When the global financial cri- sis set in, the Kremlin main- tained that they had adequate cash-cushion to endure any kind of blow. But within a few months, global financial cataclysm started invading Russian shores, proving the Russian authorities deceptively wrong. Sinking oil and commodity prices in the international market, a virtual collapse in stock markets, and declining rouble started to impinge on the real economy. Growth has slowed down, industrial activities have dipped, unemployment rate and wage arrears have increased, inflation has soared and default rate has risen. Dissipating sales and massive retrenchments have been reported from various companies in different sectors of the country. Sectors such as banking, automobile, construction and metallurgy have been hit badly. And on top of all, Russia's image as a safe haven to foreign investors has been stained and its $600 bn Stabilization Fund has lost one-fourth of its value in a futile effort to defend the overpriced rouble.
The situation has deteriorated to such an extent that the economic growth and political stability that the then president Vladimir Putin and his ex-KGB associates had attained during their eight years at the helm, now seem awfully flimsy and point to Russia's excessive overdependence on commodities and oil exports and at the same time, the uncompetitiveness of other sectors. But more upfront trouble has arisen due to the steep decline in lending by foreign banks to the country's debtors—some $170 bn in foreign debt is scheduled to be refinanced in 2009. Even the Western credit rating agencies are downgrading Russian banks; New York-based global rating agency Standard & Poor's has for the first time in nearly a decade downgraded Russian sovereign debt to BBB. Now, it is feared that, in 2009, for the first time since 1998, Russia may be running a current account deficit. The World Bank predicts that economic growth will fall by half in 2009, to around 3%. And given the depth and the extent of wealth that has eroded globally, many economists are opining that it would not be an easy escape for Russia this time also.
Since the disintegration of the erstwhile Union of Soviet Socialist Republic (USSR) in 1991, Russia under the Presidentship of Boris Yeltsin had embarked on a market-oriented reform program to achieve consistent economic growth. But the transition from centrally-planned economy to market economy had put enormous pressure on Russia. Problems in carrying out fiscal reform programs and heavy reliance on short-term borrowing to finance budget deficit had ultimately led to a serious financial crisis in 1998. The implications of the crisis were serious with escalating prices, rising poverty along with growing cases of corruption and crimes. The public sector units, which once belonged to the nation or the citizens, fell into the hands of a few, who became super rich. Added to these, the country had witnessed unprecedented erosion of capital. Falling prices of Russia's major export items (oil and minerals) and a loss of investors' confidence in the aftermath of the East Asian financial crisis had exacerbated Russian woes. Resultantly, there was a rapid fall in rouble, delayed payments on sovereign and private debts and a kind of collapse of the banking system.
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