INDEX

CONTENT Page

1. Introduction 1

2. History of Russian Economy 3

3. Previous Financial Crisis 3

4. Financial Crisis 2014 4

5. Impact on Russia 5

6. Global Impact 7

7. Conclusion 8

8. Reference List 9

9. Appendices 10

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 INTRODUCTION

Financial Crisis

The term financial crisis refer to which in the sense where the because of some
or the other reason an institution on it can be institutions which lose a large part of
their value. Financial Crisis can usually hit a single sector of the economy not the
other sectors. In today’s world financial crisis is major threat and most of the
countries are facing this type of crisis.
The cause of financial crisis can be different in different situations. Although
many people have researched about the causes of the crisis, these financial crisis
are caused by partly because the different perspectives of economics sometimes
rival each other, and partly because perhaps every financial crisis is peculiar to
itself.

TYPES OF FINANCIAL CRISIS

BANKING CRISIS
Banks are usually the place where people deposit money and take out when
they need and in return bank provides them with interest. The money which people
deposit is further utilized by the bank by providing loans to the needy people these
loans are repaid after a long period of time. Therefore, if the depositor who has
deposited large amount of money wants to take out in a single go i.e. wants to
withdraw his money in one go then the bank faces problem the bank finds itself in a
situation where it is bankrupt because of lack of cash flow. When this situation rises
it is called banking crisis.
Alternatively banks can see it coming and they take safety measures to
overcome this problem banks will provide credits and loans unwillingly to the people
because of the fear that they may not have the cash to give away to the depositors
who wants to withdraw his/her money. Such a situation is usually referred to as a
‘credit crunch’ and it also inflates financial crisis.

Speculative Bubble
This crisis is usually of a stock exchange; in a stock exchange people buy and
sell shares it is a market for shareholders and companies. People buy shares
usually to earn profit out of it. However, some people buy stock by speculating the
price, and hoping to see it a higher price later. If most of the people buy shares on
speculative basis then the rise of prices in future is more. And when they decide to
sell all the shares at that time then the price are likely to fall rapidly. At the time of
buying, when the price of a stock is more than its current price plus dividends and
interest, then the stock is said to be exhibiting a bubble.

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 International Crisis

This crisis is a type of Financial Crisis in which countries or a country is involved

this usually happens at an international level. In this crisis a country is forced to
devalue its currency either because of speculative attack or it is not able to repay its
debt. This type of crisis is bigger than the two crisis discussed above. When this
occurs trading between the countries are also affected. The currency is level goes
down and because of that investors also have to suffer great losses
It is important to note than even though one can give many reasons for financial
crises, it all boils down to poor management and poor strategy. Governments and
financial institutions therefore need to improve their financial strategies in order to
avert the dangers of financial crises.
The topic which we are going to cover is Russian Financial Crisis and it a type
of International Crisis International crisis usually occur due to the country is forced
to devalue its currency or not in a position to pay its debts to know about this we
should know about Financial Markets, we will discuss about it more in the later
sections.

Financial Markets
A financial market is a market in which people trade financial securities,
commodities, and other fungible items of value at low transaction costs and at
prices that reflect supply and demand. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods.
A market in which people trade financial securities and also commodities and
other fungible items of value at low transaction costs and at prices that reflect
demand and supply. Securities in a financial market include stocks and bonds, and
commodities that include precious metals or agricultural goods.
(Davd H, 2010)

RUSSIAN STOCK EXCHANGE

Russian Trading System (RTS) was a stock market established in 1995 in
Moscow, consolidating various regional trading floors into one exchange.
Earlier RTS was modeled on NASDAQ’s trading software and then in 1998 the
exchange went online with its in-house system. In the initial stage it was created as
a non-profit organization, it was later transformed into a joint stock company. Now it
is popularly known as Moscow Exchange as it is situated in Moscow, Russia.
Today, Moscow Exchange is the main liquidity and price discovery center for
Russian instruments. Moscow Exchange hosts trading in equities, bonds,
derivatives, currencies, money market instruments and commodities. The Group
also includes Russia's central securities depository "the National Settlement
Depository" and the National Clearing Centre, which performs the function of central
counterparty. Moscow Exchange ranks among the worlds top 20 exchanges by total
capitalization of shares traded, and also among the 10 largest exchange platforms
for bonds and derivatives trading.

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 HISTORY
OF RUSSIAN ECONOMY

In 1996 a large amount of money was invested in Russian stock exchange and
people were expecting high returns. Government bonds were purchased in large
amounts. Banking liabilities accumulated in later stages.

Alternatively in the year 1997 political instability mounted as president Boris

Yeltsins’s health withered and many government officials were stuck. In addition,
corporate governance was weak due to the privatization process, and firms were
still in a process of adjustment to the new economic circumstances. Most observers
were aware that decisions were made according to the insider preference rather
than economic or political efficiency

The Russian Financial Crisis began in 1998 and was caused by both internal
and external economic weaknesses. The crisis hit the Russian economy very hard
and it was a great threat from the start itself the economic problems were more
evident later on. The exchange rate was violated through issuance of US dollar
denominated. During the crisis, halting of global demand for Russian metals and
energy led to a severe downturn and a sudden liquidation of Russian assets.
(Sara HSU, 2013,)

Previous Financial Crisis

Collapse of the Soviet Union
A fact which cannot be denied is that Russia is an oil dependent economy.
The starting point of collapse of Soviet Union as described by Yegor Gaidar
“The timeline of the collapse of the Soviet Union can be traced to September
13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of
Saudi Arabia, declared that the monarchy had decided to alter its oil policy
radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly
regained its share in the world market. During the next six months, oil
production in Saudi Arabia increased fourfold, while oil prices collapsed by
approximately the same amount in real terms”. (American Enterprise Institute,
2007)
As indicated usually, OPEC a group of oil producing countries didn’t show any
opposition about falling oil prices. They didn’t agree about cutting output as a
result of lowering prices. That left Russia in a perilous position. Soviet Union
was now forced to borrow money in order to fulfil needs of the economy. But
the help granted was much less than the help needed, this forced USSR to
allow eastern European countries gain independence.
Another fact according to Gaidar is that “No one can accurately predict the
fluctuations of oil prices.” The lesson that should be learnt from collapse of the
Soviet Union is that no policy should be formed keeping in mind that oil prices
will remain high. This is applicable for oil dependent economy like Russia.

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Many situations may have changed after the collapse of Soviet Union but an
underlying fact is that dynamics remains the same for Russia. The Russian
policy makers should also learn to make policies for the unfavourable
conditions where changes cannot be adopted easily.

Russian Financial Crisis 2008-2009

The period from 1999 to 2008 marked with overall growth of the Russian
economy. The country’s exports grew 525 percent and imports rose almost
640 percent. By the end of this period it can be concluded that half of Russian
growth can be attributed to oil prices and the number of economic reforms
undertaken by Putin during his first term. But the reforms failed to address
major issues like weak economic infrastructure and high dependence on
certain commodities. It can be further concluded that economic boom and
ruble appreciation was mainly because of rising

Commodity prices along with huge inflow of foreign capital which were
temporary factors. In 2008 a deep recession followed. This time intervention
by the central bank did not work. Because of central bank intervention it lost
FX reserves of amount 170 billion by 2008 ending. This lead to a total decline
of 35% and the core cause of decline can be stated as serious policy mistake.
Rouble was equally affected in 2008 because of the crisis.

Russian Financial Crisis 2014

If Russian financial crisis are to be compared we can find numerous similar
problems in the making. Russia’s high dependence on oil and over the years
its failure in diversifying its economical base cannot be ignored. But another
proximate cause to explain the crisis can be falling value of rouble over
dollars. As its value decreases it increases difficulty for the Russian corporate
sector to repay its debt worth $ 100 billion.
It all started on 16 December 2014 when the Moscow stock exchange
exposed the actual tenure of the Russian financial system. Due to it the dollar
and euro exchange rates unexpectedly soared to record levels of 80 and 100
roubles per unit of currency, respectively. It was caused largely because of
declining oil prices and also because of tenseness between Russia and the
West over Moscow’s aggressive policy towards Ukraine. And so there are a
series of events which lead to destabilised the Russian financial market.
These events broke the faith the faith of the investors from the Russian
market who then started to withdraw their investments. Although the Russian
central bank tried hard to save rouble from depreciating further by spending
US$ 8 billion on currency interventions in the first half of the month. But the
efforts could not stop rouble from depreciating further.
Main factors explaining Russia’s economic decline:
Undiversified Russian Economy:
Russia always failed to understand that its smaller firms that are the
foundation of a well diversified economy. It always protected large state
owned firms at the cost of smaller firms. In Russia smaller firms contribute just
15% of the total GDP whereas in EU its 40% of their GDP. Russia is still using
state based approach for diversification. It can be explained as between 2008

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to 2012 Russia’s private sector lost 300,000 jobs whereas state added more
1.1 million. These figures are mere discouraging to anyone wanting to start
business in Russia.
Over dependence on Oil Markets:
Russia has always felt a shock as the price of oil hit low. As the OPEC
Countries never complain in order to eliminate competition its Russia which
ends up suffering. As nearly 50% of the Russian Government revenues come
from the sale of oil and gas.
Other Problems:

impact of financial crisis on Russia

1 IMPACT OF CRISIS ON RUSSIAN BUSINESS

The financial crisis in Russia which is occurred in mid-December 2014 has

vastly affected the Russian market .Russian financial crisis not only affected
banks , it also affected big companies like roseneft Russia’s largest oil
company pinned the decrease in oil prices by fifty percent . Crude oil is gone
from a high of $100, a barrel in June to $60. US $ values has declined by
twelve percent. This increased the decline of RTS. Some companies in
Russia have also become bankrupt due to inflation, decrease in reserves on
gold and foreign currencies and increase in interest rates. Car sales in Russia
declined by twelve per cent from previous year 2013.The crisis also caused
decline in domestic demand in goods and services due to which prices of
goods and services increased by forty to fifty percent. The high technology
sectors like energy are the most affected once. (Berberoglu, N/A)
In simple words the crisis has affected both consumer and companies, and
regional financial markets. As the ruble falls Russian foreign currency are
quickly becoming unsustainable and investment in Russia is also reduced.
The resultant effect of ruble fall is dollar-denominated capitalization, banks
decreased and insufficient supply of foreign currency. Due to insufficient
supply, the demand for goods and services is also decreasing as well as
decreasing profit percent. Exchange rate difference is also caused due to
ruble fall .Other factors which drastically affected Russia are decrease in oil
prices, lower volume of gas exports and western financial sanction.
(Underhill and Zhang , 2004)
At last, I would like to conclude that all the factors mentioned above due to
which Russian market is vastly affected had negative effect on legal and
institutional environment . Due to inflation people as well as economy also
suffered and the reason of their suffering was none other than financial crisis.
If precaution were taken before and if government had focused on financial
aspects then it would not had resulted in such a big financial crisis. Decrease
in price of crude oil, which was the major export of Russia, is proven one of
the biggest weaknesses of Russia. Russian economy is greatly affected due
to factors like ruble fall, decrease in price of crude oil, western sanction, lower

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volume of gas export and inflation. But Russia is trying to making its situation
better.
2 IMPACT OF CRISIS ON PEOPLE

Ordinary people or local people of Russia are facing problems due to

decrease in real wages, they are not able to fulfilling their basic necessities
like food, clothing and earning. Food commodities prices have been
increased in agriculture and food sector. Buying food becomes less affordable
due to ban on western import, inflation and low income. Many restaurants are
using cheap quality food items and also selling them in higher prices. Due to
fall in real wages, travel tourism also become unaffordable. People are also
afraid of losing their jobs as companies are not earning revenues so they are
eliminating employees. People who are employed are insecure of their jobs
and many have to migrate. Unemployed people remained unemployed
because people are not ready to work in low wages. So there is increase in
number of unemployment than compared to previous year. In fact due to crisis
legal and institutional environment is also affected. The situation become so
worst in Russia that even people who used to work in banks are also not
able to earning much .

Due to insufficient supply of goods, people are not getting satisfaction .Market
is also facing boom period in which shortage of goods and services occurs.
Market needs to recover soon to fulfil people’s needs and wants. Increase in
prices by 5.5 percent also vastly affected people and due to which
government decreased wages. Real income also turned out to be 4.7 percent
lower than previous year. The economic condition is getting worse that even
in public surveys 80 percent of Russians have felt effect of crisis. More than
20 percent of the people have had given up buying things which they used to
afford before. If last year financial situation of people is considered than it
improved this year much .Government had also assured that very soon
financial situation will be improved and the level of welfare spending would not
be reduced. . (Berberoglu, N/A)
As government is providing livelihood to people and Russia is also trying to
regain its position. Government is supporting labour and introducing various
programmes so that labours wages share get increases but as due to
financial crisis , Russian economy become really weak and inefficient that it is
taking time to regain its position in global market . There is reduction in
investment, consumption, export and import. Unemployment also increased
unexpectedly as compared to previous crisis in Russia. Crisis had vastly
impacted the households as they have worked through adverse effects on
aggregate demand, labour demand and asset price . Based on the growth
outlook and household survey data, the number of poor people in Russia will
likely increase by 2.75 million. (Pearson, 2004)

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 GLOBAL IMPACT OF FINANCIAL CRISIS
Russian financial crisis not only affected its own economy but it affected other
counties economy also as well as its post-soviet states. This financial crisis
affected stock market, export of crude oil, world GDP and currency of other
countries like United States of America. If all the factors which got affected
due to financial crisis explained briefly then, conclusion will be coming out as
Russian economy has slowed down due to which other countries economy is
getting affected in some of the other ways. Russian stock market has fallen
down and its economy become so unbalanced that global investors and
participants are backing out .Investors at global level are not ready to invest in
Russian stock market and even some countries which were previously in
contact with Russia are slowing down such as countries like china and
Europe . If other countries GDP percentages are compared with Russia’s
GDP then it accounts for only 2.7% of world GDP as nearly 1/7th of Russian
economy GDP used to come from oil but due to crisis there is reduction in oil
export. US banks are also insignificantly lending money to Russia due to
financial crisis taken place recently in Russia.
(Župlev and Liuhto, N/A)
Due to rouble fall, Russia has not only affected post-soviet states but also
many developing and developed countries. In some soviet states like
Armenia, dram, and Azerbaijan value of currency decreased and depreciated
because of rouble fall and increase in inflation. There is huge decrease in
Russian imports which affected major importers like Ukraine, Belarus and
Baltic’s depend on Russian economy to a major extent but due to sanction
imposed Russia is accessible limited to capital market. Russia helped some
soviet states like Uzbekistan and Tajikistan by using its reserve. So, it has
been made clear that Russian crisis had impacted globally but Russia is trying
to come out of this crisis and helping other soviet states also for economic
stabilization and peace.
The crisis is occurring since 1998 and its impacts can be seen as the
government have become busy in providing livelihood to people instead of
restructuring the economy. The government is trying its best to minimize the
impact of crisis but since 1998, it seems to be like that in Russia, its economy
is getting weak day by day and it’s not only impacting people, Russia but also
the economy. The Russian economy also becomes very concerned about
foreign direct investment due to increase in property rights. There is a huge
increase in real estate prices in many countries , equity , assets and
markets in Russia become really expensive .Crisis is associated with both
increase and decrease and if we see there is huge reduction in consumption ,
investment , industrial production , employment , export and import . In
general, Russian economy becoming weak and inefficient day by day due to
inefficient marketing, fluctuation in oil prices and increase in tax rates.
Government needs to take corrective measures so that Russian economy
able to gain its value and for stabilization.
(Claessens and Kose, N/A)

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 CONCLUSION
After the report we conclude that the work has been done with all the
referencing and also we have collected facts and figures from various trusted
sources and we now conclude this report. In the end we got to know about the
Russian Financial Crisis how they had many problems what are the various things
that the Russian country is trying to cover up to fulfill the problems which they are
facing we covered each and every topic in reference with the topic being provided
by the college. Russian Financial crisis is a major threat and now it is getting
controlled by Russia hope it gets over soon.

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 REFRENCE LIST

1. Berberoglu B. The Global Capitalist Crisis And Its Aftermath.

2. Bird, Mike. 'Russia's Ruble Crisis Is Following The Same Pattern That
Destroyed The Soviet Union'. Business Insider. N.p., 2015. Web. 7 Dec.
2015.

3. Bremmer, Ian. 'Here's Why Russia's Economy Is Cratering'. TIME.com.

N.p., 2015. Web. 7 Dec. 2015.

4. Business Insider. Russia's Economic Crisis Has Officially Arrived. 2015.

Available at: http://www.businessinsider.in/Russias-Economic-Crisis-Has-
Officially-Arrived/articleshow/45935438.cms. Accessed December 7,
2015. (Fig 1)

5. Claessens S, Kose M. Financial Crises. [Washington, D.C.]: International

Monetary Fund; 2013.

6. Hardt J. Russia's Uncertain Economic Future. Armonk, N.Y.: M.E.

Sharpe; 2003.
7. N.p., 2015. Web. 7 Dec. 2015.

8. Pearson T. Russian Officialdom In Crisis. Cambridge [England]:

Cambridge University Press; 1989.

9. Sara Hsu, Russian Financial Crisis 1929 to the present (2013), pp94-95
10. Sieron, Arkadiusz. 'The Short Story Of Past Russian Financial Crises'.
News.goldseek.com. N.p., 2015. Web. 7 Dec. 2015.

11. The Economist,. 'What’S Gone Wrong With Russia’S Economy'. N.p.,
2014. Web. 7 Dec. 2015.

12. Timesofindia-economictimes. Russia's MTS raises full-year sales growth

guidance. 2005. Available at:
http://economictimes.indiatimes.com/news/international/business/russias
-mts-raises-full-year-sales-growth-guidance/articleshow/49819252.cms.
Accessed December 7, 2015.

13. Underhill G, Zhang X. International Financial Governance Under Stress.

Cambridge, UK: Cambridge University Press; 2003.

14. Zhuplev A, Liuhto K. Geo-Regional Competitiveness In Central And

Eastern Europe, The Baltic Countries, And Russia.

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 APPENDICES

(Fig; 1)

(Ref. 4)

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