The Russian economy in 1998 was affected by financial and economic crisis.

The macroeconomic situation in 1998 was characterized by the following: a decline in production; crisis in the banking and financial sectors; a reduction in investment in fixed capital; a fall in the exchange rate; a reduction in the volume of trade, that is, a decline in exports and imports; a deterioration in the balance of payments; acceleration in the rate of inflation; a reduction in real income; and a deterioration of the financial situation of enterprises in the real sector.

For 1998 as a whole, real gross domestic product (GDP) declined by 4.6%.

The development of GDP in 1998 was marked by a decline in all sectors, particularly in agriculture and construction.

From 1997 to 1998, elements of GDP were affected by the sharp fall in demand due to the crisis. All the main elements of final demand recorded negative growth:

• In 1998 the final consumption of goods and services was reduced by 2.5%, compared with growth of 2.4% in 1997.
• The final consumption of households was reduced by 3.7%.
• The physical volume of payable services to the population fell by 2.4%.

The economic situation was worsened by inefficient use of savings as much of the savings were kept in foreign currencies. In addition to a reduction in real income, households tended to reduce their investment in the domestic market. Gross savings of the households in 1998 fell more than threefold (from 0.8% of GDP in 1997 to 2.5% in 1998).

Because of the deteriorated budget situation, nominal costs on the final consumption of state institutions reduced.

Gross capital accumulation declined in 1998 at a much larger rate than other components of demand.

Opportunities for attracting financial resources in the real sector of the economy were limited by measures taken by the Bank of Russia (which increased the discount rate and standby rates) and the crisis in bank liquidity.

Budgetary deterioration reduced the share of consolidated budget revenues, that are the sources of financing of investments. In 1998 it fell to 19.7% against 20.7% in 1997. This is the largest drop among the capital embedded in the federal budget facilities account (from 9.5% in 1997 to 5.5%).

As a result of the worsening of the investment climate in 1998, gross accumulation of capital was reduced by 12.9%.

There was a decline of 5.2% in the volume of industrial production

The depth of decline of industrial production reached a maximum in September 1998, declining 14.5% in comparison to that of August 1997 (11.5 %).

As from October, there has been a marked trend towards the stabilization of the industrial situation. Since the end of 1998, the volume of industrial production has begun to recover in terms of the growth rate against the same period of a previous year. It recorded -11.1% in October, -9.1% in November and -6.6% in December.

Deep financial and general economic crisis affected the conditions of the monetary-credit sector.

In spite of the increase in significant volumes of new credit (volume of external debt for 1998 was enlarged by US$13 billion), gold and currency reserves for 1998 were reduced to US$5.6 billion (31.3%).

After a sharp contraction of the money supply in July and August by 2.3% and 4.6% respectively, as a consequence of the foreign currency intervention by the Bank of Russia in the exchange market, money supply for September-December grew by 31.7% according to the operative data of the Bank of Russia. The growth in money supply occurred through the increase in the share of available money from 34.9% in the beginning of 1998 to 41.5% in the beginning of 1999.

The velocity of money turnover was increased.

In the midst of the worsening financial condition of enterprises and the increasing payment crisis of the bank system, lending continued to be volatile. From December 1997 till December 1998, the volume of rouble credits to enterprises, organizations and physical persons was reduced by 39.8%.

The financial crisis has caused a significant acceleration in inflation. In the second half of August-September a situation of hyperinflation nearly occurred: consumer prices increased by 40%. Faster rise in prices began after a sharp devaluation of the exchange rate of the rouble. This has caused price increases in imported consumer goods. The situation called for tighter management of the price of domestic products. In recent months the government has managed to avoid galloping price increases and stabilized the consumer market situation.

The inflation rate was at 4.5% in October; at 5.7% in November, and at 11.6% in December. For 1998 as a whole, the consumer price index stood at 184.4 %.

In 1998 negative trends in the social sector grew. For the year as a whole real income was reduced by 18.5%, in comparison to 1997 when its firm growth was noted.

As a result, the average real monthly wage of a worker was reduced by 13.8%.

In 1998 the economic crisis had large impacts on employment. A significant reduction in labour demand continued.

By the end of 1998, the number of employed in the economy was 63.3 million, a reduction of 1.0 million over the whole year. Using ILO’s calculation method, the total number of unemployed at the end of 1998 was 8.93 million, an increase of 12.4% or 0.8 million.

In 1998 the balance of payments worsened.

The worldwide price reduction on fuels, a significant increase in the percentage of payments to nonresidents, as well as the influence of the financial and economic crisis in Russia have brought about a sharp, nearly three fold, reduction in the positive balance of the current account, compared with 1997.

With the decline of the positive balance of trade, the deficit in the balance of services has been reduced two fold compared with 1997. In connection with this, net export (the balance on operations with goods and services) increased slightly against that of 1997. The negative balance in profits from investments, labour payment and current transfers increased by 1.4 times.

A significant portion of the Russian economy’s export-oriented sector experienced changing external demand which rendered a direct negative influence on internal demand, in both consumption and investment demand.

In 1998 the investment climate in Russia remained unfavorable. The total volume of investments in fixed capital to the account of all sources of financing was reduced to 1997 levels (6.7%).

According to the State Statistic Committee of Russia, in 1998 the volume of all kinds of foreign investments in the economy of Russia reached US$11.8 billion. The volume of direct foreign investments reached US$3.4 billion, an increase of 63% in comparison to 1997.

For 1998 the volume of attracted portfolio investments totaled US$0.19 billion, a reduction of 71.9 % compared with 1997.

A significant share of foreign investments was received in the form of credits from international financial organizations. The volume of other foreign investments in 1998 reached US$8.2 billion, an increase of 31%.

Russia’s international trade in 1998 was constrained by the influence of negative trends in the development of the world economy.

Russia’s international trade volume for 1998 (with provision for officially non-registered exports and imports) reached US$133.4 billion (82.4% of 1997’s figure), including exports: US$73.9 billion (83.6%), and imports: US$59.5 billion (80.9 %).

Russia: Overall Economic Performance

Source: Data are as submitted by member economies, unless otherwise specified.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999).