Russia’s recession could dwarf the 1998 debt crisis

Russia is on track for an economic collapse that will match or even eclipse the size of the 1998 crash (at least for the Russian economy) that triggered the country’s debt default, though the financial fallout may be less today than it was then. Days after President Vladimir Putin ordered troops into Ukraine, economists began releasing forecasts for what is now the world’s 11th-largest economy, though they warn the picture is opaque and subject to revision. The economy will undoubtedly enter a recession, now the question is how much it will fall.

JP Morgan economists have assured their clients in a report on Friday that they expect a 7% contraction in GDP for this year, while Bloomberg Economics forecasts a drop of around 9%. The economy shrank 5.3% in 1998 amid the debt crisis.

“Russia in 1998 suffered the largest sovereign debt default in the world and a large devaluation of its currency. Oil prices and its foreign exchange reserves were very low. The Asian financial crisis was already at its peak. The Russian economy was more relevant and global banks were significantly exposed. This saw Bankers Trust pushed into the arms of Deutsche Bank and a $3.6 billion bailout from Long-Term Capital Management (LTCM),” concludes Ben Laidler, analyst at eToro.

Today, the financial picture does not seem so dire, but the economic picture can be devastating if a scenario of more extreme sanctions is triggered that ends up affecting gas and oil. However, Russia will be the big loser, in economic terms, in all scenarios.




Comparison of the weight of Russia in the world today and in 1998

The Russian economy will suffer much more than in 1998, but the impact on global markets should be a priori much lower because Russia’s weight in the world has been drastically reduced, both in terms of GDP and the market capitalization of its companies.

However, it must be borne in mind that Russia remains one of the the largest exporters of key raw materials (gas and oil)o) and which has the largest number of cnuclear heads of the world. Drawing these weapons could pose a threat far greater than that of 1998.

Russia is reeling

Russia’s economy is reeling after foreign governments have imposed trade, financial and travel sanctions, frozen its central bank’s reserves and cut many of its banks from the SWIFT global messaging system. Russia has tried to isolate its economy and its markets with capital controls, doubling interest rates and other emergency measures, measures that will harm economic growth and that have not yet generated an appreciable benefit in finances.

“Sanctions undermine the two pillars that promote stability: the ‘strength’ of foreign currency reserves of the central bank and Russia’s current account surplus,” JP Morgan economists led by Bruce Kasman say in their report. “Sanctions will hit the target of the Russian economy, which now appears headed for a deep recession.”

a very deep recession

Still, investors believe that while the human impact and geopolitical invasion of Russia are greater than those witnessed in 1998, in the short term the fall of the ruble has been less and the country now has a greater ability to avoid defaulting on its debt, especially if other nations continue to resist imposing sanctions on its energy exports.

“It’s the long term that’s more of a concern,” said Tim Graf, head of EMEA macro strategy at State Street Global Markets. “The longer sanctions are in place, and especially if they are extended to include oil and gas exportsRussia is more likely to become an untouchable capital market in the coming years.”

more inflation

“The currency weakness we see now will inevitably be inflationary, particularly if the economy remains isolated from the rest of the world,” JP Morgan experts say. “It’s not hard to imagine extreme scenarios similar to the post-1998 period in this case.”

Oil and gas revenues have provided strong currency inflow support to Russia because energy sales and transportation have so far evaded sanctions as the US and other governments fear such limits will end up hurting their economies further. If the sanctions reach these sectors, the blow to the economy will be brutal.

How can all this affect the rest of the world? The biggest blow will be suffered by the countries that are most dependent on Russia’s energy and raw material exports. “We consider the economies of Central and Eastern Europe to be the most at risk. Among the major countries that are little dependent on Russian trade, we see the biggest risk to growth in worsening business and consumer confidence.” “, they explain from Ebury in a special report on the economic consequences of the sanctions.


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