November 10, 1997 the Central Bank of Russia admitted that financial crisis was in the country. For that reason Central Bank announced increasing of the key interest rate from 21% to 28%. It had also been announced that beginning January 1998 1 US dollar at Russian market would be equal to 6200 rubles plus-minus 15%. Practically, it meant the end of the currency corridor, since by the rules of the MFCE dollar exchange rates couldn’t change by more than 10% in one trade day. Finally, the requirements for the reserve funds in foreign currencies were increased from 6% to 9% for banks. These measures were necessary, because there were no other way to normalize the situation at financial market. Foreign investors possessed about 30% of the money, invested at that moment in government bonds, and not less than 70% invested in stocks. And they, following the market laws, quickly began to sell these assets. As a result of the massive selling of government bonds their prices began to drop and the yields to rise. Money, gotten from the selling of government bonds, were immediately forwarded by foreign investors to the foreign exchanges market, were they were converted into dollars, lowering ruble’s exchange rate. To support ruble’s rate, Central Bank was forced to spend large amounts of its foreign exchanges reserves. In such situation it is necessary to make money more expensive, which can be achieved by increasing the key interest rates and norms of minimal reserves. Since the reserves were to be formed in rubles, banks were rather to sell American currency, than buy it. As history showed, these measures worked and market relatively normalized. However, since then Russia has been facing a decline in investors confidence which in turn has led to a deterioration in general economic conditions, causing next, by far more severe crisis of August 1998. Crisis in August 1998 Causes:1.External influenceThe Russian crisis occurs as ot...
