Abstract

The August 1998 crisis had an immediate and significant impact on the banking system. The combination of the government’s de facto default on its domestic debt and the sharp devaluation of the ruble provided the visible classic triggers for a collapse of the system. Much of the system became formally insolvent, though it continued to operate—in a fashion. Indeed, the crisis only brought into focus the underlying weaknesses of a banking system proliferated by weak institutions that held banking licenses but possessed few of the characteristics of typical commercial banks. Nonetheless, these institutions were exceedingly vulnerable to asset quality, foreign currency, and counterparty risks. These weaknesses and exposures can in large part be traced to Russia’s poor record of macroeconomic stabilization and to failures to address structural weaknesses of the financial sector and of the economy at large.