property rights over gigantic state-owned enterprises to politically connected former directors . With limited competition , there was little incentive to improve the operational efficiency or administrative structure of those firms and sectors .
Additionally , political pressures hindered the executive management — in particular where workforce reductions were needed — from introducing changes which in some cases were essential to the financial stability of the formerly state-owned enterprises . Also , the development of contract law and broader legal frameworks so pivotal to commercial matters lagged following the demise of the Communist regime .
But the most formidable challenge facing the fledgling Russian republic was arguably the enormous burden attending the debt of the former USSR . In 1992 , the debt load was staggering , amounting to roughly 117 % of the nation ’ s GDP . That level of indebtedness would be exceptional even for a country not grappling with the substantial transition difficulties facing the new Russia . Nevertheless , by the mid- 1990s the country began to wrest control over its economy .
After several years of economic mismanagement , inflation — which had reached a staggering 131 % in 1995 — had receded to just 11 % by 1997 . Simultaneously , as domestic industries integrated into global markets , Russia ’ s trade surplus began to approach equilibrium . And , although corruption was widespread with tax collection both ineffective and inconsistent , there were signs that the former Soviet Union was making progress .
Oil , upon which the Russian economy was ( and remains ) heavily reliant , began 1997 at around $ 26 per barrel , marking the highest price since the Gulf War of 1990- 1991 . With oil exports increasing from just under $ 15 billion ( USD ) in 1994 to over $ 23 billion in 1996 , the foundation of Russia ’ s economy began solidifying .
Reaching an agreement with creditors concerning the repayment of the USSR ’ s debt was a crucial step towards deeper engagement with market economies in Europe and Asia . Doing so , it was widely believed , would instill confidence in Russian financial institutions and would lay the foundation for sizable public and private investments in its domestic industries , many of which were still in precarious commercial health . At that point , both the World Bank and the International Monetary Fund were providing assistance and coordinating programs with Russian political leaders in pursuit of that goal . And , by the spring of 1996 , the Russian economy had stabilized to a sufficient degree to initiate concrete negotiations regarding the repayment of the debt inherited from the former USSR .
Speculative Attack
Since the end of the Bretton Woods agreement in 1971 , international foreign exchange markets have seen a remarkable increase . The average daily volume of transactions surpassed $ 1 trillion ( USD ) in 1996 and is currently estimated at over $ 5 trillion daily ( USD , 2023 ). While that growth has benefitted international trade via deep , broad and liquid markets for spot and derivative exchange rate products , smaller nations with tighter monetary “ floats ” sometimes experience substantial pressure on their exchange rates . At times , that pressure arises from the simple dominance of sellers over buyers or vice versa . Other times , however , coordinated efforts to manipulate currency rates and induce policy responses have been orchestrated .
When faced with the effects of currency speculation , governments must generally choose from three alternatives : ( 1 ) utilize their foreign exchange reserves to support the currency at a desired level , ( 2 ) increase domestic interest rates to draw in new capital or discourage capital outflows or ( 3 ) stand fast and permit the currency to devalue . Each of these choices carries significant implications for both economic policy and macroeconomic outcomes . Raising interest rates to safeguard the currency is likely to slow or choke off economic growth , while allowing the currency to depreciate may result in elevated inflation and perhaps even reprisals from trade partners .
In the summer of 1997 , several Pacific Rim nations experienced currency crises , beginning with a bear raid on the Thai baht . That was followed by attacks on the currencies of Indonesia , South Korea , the Philippines , China , Hong Kong , Malaysia and others . As is customary , the targeted states engaged in extensive efforts to defend their currencies . The use of interest rate hikes predictably triggered stock market downturns and before long declining economic output . Sharp declines in global stock markets further exacerbated
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Treasury Secretary Robert Rubin ( right ) and Federal Reserve Chairman Alan Greenspan testify before the Senate Foreign Relations Committee on the International Monetary Fund , 1998 .
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