the domestic currency. And, as Ronald McKinnon from the Stanford University says, the exchange rate flexibility does not provide protection against the carry trade.
  2. Russia has much more in foreign exchange reserves. At the end of 2014 they amounted to $418 billion, far exceeding the $16 billion before the 1998 default. Undoubtedly, it puts Russia in a better position. However, the reserves are not infinite and are vanishing at an unsustainable rate. In only two weeks before December 26, Russia used $26 billion to defend the ruble. Having in mind that the 2008 intervention to defend the ruble cost $200 billion, the foreign reserves may protract the collapse, but will not prevent it, especially now that they are lower than the $700 billion of external debt. We should not forget that not all reserves are at immediate disposal. Part are accumulated in special funds and committed to long-term projects. According to some, the usable amount could be only around $200 billion.
  3. Russian public debt is much lower. In 1998, before the default, the government ran budget deficit of 8% of GDP and its cumulative public debt was 75% of GDP. Now, the budget deficit and public debt relations to GDP are very small and amount, respectively, to less than 1% and 10%. These facts make a default on public debt more unlikely, indeed, but not impossible. This is because Russian state, private sector companies and banks have accumulated $600 billion in foreign debt (around $100 billion is due this year). Moreover, the external debt to GDP ratio is similar to 1997 levels and higher than before Lehman bankruptcy. Investors should also remember that private companies in Russia are often quasi-sovereign and their ownership structure is rather fluid, so in reality the public debt is larger. This is why credit rating agencies will probably downgrade Russia’s rating to junk status soon.
  4. The risk for financial contagion is much lower. The 1998 Russian crisis caused the global flight to quality. Investors were selling various sorts of bonds and buying U.S. Treasuries, which eventually led to the collapse of Long Term Capital Management hedge fund and the stock market crisis in the USA, the S&P 500 index plunging about 20% between July and October of 1998. The level of interconnectedness between Russia, which makes up less than 3% of the global economy, and Western countries is now much lower because of current sanctions (suggesting that Russia cannot presently expect any international help).

Nevertheless, the global economy is rather weak and fragile right now. Volatility is up. The gold to oil ratio is above 20, which usually implies a crisis. The Swiss National Bank removed the franc’s peg to the euro, signaling no faith in euro. Thus, the growing problems of Russia may lead to even further elevations in global risk aversion and to portfolio rebalancing or capital outflows from other emerging markets which are more interconnected with developed markets. The fall of the ruble has already affected the currencies in many post-Soviet countries that are still economically tied to Russia. Leveraged investors may also try to cover their losses in Russia by selling debt tied to other emerging markets. Moreover, the deepening of the crisis may attract a landing of another geopolitical black swan released by the Russia. Indeed, fighting in the Ukraine continues to support gold prices.

So, is Russia heading to a new 1998 crisis? Public finances are in relatively good shape, so the government default is not as probable as in the late 1990s (so far). However, Russia is entering into a full-blown financial crisis with banks and companies’ defaults (which may entail a sovereign debt crisis in the future). A crisis caused by the falling ruble and following balance sheet problems, just as in 1998, when private banks as well as the state bank collapsed.
If you enjoyed the above article, we invite you to stay updated on the latest developments in the emerging markets and global economy by joining our gold newsletter. It’s free and you can unsubscribe in just a few clicks.

Thank you.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules