MOSCOW BLOG: Ukraine is Russia in 1998

By bne IntelliNews December 18, 2014

Ben Aris in Moscow -


Russia's economic situation looks nothing like its 1998 crisis, but today's Ukrainian economy bears a striking resemblance to that of Russia in the run-up to its last big collapse on August 17, 1998.

Below is a table comparing some of the numbers. The comparison has been made more difficult by the sudden collapse of the ruble in the last days, so we have taken the pre-December 15 Russian numbers. We have done this partly as, like the Central Bank of Russia (CBR), we expect both oil prices and the ruble exchange rate to recover in the coming months.

It needs to be remembered that as long as the plunge in the value of the ruble does not develop into a full-blown financial crisis – which remains a distinct possibility – the devaluation also has positive effects. Specifically as bne recently noted, if you include the appreciation effect on Russia's dollar revenues from exports, then the fall in the size of the economy since the start of this year is not 30%, as some have argued, but actually more like 3%.

For Ukraine, the main issue is its lack of hard currency reserves. While Russia has a whopping 29 months of import cover as hard currency reserves now, in 1998 it had only $10bn worth of reserves or 2.2 months of import cover. Ukraine has even less – only 7 weeks of import cover, which makes the currency vulnerable to devaluation.

The good news for Ukraine is that the 40% devaluation the currency has already suffered has killed off imports to the point that in January-September, Ukraine's foreign trade account turned positive to the tune of $4.2bn compared to the $5.94bn deficit recorded in January-September 2013, the State Statistics Agency announced. This number alone is contributing to preventing a full-scale meltdown.

The same thing is happening in Russia, which is on course to put in a record trade surplus of the order of $200bn, also because of a devaluation (prior to December 15) that has killed off imports. Following the even bigger devaluation this week, imports will fall even further, but that will be offset by the fact that oil prices have also fallen nearly $10 in a week.

Debt to GDP is another problem for Ukraine, although the 60% level is not considered critical in terms of being able to finance external debt. In 1998 Russia was spending up to three quarters of its federal income on servicing debt, even after it had rescheduled its so-called London and Paris Club debts. 

The level of interest rates is another place where Ukraine is doing surprisingly well. Despite the fact that Ukraine is running a deficit equal to 4.8% of GDP, which is expected to rise to 5.3% next year according to the plan agreed with the IMF, central bank interest rates are still a relatively low 14%, whereas in Russia in 1998 they spiked from 22% at the start of the year to 160% a month before the August crisis. Rates remain low as investors are still banking on more international financial institution money, so there is no panic.

The problem that Ukraine faces now is that both the IMF and EU are dragging their heels coming up with an estimated additional $15bn bailout money. Interest rates have not risen but the yields on Ukraine's bonds in recent weeks have. The danger is that financing the federal budget deficit is going to get harder and more expensive and confidence in Ukraine's ability to close this funding gap has already started to decay.

Finally the economy is extremely sick. The poverty levels are higher than those in Russia in the late 1990s and per capita income is still 20% below those of the end of the Soviet Union. With the economy due to shrink by about 9% this year and remain in recession next year as well, all the pressure is on the government to draw up a radical reform plan. This could enable the country to start the catch-up process that all the other countries in the region have enjoyed in the last two decades, but Ukraine has almost entirely missed out on because of its kleptocratic governments and political turmoil.


Russia 1998 vs Ukraine now


Russia 2014 *

Russia 1998

Ukraine 2014

GDP growth % year-on-year




Size of economy $bn




Debt/GDP % *




Gross international reserves $bn




Gross reserves in terms of months of import cover




Trade surplus % GDP *




Current account surplus/deficit % GDP *




Federal budget surplus/deficit % GDP *








Overnight interest rates




GDP per capita $ Ukrainian PPP adjusted*




Population below poverty line %




Currency performance YTD **




* assuming Russian GDP at $2 trillion

** pre-crash in 1998, as of 17/12/14 this year

sources: IMF, Index Mundi, Trading Economics, SP Advisors, bne estimates 

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