’98 default is a distant memory for Russians now

MOSCOW: The streets emptied, the banks shut their doors and an eerie silence descended on the capital.

It was the day Russia could no longer pay its debts and the country ignominiously “defaulted”, joining a casualty list of emerging nations such as Thailand and Mexico which succumbed to financial earthquakes in the 1990s.

Thousands of employees working for banks, expensive restaurants and fashion stores were thrown onto the streets when a bubble fed by a reckless government borrowing spree finally burst on August 17, 1998.

Five years on, Moscow, which suffered a jarring slump after the default, is bustling with energy, its roads thronged with shining imported cars.

Marble-clad shopping malls are springing up all over the capital bringing a “shop until you drop” culture to a new middle class anxious for all the trappings of material wealth.

Streets in the city centre ring to the hammering and drilling of workers renovating dilapidated buildings.

It is a dramatic turnaround from 1998 when the deficit ballooned to an alarming eight percent of gross domestic product, setting the stage for a default which drove many banks out of business and wiped out the savings of thousands of Russians.

“A policy consensus emerged after the crisis. They decided ‘We cannot afford to run budget deficits if we want to be masters of our economic destiny,’” said Niclas Sundstrom, an investment strategist at Citibank in London.

“Without the crisis we would not be where we are now,” he said.

Five years after the meltdown Russia has mastered the art of keeping its financial house in order with a speed that has amazed even the most sceptical of foreigners. The country runs fiscal surpluses of a magnitude that central bankers in the United States and Western Europe can only dream of.

GERMAN CENTRAL BANKER PRAISES RUSSIA: The President of Germany’s Bundesbank, Ernest Welteke, was full of praise for Russia’s economic management on a recent visit. “I was stunned after the 1998 crisis by the positive changes we have seen in the macroeconomic situation,” Welteke told a news conference in Moscow.

Welteke ruefully told reporters he expected Germany, in contrast, to show a big fiscal deficit this year and next.

Russia is set to run a surplus in the state budget for the third year running in 2003. The treasury is so flush with cash that it is planning to inject at least $6 billion into a special contingency fund this year.

The economy, fuelled by an oil-export boom, is cruising towards annual growth this year of at least six per cent after growing by more than seven per cent in the first six months.

Central bank reserves are comfortably above $60 billion dollars, five times what they were in 1998.

Many remember the heady gold rush atmosphere in 1998 that attracted foreign financial investors in droves from all over the world even as disaster approached.

Al Breach, an economist now working for investment bank Brunswick, remembers causing consternation among a group of foreign bond investors when he briefed them about the state of the economy not long after his own arrival in Russia.

When Breach told them Russia had a major fiscal problem, their jaws dropped. “None of them seemed to know. The degree of understanding of the country was very low,” he said.

EMPTY PLANES: The crisis, when it came, was swift.

Planes which had been landing in Moscow every day packed with western businessmen eagerly seeking out business opportunities were suddenly flying almost empty.

“BA flights from London went from packed to empty within a week. It was quite extraordinary,” said a banker who was living in Moscow at the time.

Many businesses went under within days.

Russians bore the crisis with resignation, often fearing the worst, but there were no signs of the social unrest that swept Argentina when its government defaulted in December 2001.

If economic nemesis was sudden it took at least two years before most Russians started to sense a real recovery.

“It turned out to be a hiccup,” said Breach.

So how did Russia manage to bounce back so quickly?

A steep devaluation of the rouble gave a powerful competitive boost to local manufacturers of cars and heavy equipment which had taken a big battering in the run-up to the crisis as an overvalued currency sucked in imports.

“The devaluation improved local competitiveness and it was good for developing industry,” said Martin Pronk, a first vice president at Russian investment bank group Nikoil.

The government quickly tightened its grip on its finances, acquiring a discipline which has been pursued with increasing zeal since President Vladimir Putin took over the presidency from Boris Yeltsin nearly four years ago.

Although many lost savings when banks went under, the majority were relatively unscathed because so few Russians entrust their money with a bank, preferring to keep dollars or roubles under the floorboards or stuffed in a jam jar.

LACK OF CREDIT: One of the lingering hangovers of the crisis is that most Russians are still very reluctant to open deposit accounts, thereby holding back the growth of a proper banking industry.

“The legacy is quite serious. People lost their confidence in banking,” said Evgeny Gavrilenkov, chief economist with Moscow brokerage Troika Dialog.

The absence of a thriving network of banks means that all but the largest companies are starved of credit.

The bulk of Russians’ savings are not being “intermediated”, or put to productive use by banks who can lend on the money to businesses, but instead lie dormant in people’s homes.

As a result Russia lags behind other post-communist countries in Eastern Europe in fostering the growth of small enterprise.

“Russia has some world class companies but it does not have a world class financial system,” said Nikoil’s Pronk. “They need to be more efficient at intermediating deposits.

Russia also remains heavily dependent on oil exports. Record crude prices have brought money flooding into the country and some economists worry the fizz will go out of the economy if prices fall.

But while Russia steadily pays off its debts and builds up large reserves few expect another default if the economic climate turns sour.

“The probability of this (a default) happening again has fallen dramatically,” said Elena Anankina, a credit risk analyst at Standard & Poor’s in Moscow.—Reuters