The ruble exchange rate fell three times: economist Medvedev named the main mistakes of the default

Paying for naivety

– How did the State Duma react to the announcement of default on August 17, 1998?

– Very active. All power structures were then very active in the political, economic and social sense of the word – they quickly responded to events. In particular, after the default was announced, a commission was created that was supposed to save the situation. I was part of it. She requested a report from the government. To report on the real state of affairs, a high-ranking official came to us, I will not give his name now, because at that moment he showed incredible naivety. He was asked what happened, what are the prospects. In his report, this official stated quite confidently that there would be no devaluation of the ruble, that the dollar exchange rate would not exceed 7 rubles. Let me remind you that at the beginning of August 1998, the unit of the American currency was trading somewhere at the level of 6.3 rubles, after the default was announced, its rate went up and a week later it was above 7 rubles. Less than a month later, on September 9, almost 21 rubles per dollar were given, then there was a rebound to 15-16 rubles, but by December 1998, the dollar won back positions to the September maximum. For most members of our commission, the statements of this high-ranking official were obviously implausible already in August.

Is he the only one in power who has shown such naivete?

– No, of course, many showed this quality to a much greater extent. But there were also many rational proposals for overcoming the crisis. In particular, our commission, in my opinion, expressed reasonable thoughts. However, these ideas are unlikely to have had a noticeable impact on the further development of events. The Primakov government, which soon came to lead the economy, developed its policy more or less independently, and, conversely, it significantly influenced the parliament, prompting it to take the necessary decisions.

– Is the reason for the default in this naivety of officials or even the government as a whole? Did she lead the country to a dead end then?

– Not only. The problem was much deeper. I would say that its name is power populism in general. The fact that Russia is moving towards default has been clear to attentive specialists since 1996, when the cost of preparing for the election of Boris Yeltsin became obvious. In order to win, he and his team made many different populist promises. To fulfill at least some of them, money was needed. They were mined in a barbaric way. At that time, the so-called GKOs (state short-term obligations. – “MK”) were widely sold. They were bought willingly, since the government constantly increased the percentage of payments on them. At some point, the yield of these securities has become more than 300% per annum. At the same time, in parallel, for populist reasons, the government did not want the dollar to grow strongly. For the American currency, a so-called inclined corridor was then established. To keep the dollar from rising in value too quickly, huge quantities of it had to be sold to meet the demand for American currency. The reserves of the government and the Central Bank were small, and everything ended naturally: in the end, the last dollar was sold.

professionalism and populism

– And what was the reason for such behavior of the “powerful people” of the Yeltsin era? They did not understand the mechanisms of the market economy?

Some understood, some didn’t. But those who were important for momentary effects, for example, victory in the next elections, dominated. For this, the medium-term perspective was sacrificed. Among the financial and economic leaders there were many who not only understood the perniciousness of such a policy, but also tried to oppose it, but the main levers of control were not in their hands.

By the way, the activities of Sergei Dubinin, who at that time held the post of head of the Central Bank of Russia, can serve as a vivid example of professionalism.

– It turns out that the head of the Central Bank at that moment was forced by the government to do the wrong things?

– Dubinin saw everything perfectly and did everything in his power to save the situation. I must say that he even managed to achieve some success: a sharp reduction in inflation. But just imagine the position he is in. After all, he worked under the conditions of populism of the country’s top leadership, which was supposed to show the people that everything is going well: look, even the dollar is hardly growing. Dubinin, with the help of a reasonably prudent monetary policy, tried to somehow restrain the flow of excess unsecured rubles in the economy, but the government’s catastrophic borrowings devalued his efforts.

— Do you mean the result of launching operations with GKOs?

– The hole in the budget was so big that the government, with the help of GKOs, needed to borrow amounts that were completely incomparable with the ability to repay the debt. They paid for the previous issue with the help of the next one. To attract buyers, it was necessary to make papers more and more profitable. Since the dollar rose in price very slowly, the yield in foreign currency differed little from the yield in rubles. Consequently, T-bills turned out to be attractive to foreigners, which lengthened the life of this pyramid, but also made it more cumbersome and unsupportable for the Russian budget, for its economy, which ultimately led to financial collapse.

– It turns out that because of the unreasonable actions of the first persons, the crisis was inevitable?

– “Annushka spilled oil” back in 1995, and they started cleaning up only at the end of 1998. In this sense, the crisis was inevitable.

The way out of the economic hole

– Did the stress experienced by many sober?

“I think we’ve all learned a lot. In particular, that naive boss who assured us in August 1998 that the dollar would not appreciate more than 7 rubles became an excellent and successful economic leader. In addition, the country was lucky with the chairman of the government. Yevgeny Primakov was an amazingly mentally stable person: in such an environment in which he had to take the reins of power in his hands, it was just right to go crazy. There was nothing like it. Even then I had the idea that he was similar to Kutuzov in the interpretation of Leo Tolstoy. Most importantly, Primakov did not interfere until the last moment in the rational movements of the economy, in the sound decisions of its agents. This behavior of Primakov quickly became apparent to these same agents. This gave active people the confidence and courage that is so necessary to get out of the economic hole.

– That helped?

— Yes, the “scrambling out” immediately began. The collapse of the ruble led to the fact that the then-known “Bush legs” (the so-called chicken meat supplied from the United States to the Russian market. – “MK”) became unaffordable for people at a price. At 6 rubles per dollar, buying “Bush legs” was simply a blessing, but at 18-20 rubles per unit of US currency, they became gold. And in Russia, meanwhile, there were chicken production facilities that were not used, because it was impossible to produce Russian chicken at a price that could compete with Bush’s legs. But after the cosmic rise in prices for foreign chicken meat, domestic poultry production became profitable. And Primakov, by his very appearance, guaranteed the absence of bureaucratic sticks in the wheels of those enthusiasts who dared to compete with Bush himself. Of course, “Bush legs” is just one small example of the trends that took shape in 1998-1999.

Could the crisis have been avoided if not for the thoughtless actions of the previous government?

– History does not know the subjunctive mood. I met Boris Yeltsin in 1989. He invited me and several other comrades, whom he considered potential economic reformers, for a talk. We talked to him for three days. It all started with the fact that he did not understand the essence of the matter, but learned new ideas for him right on the fly. As a result, we were able to sketch out a plan for future economic reforms, which, at least in theory, would avoid painful crises. However, soon short-term political problems came to the fore, which came into irresolvable conflict with economic laws and the interests of the majority of the population.

Populism is a terribly contagious disease. And now we have not completely recovered from it. And now, sometimes, we can’t resist adjusting some prices. Fortunately, it is much more delicate than the price of the dollar in the second half of the 90s, and therefore not so painful for the citizens benefited by this regulation, but still clearly to their detriment. In particular, the price of borrowings is regulated. At first glance, this seems to be a boon for borrowers: you have to pay less for a loan. And as soon as you recalculate the “cheat” into a percentage, you are immediately convinced that the classics of economic science were right: populism goes sideways to borrowers.

Lessons from the crisis

— Now the economic culture of decision-makers in Russia has grown a lot?

– Of course, although it – culture – still did not win a complete victory. And today we regularly hear criticism of the policy of the Central Bank, to put it mildly, from extremely naive positions. However, the support for the rational actions of Elvira Nabiullina is incomparably higher than that which Sergey Dubinin could count on in his time.

– Can we assume that the lessons of the 1998 crisis have been learned by the Russian authorities forever?

– This is an important question, the answer to which, unfortunately, I do not know. However, regulators – the Bank of Russia and the Ministry of Finance, the entire financial bloc of the government – inspire hope. Not only do they behave rationally. I admire the composure shown by the leadership of the Central Bank of the Russian Federation, continuing to pursue a sound policy in the face of unfair and often illiterate criticism pouring on their heads.

— Last year, Russia again faced the threat of default. I mean the situation when Russia’s Western creditors refused to accept loan payments from us, referring to the fact that our country cannot make transactions, including transfers to creditors, in dollars and euros. Moreover, these unfriendly countries themselves previously blocked this possibility of transactions in foreign currency for Russia.

– No, it’s completely different. The word used is the same – default, but in fact the situation is completely different. In 1998, we had nothing to pay, but in 2022 we had money. They could not be paid because creditors would not accept them. For such circumstances, you need to come up with another word that is different from the term “default”.

– Do you think that a repetition of the events of twenty-five years ago in Russia today is impossible?

– With the team that I see today in key positions in the economy, yes, it is impossible. But I don’t know what will happen tomorrow. May God give the members of the financial and economic bloc of the country’s leadership health and spiritual strength to withstand the heat of undeserved criticism that is periodically heard against them.

Help “MK”

The government of President Boris Yeltsin declared a technical default (a situation in which a country cannot pay its debts to external and internal creditors) on August 17, 1998, for which this day was dubbed “Black Monday” in the press. Russia’s public debt at the time of the default was $200 billion, which corresponded to 44% of the country’s GDP. The dollar began to strengthen and almost tripled in three weeks. Inflation accelerated from 11% to 84.5%, and Russia’s GDP fell by half. Unable to cope with the economic shocks, several large banks, where the savings of citizens were kept, declared bankruptcy at once. The deposit insurance system did not work then, so their exit from the market meant a complete loss of their money for people. For many companies, because of all these problems, the only way out was bankruptcy. The money supply of the country depreciated several times. Russia’s total economic losses during that period amounted to about $96 billion. After the default, President Boris Yeltsin dissolved the government and appointed a new prime minister, who became Yevgeny Primakov.