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Countermeasure

1. Crisis plan announced: (government spending cut).


Russia has been working (poorly) with creditors to re-schedule several debt payments.
The Fund urged cuts on the remainder expenditures, which amount to 11% of GDP. The
largest component of these is social policy, education, health, culture, and media.
According to a 1996 World Bank country study, employment in education and health has
stayed constant or even increased after the reform. However, expenditures on
materials, repairs, medication, and textbooks have been decreased sharply reducing
the quality of these services. It would have been hard for the IMF to argue for larger
cuts in health and education materials. Nevertheless, the IMF recommended reducing
expenditures by 2% of GDP. Russia's Letter of Intent (July 13, 1999) indicates that they
intend to follow this recommendation. Expenditure cuts would primarily come from two
sources. First, the number of employees in the public sector and those in education,
transportation, and health care would be downsized. Second, some public programs
would be reduced. This Letter of Intent also makes clear that "these cuts will not be
sustainable over the medium term" Some of the poorest segments of the population,
namely pensioners, would be badly affected by the spending cuts. Likewise, large
numbers of fired public employees could lead to social unrest. While the spending cuts
were necessary, it's arguable that the specific items that Russia proposes to reduce will
truly reduce the inefficiency of the public sector.
2. Government refused to float exchange rate.
On 2 September 1998 the Central Bank of the Russian Federation decided to abandon
the "floating peg" policy and float the ruble freely. By 21 September 1998 the exchange
rate had reached 21 rubles for one US dollar, meaning it had lost two thirds of its value
of less than a month earlier.
3. Wanted to keep investor confidence intact.
The inability of the Russian government to implement a coherent set of economic reforms led to
a severe erosion in investor confidence and a chain reaction that can be likened to a run on the
Central Bank. Investors fled the market by selling rubles and Russian assets (such as
securities), which also put downward pressure on the ruble. This forced the Central Bank to
spend its foreign reserves to defend Russia's currency, which in turn further eroded investor
confidence and undermined the ruble.

4. Spending on Foreign exchange reserve


The Russian government total spending of about $ 5 billion in foreign exchange reserve is also
one of the countermeasures by the government.

Recovery
5. World oil prices
Russia bounced back from the August 1998 financial crash with surprising speed. Much
of the reason for the recovery is that world oil prices rapidly rose during 19992000 (just
as falling energy prices on the world market helped to deepen Russia's financial
troubles), so that Russia ran a large trade surplus in 1999 and 2000 .

6. Domestic industries
Another reason is that domestic industries, such as food processing, had benefited from
the devaluation, which caused a steep increase in the prices of imported goods

7. Barter and other non-monetary instruments of exchange


Also, since Russia's economy was operating to such a large extent on barter and other
non-monetary instruments of exchange, the financial collapse had far less of an impact
on many producers than it would had the economy been dependent on a banking
system. Finally, the economy had been helped by an infusion of cash. As enterprises
were able to pay off debts in back wages and taxes, in turn consumer demand for
goods and services produced by the Russian industry began to rise.

For the first time in many years, in 2000 unemployment fell as enterprises added
workers. Since the 1998 crisis, the Russian government has managed to keep
social and political pressures under control, and this has played a vital role in
bringing about the current recovery.