So What Changed? The 1998 Financial Crisis and Russia's Economic and Political Development

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Abstract: At the time, the August 1998 financial crisis was described as a watershed in Russia's development. This article looks at the reasons the crisis had a minimal effect on Russia's economy and argues that the political effect of the crisis was more marked. The growth that has occurred in the Russian economy since 1998 may mean that a reoccurrence of crisis will not be as benign as the 1998 crisis turned out to be. Keywords: financial political economy, Russia, virtual economy Introduction It is nearly a decade since the August 1998 financial crisis in Russia. At the time, the crisis marked a turning point in the development of Russia's economy. In its immediate aftermath there was some expectation that it would be the prelude to what promises to be a long and painful period of insolvency and crisis, (1) and would lead rapidly to another, more severe, financial crisis. (2) These predictions have not come true. Indeed, Russia's financial crisis experience would seem to be an enviable one: it has not caused a loss of economic sovereignty with international agencies asserting their influence over economic policy as a condition of alleviating the problems of currency collapse and debt default, nor did it presage a period of economic depression. Instead, the power of the Russian state has grown since 1998 and Russia has experienced a near uninterrupted economic recovery since 1999 with gross domestic product (GDP) growth averaging 6.8 percent per annum from 1999 to 2005, growth in industrial production averaging 7 percent per annum from 1999 to 2005, unemployment falling from 13.2 percent in 1998 to 7.7 percent in 2005, and average wages rising from $108 to $301 a month. If the 1998 crisis had an effect on Russia, it was positive. Why was the impact of the August 1998 financial crisis so muted economically in Russia? Russia's economic success since 1998 is not because of any particular negative or positive economic effect of the crisis. The crisis of 1998 was not more devastating or influential because of the peculiarities of Russia's postcommunist economic system and the chief problem of this system, the lack of capital to reform industry and create a more competitive economy with a diversified export structure. This problem endures. This article argues that three factors shaped the influence of the August 1998 financial crisis on domestic forces and the subsequent development of Russia's political economy: the legacies of the USSR, the way that earlier reforms under President Boris Yeltsin benefited a small number of financiers and exporters, and the political fall out of 1998. Each of these was largely responsible for shaping one of the main segments of Russia's political economy: the sectors of the economy--those branches of the economy that produce mainly for domestic consumption and do not receive a great level of foreign investment, the sectors of the economy, and the government/state. Each of these segments of Russia's political economy has a peculiar relationship to the global economy. The national economy is isolated from it, receiving benefits indirectly from the general rise in national wealth from energy exports. Its role is passive; its character and structure in the 1990s meant limited foreign involvement in Russia's economy and little pressure to respond to the 1998 financial crisis in ways that would ensure continued capital inflows from abroad. The transnationalized economy and the state have more active relationships with the global economy and are in competition to facilitate Russia's relationship with the global economy. At the moment the state has the upper hand in this relationship. This might, if recovery carries on long enough, eventually turn into a successful response to Russia's problems. However, Russia's ability to grow depends on moving resources into the national economy to modernize it. If it does not, it will bear the cost of a large, unmodernized industrial sector, just as it did in the 1990s. …