MOSCOW. (RIA Novosti political commentator Yury Filippov) --Seven years ago, on August 17, 1998, Russia defaulted on its foreign debt.
Although a decade has not yet passed since the default, Russians are still very much aware of the anniversary of the event. Economists are holding round tables and seminars and commentators are writing articles trying to understand what happened in Russia seven years ago, and whether the country could default again.
The country's population also remembers the default, with public opinion polls showing that more than 50% of Russians are afraid that it may happen again.
In August 1998, Sergey Kiriyenko's government imposed a 90-day moratorium on repayment of all foreign loans, and announced that it would default on its short-term ruble obligations. The currency trading band was expanded by more than 50%, but to no avail. By the end of the year the value of the ruble had plummeted to a quarter of its pre-default level. The national banking system went into a stupor, having swallowed up the deposits of businesses and individuals.
Speaking to the U.S. Congress as an expert on Russia, George Soros said in September 1998 that Russia had experienced a total financial collapse. The international financial guru said that this collapse was truly dreadful and would have enormous political and social consequences.
But even seven years ago leading Russian economists did not share his pessimism. Yevgeny Yasin, head of research at the Higher School of Economics and former finance minister, said several years ago that paradoxical as it might seem, the default had benefited Russia at the macroeconomic level.
Almost immediately after Russia defaulted, in late fall 1998, Russia embarked on a new cycle of economic growth. The Russian economy, which had declined by at least a third since 1991, grew by 5.3% in 1999, and then by 9% the following year. Since then it has been steadily growing by at least 5% a year. While there is some disagreement as to the exact rate of growth, it is indisputable that the economy has been on the up.
There were two consequences of the default that economists say allowed the recovery of the Russian economy. The first was the devaluation of the ruble, which made goods manufactured in Russia competitive both at home and abroad. The second was the sudden boost given to Russia's previously torpid industry. The cost of imports skyrocketed overnight and most Russians switched to domestic products, much to the delight of local producers.
A third growth factor then came into play, though this time it was not a consequence of the default: world oil prices unexpectedly started going up in 1999. Moreover, every zigzag in world politics, especially after the Republican administration came to power in the U.S., pushed prices yet higher. As a result, the problem of Russia's foreign debt, which reached $150 billion in 1999, resolved itself. Despite gloomy forecasts, Russians did not have to tighten their belts either in 2003 when foreign debt repayments reached their peak, or later on.
High prices for oil and gas, which are Russia's major exports, mean that the country will not default again in the foreseeable future. At any rate, this is the view of the government, which two years ago established a stabilization fund for super profits from exports.
"By setting up its stabilization fund Russia has totally eliminated the risk of default," Russian Finance Minister Alexey Kudrin said. His opinion would appear to be well-founded considering that on August 1 of this year, the fund contained 721 billion rubles ($25.2 billion), which was comparable to Russia's 1998-1999 federal budget.
This is an enormous sum, but the Russian government has only recently decided to spend some of the fund on federal investment programs. After all, the risk of default is not simply an abstraction for Russia, no matter what the finance minister might say.
In addition to the availability of money, there are other factors protecting Russia against default. When it became impossible after August 17, 1998 for Russia to live off loans, the government established a tax system, something that had previously been practically non-existent. Although one third of all taxes come from energy exports, two thirds still come from industry, agriculture and services. Neither of these, especially the former two, had been doing well before the default, but August 17 gave them a new lease of life.
Yevgeny Yasin believes that terrorism and industrial accidents are Russia's worst problems affecting its economy as well. But although these are serious threats, they will not reverse the steady advance of the Russian economy. "If somebody talks about default, don't believe and don't panic," he said.