Assignment on International Financial Management

Added on - 21 Apr 2020

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Running Head: INTERNATIONAL FINANCIAL MANAGEMENTInternational Financial ManagementName of the Student:Name of the University:Authors Note:
1INTERNATIONAL FINANCIAL MANAGEMENTTable of ContentsIntroduction:....................................................................................................................................2Related literature:.............................................................................................................................2Description of the country:..............................................................................................................4Crisis and effects:............................................................................................................................9Conclusion:....................................................................................................................................14Reference.......................................................................................................................................16
2INTERNATIONAL FINANCIAL MANAGEMENTIntroduction:The devlopment of a country is very much dependant on the progress of its Economy andthe economic progress of a country on the other hand is dependant on a strong and developedmonetary market. A country must have a strong currency to develo a strong and compactmonetary market. The economic policies of a country play the most crucial role in progress anddevelopment of a country’s economy including the currency strenghts (Dabrowski, 2015). In thisdocument a detailed deiscussion shall be made on the currency crisis of Russia which the countryfaced during late 90’s. In 1998 the country faced a huge economic crisis also known as Rublecrisis that saw devaluation of Ruble by the Russian Government and Russian Central Bank.Related literature:On 17thAugust, 1998 Russia was hit by the Ruble crisis. This promted the RussianGovernment to devalue its currency and saw Russian Central Bank defaulting on its debt. TheRussian financial crisis, better known as Ruble crisis in Russia, also influenced many otyherneighbouring countries and their economies.Background of Russian financial crisis:First time since the Russian Federation was formed in 1991 the country experiencedpositive economic growth in the year 1997. Thus, after a long wait of six years and experiencingnegative economic growth for the period between 1991 to 1996 it was a welcome change for thecountry’s economy to experience positive economic growth for the first time after the formationof Russian Federation in 1991 (Balaga & Padhi, 2017). Russia then used to follow the fixedexchange rate regime and combined that with the country’s fragile fiscal position it was only amatter of time when the financial distress in other parts of the world would have spilled over the
3INTERNATIONAL FINANCIAL MANAGEMENTcountry and that’s excatly what happened on August 17, 1997 when finally the currency of thecountry, i.e. Ruble, stumpled. As a result of this the Russian Government left with no choice butto devalue its currency.Positive outlook of the Ruble crisis of 1998:However, the senior Vice President of US Russia Investment Fund Mr. James Cook describedthe Ruble crisis of 1998 as a positive event which tought the Russian banks to use the strategy ofdiversification of assets to meet the needs of their differents stakeholders and the country’seconomy.Declining productivity:The Russian Federation was formed in the year 1991 after a lot of political turmoil. The longdrawn political turmoil certainly played its part on the economic slow down of the country as thecountry experienced a continuous negative economic growth during the period between 1991 to1996. The productivity of the country, i.e. the Russian Federation after its formation in 1991,continue to decline year after year which is always a negative sign for the development andprogress of a country (Afanasiev & Fedorova, 2016). Productivity has to be differntiated fromproduction, GDP of a country reflects the production in a country whereas productivity is abouteffeciency and effectiveness in production. Thus, it is more about better utilization of availableresources within the country than about the quantity of production. Declining productivityindicates that the country was unable to make best use of available resources which took its tollon the economic condition of the country.
4INTERNATIONAL FINANCIAL MANAGEMENTDescription of the country:The Ruble Crisis 1998 took place in Russia in the very first dacade when Russia was inthe phase of huge transition, i.e. the country was under the transitional phase of communism tofree market economy. The Soviet Union of which Russia was the most important constitutenthad an economy which is centrally planned. The Soviet used to follow a corresponding fixed-price system, full employment with very little income differences. There was rapid expansion ofindustry in the first five years of Soviet’s existence. The Soviet Union experienced rapidindustrialization and economic growth during this period (Libman, 2015). However, immediatelyafter that the long period of stagnation began as the lack of innovation and huge amount ofexpenditures on defence proved to be a huge burden for the economy and finally it succumbed tothe burden. Mikhail Gorbachev and his administration’s inability to come up with trend settingeconomic reforms led to the dissolution of Soviet Union in 1991 and the Russian Federation wasformed. Coming from this historic baggage it had to come sooner or later for the RussianFederation and it came finally after a six years from its formation as the country was rocked byruble crisis in 1998.High fixed exchange rate:The company used to follow fixed exchange rate as far as its monetary policy withforeign exchnage was concerned. In fact in order to avoid public turmoil the Government used tofollow high fixed exchange rate betweet the home currency, i.e. Ruble and foreign currencies. Asa result of following high fixed rate between ruble and foreign currencies the countryexperienced fiscal deficit year after year (Obizhaeva, 2016). This fiscal deficit turned into achronic economic problem after combining with the continuous negative economic growth of thecountry. As a result the country has to experience the ruble crisis in the year 1998.
5INTERNATIONAL FINANCIAL MANAGEMENTWar on Chechnya and its impact on the economy of the country:The first war on Chechnya which cost around $5.5 Billion (a rough estimation that tooexcluding the cost of rebuilding the war ravaged economy of Chechnya) certainly contributed tocomplicate the Ruble crisis in the late 90’s. In-fact in the first half of 1997 for the very first timein the history of Russian Federation which is only about 6 years as the country was formed in theyear 1991 showed a sign of improvement (Shuzhen & Jun, 2015). After the formation of thecountry in the year 1991 the country for the firs time experienced positive economic growth inthat year. However, by the end of 1997 the problems started to magnify and finally the crisis hitthe country in August 1998.These are all internal factors that affected the economy of the country and contributed tothe Ruble crisis that compelled the Government to devalue the ruble and saw the Central Bankdefaulting on its debt. However, there were other factors too, external factors, that affected andcontributed to the Ruble crisis in the Russia (Borodacheva et al., 2016). Asian financial crisiswas one of the external shocks that shook the Russian economy and was a major contributor tothe Russian financial crisis.Asian Financial Crisis:In 1997 was also the year in which the Asian Financial Crisis began. As a result of theAsian Financial Crisis the demand of crude oil and non-ferrous metals dropped substantially.This obviously resulted in reduction of crude oil and non-ferrous metals. Both these are integralparts of overall exports of Russia. Thus, the financial crisis that hit the Asia Continent certainlyhad its impact on the revenue of Russia as the crude oil and non-ferrous metals demand as wellas prices both dropped significantly (Abdullah & Chan, 2016). The Russian foreign exchange
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