Features of the development of the Russian banking system in 1996-1999.

Baydakov Ivan ORCID: 0000-0003-0651-3029 Director of the Centre for Public History, Research Fellow, Laboratory of Contemporary History, Institute of Social Sciences, Russian Presidential academy of National Economy and Public administration 119192, Russia, Moscow, Michurinsky ave., 12k1, sq. 69 Baydakovim@gmail.com Other publications by this author

Introduction

The socio-economic role of the banking system in society is realized, despite the importance of the regulatory role of the state, on the one hand, by the banking community – the whole set of people performing their work duties in the system, with a special significance in it of persons who have the right to make decisions and are personally responsible for them (commonly referred to as "bankers") and on the other hand, the population, whose attitude to the banking system is the basis of their interaction.

              Any system has stages of development. We propose to define the historical "points" of a sharp change in the goal-setting and/or mentality of the banking community and/or the vector of society's relations to the banking system as the boundaries of the stages of its development. Two initial stages can be distinguished in Russian banking: its formation in 1991-1995 and the crisis four years of 1996-1999.

            By January 1, 1991, the re-registration of all divisions of state-owned special banks located on the territory of the republic into commercial banks with Russian jurisdiction and the reassignment of the republican State Bank to the Supreme Council of the RSFSR should be considered the birth of the modern Russian banking system. The stage ended at the end of 1995 after the first systemic Russian banking crisis – the August "black Thursday", as a result of which both credit institutions and society were able to abandon the false post-Soviet understanding of banks as a part of a jointly operating national economic complex and begin to adapt to the requirements of market reality;

The end of the second stage was the beginning of the restoration of the banking system in 1999 after the default and devaluation of the ruble in August 1998, which changed the prevailing orientation of banks to be present mainly in the speculative sphere and aimed the banking community at working with the real sector of the economy and the needs of the population.

This article is devoted to the second stage of the development of the Russian banking system.

            There are many published works on the period 1996-1999, especially in the field of journalistic or popular science literature. At the same time, their quality, unfortunately, is not without the influence of the political views of the authors due to their personal life experience, or due to the lack of opportunity to abstract from their political preferences.  Scientific research is also often not devoid of political overtones and not completely objective assessments about this past, but the period closest to us.

Among the scientific works, from our point of view, striving to objectively consider this period, the main place is occupied by economic works, among which it is necessary to highlight the research "hot on the heels" as domestic economists ^{[11; 15; 23; 25; 26; 44; 51]}, and foreign ones ^[54-56], as well as the results economic analysis after a certain period of time ^{[21; 22; 24; 57]}. Analysts of the Institute of Economics of the Transition Period paid great attention to the crisis four-year period in research led by E. T. Gaidar ^[33-38]. Sociologists also considered this time ^[6]. The direct participants of the events expressed their opinion ^{[1; 16; 48; 53]}. The IMF's view of the crisis period was presented by M. Gilman ^[9]. Other authors have also touched on this topic in their works: L. I. Lopatnikov, R. G. Pihoya, N. S. Simonov, S. G. Sinelnikov-Murylev, G. I. Khanin, A. A. Yanik.

However, it should be recognized that there are still not enough specialized historical works in research on this topic, and there is no historical and economic overview of the history of the Russian banking system.

Consequences of the August 1995 systemic banking crisis

The August events of "black Thursday" in 1995, the first systemic banking crisis, were associated with the largest failure in the interbank market, where short–term lending was massively used by banks to maintain their own liquidity.

The absence of an operational automated payment system from the Central Bank (CB) allowed banks to fill the shortage of their own funds for current payments through interbank settlement chains ^[49]. This technology made it possible for banks to "not advertise" their current liquidity to the Central Bank, which significantly complicated the operational intervention of the regulator in "emergency" cases, and the problems of any of the banks created failures through the effect of a "falling domino" throughout the chain of credit institutions. This scenario was realized on August 24, 1995.

He clearly demonstrated to the society that the task of creating a national market banking system ^{[4, p. 43]} has not yet solved the problem of ensuring its reliability through the active regulatory and control work of the Central Bank.

What happened urgently required a tightening of the complex of banking regulations that increase the reliability and regulate all activities of credit institutions and the effectiveness of control over them, and the elimination of the technical backlog of the Central Bank in automating both the control sphere and the payment system, and in bringing reporting closer to international standards.

The first systemic crisis changed the mentality of both the banking community and the population, who in practice realized, "thanks" to the loss of money in the collapse of credit institutions, the harsh market realities of the banking sector ^{[4, p. 53]}.

"Black Thursday" also had a personnel consequence: on October 22, 1995, the State Duma did not approve T. V. Paramonova for the post of Chairman of the Central Bank, who had been performing these duties a year before. This post was taken by S. K. Dubinin, who had practically no banking experience before.

The political situation and the budget crisis

The results of the elections to the State Duma on December 17, 1995, which were won by the Communist Party, which opposed reforms and received the largest number of votes in the Duma (157 out of 450), predicted the actual alignment of political forces in the upcoming presidential elections and the future tough struggle of reformers and anti-reformers.

In parallel with the acute political struggle, the crisis of trust between both Parliament and the Government, and society as a whole towards the executive branch, a deep budget crisis was unfolding, and to some extent fueled by them.

Its basis was the chronic insufficiency in tax collection in the first half of the 1990s, which became particularly critical in 1995-1997. E. G. Yasin (Minister of Economy in 1994-1997 and Minister without portfolio in 1998, responsible for economic analysis and investment policy) designated the tax problem as "the bottleneck of the Russian economy", calling The limit of the budget deficit is tax collection of 15-16% of GDP instead of, for example, 10.6% of GDP in 1995 ^{[53, pp. 32-33, 99]}.

The insufficiency of state revenues to cover its expenses does not exhaust the understanding of the essence of the unfolding budget crisis.

Russia, having emerged from a command-and-control economy and was in the 1990s. "according to the level of economic development of one of the last in a number of democratic states," it was not possible "without a dangerous increase in public debt" to fulfill the socio-economic obligations inherited from the Soviet system, which are "at the level of the United States in terms of budget burden."  The level of economic development of the country and the political regime of the transformational period were incompatible with the necessary high level of tax pressure on society, and with the required restructuring of expenses, which was extremely painful from both social and political points of view ^{[24, pp. 393-400]}. The society was not yet ready for a structural transformation of activities in market conditions of health care and education systems, the rejection of "gross" social support and the transition to targeted support, and the Government was able to begin a comprehensive solution to these tasks only with the implementation of the Gref Program in the first decade of the XXI century.

Of course, there were other opinions in the expert community on the issue of budget cuts: they lead to a decline in production, which reduces the tax base of budget revenues, which does not allow for an active policy of restructuring the economy, and this causes a new round of budget cuts, etc. ^{[31, p. 214]}.

In addition, the constant opposition of powerful lobbying groups associated primarily with the military-industrial complex, agriculture and raw materials, whose support in the legislature and among the Government was significant, did not contribute to the creation of a rational structure of budget expenditures ^{[22, p. 95]}.

The execution of the revenue side of the budget was hampered, on the one hand, by the general socio-economic state of society and the low incomes of individuals who were significantly in the "gray" zone (according to experts, in the second half of the 1990s, up to 60% of all money earned in the country was paid "in envelopes" ^[18]), and the problems of production: their low profitability and competitiveness, and a flourishing system of non-payments, an important specific factor in the emergence of which was the accumulation of the results of post-Soviet production management by the director's corps ^{[48, pp. 152, 156]}, which considered its main task to produce and ship products, shifting the proceeds of money for it or to the owners of the enterprise, either to the state or to the servicing bank, receiving loans from it (in terms of non-payments that are practically non-refundable) for the fact of shipment and accounts receivable. 

On the other hand, distortions in the expenditure side of the budget associated with the support of inefficient lobbied industries contributed to the maintenance of industries that are unable to be effective taxpayers and for which "non-payment of taxes has become the last means of fighting for their survival" ^{[33, p. 3]}.

In addition, in the context of a tough election campaign, the issue of paying taxes has acquired a political character. Anti-reform forces declared tax non-payments to be one of the tools of the fight against "national traitors" in the person of reformers. As E. G. Yasin figuratively described what was happening, "some do not pay because they are waiting for their own; others do not want to create a financial base for the Communists if they come to power" (cit. according to: ^{[19, p. 164]}).

With a chronic shortage of tax revenues, the Government had to resort to borrowing to reduce the budget deficit.

For example, in March 1996, bonds of government non-market loans, fully repurchased by banks, were issued (Post. Government dated 03/21/1996 No. 316 (hereinafter, unless otherwise specified, the text of the document is presented in the ConsultantPlus database)).

However, the main instruments of replenishment of the budget, which provided real monetary attraction, remained the state short-term obligations (T-bills) introduced in the winter of 1993. (Post. Government dated 02/8/1993 No. 107), and federal loan bonds (OFZ), the first issue of which was carried out in May 1995 (Post. Government of 05/15/1995 No. 458).  This was explained, among other things, by the fact that the majority of budget revenues (two thirds by April 1996 ^{[53, p. 72]}, and by early 1998 – almost all revenues ^{[48, p. 153]}) were not monetary: treasury tax exemptions and obligations, guarantees and sureties of the Ministry of Finance for bank loans to cover current budget expenditures.

The beginning of the presidential election campaign added to budget problems due to the need to make additional expenses for the fulfillment of the President's election promises, the most significant of which were the payment of salary arrears.

As B. I. Zlatkis (head of the Securities and Financial Market Department of the Ministry of Finance in 1993-1998) recalled, only to finance these payments during the election campaign in the first half of 1996, budget expenditures were increased by 100 billion rubles due to the issue of government bonds, exacerbating the "problem of T-bills" (cit. by: ^[39]).

The fact that the adoption of the new Government program in the spring of 1997 was, among other things, caused by the need to take into account their fulfillment speaks about the significant amounts of the President's election promises.

In April 1996, there was a sharp jump (an increase of about 1.76 times) in the ratio of government expenditures on GKO-OFZ to budget revenues, which was associated with simultaneous growth in social budget expenditures and a decrease in tax payments ^{[44, p. 116]}.

The volume of T–bills placement was constantly increasing: for example, if the state's debt on securities on January 1, 1994 was 0.2% of GDP, then by January 1, 1997 it was 12.4%, and a year later it was 18.3%. Since February 7, 1996, non-residents have been limited access to the T-bills market. The turnover of T-bills in the financial market also increased sharply: in 1996, compared with 1995, when the market was already so high, it rose 3 times more.

An important role in this was played by the introduction by the Central Bank in April 1996 of the practice of REPO transactions, in which banks were issued a short-term loan secured by GKO–OFZ, issued as a securities sale transaction with a repurchase obligation, which allowed credit institutions to combine the solution of two previously contradictory tasks - to support their own liquidity through short-term borrowings and earnings on the speculative securities market, which require significantly longer-term investments, and without changes in the indicators of the standards governing the attraction of borrowed funds. REPO operations have opened up wide opportunities for banks not only to lend at the expense of the Central Bank, but also to borrow money abroad secured by Russian government securities ^[3]. This, of course, contributed to the resolution of the crisis consequences of the August "black Thursday" for the banking system, but also stimulated banks to "unwind" the T-bills market, expanding investments in them, supporting the state budget.

As the volume of funds raised by the state increased, so did the cost of debt servicing, which required more and more borrowings. The aggravation of the budget crisis and the simultaneous intensification of the political struggle as the elections approached led in the period from March to June 1996 to a 4-5-fold increase in the cost of borrowing on the market to the level of 200-250% per annum, which resulted in a rapid increase in debt relative to GDP ^{[11, p. 30]}. As E. G. Yasin recalled, already in August 1996, "the danger became obvious that T-bills would turn into a financial pyramid" ^{[53, p. 72]}.

It should be noted that the victory of Boris Yeltsin in the presidential elections on June 16, 1996 reduced such a high yield by 2 times (see: Interest rates in 1996 // Central Bank of the Russian Federation).

On August 10, 1996, the second Government of V. S. Chernomyrdin began to work, actively continuing the fight against the budget crisis. However, the measures taken, including administrative pressure, did not have an effective impact, and a "debt-free economy" was formed in the country, when almost all business entities did not comply with tax discipline and preferred to "live on loan" ^{[52, p. 453]} rather than knowingly find themselves in unfavorable competitive conditions. A significant limitation of tax collection was also the high concentration of non-payments, when about 40% of budget arrears accounted for 102 enterprises ^{[24, pp. 315, 324]}.

There was not enough money in the budget, and in August the Central Bank lifted pre-existing restrictions on the participation of non-residents both in auctions and in the secondary market of T-bills with a quota of 1 billion USD per month, as well as the repatriation of their profits (already in November the quota was raised 2 times). Preparation for this step required a change in the procedure for determining the exchange rate in order to manage its stabilization: from July 1, 1996, instead of a clearly marked "currency corridor" linked to the ruble/USD exchange rate, in which the Central Bank regulated fluctuations in its price through its participation in the sale/purchase of currency, a variable "inclined currency corridor" was introduced, where the boundaries of the ruble exchange rate were adjusted by the Central Bank depending on the forecast estimates of the current inflation rate. At the same time, in order to prevent speculative games on the ruble exchange rate, foreign investors were obliged to conclude forward contracts at the time of entering the T-bills market to convert rubles into currency upon exiting it, which guaranteed a fixed yield, which "actually transformed short-term ruble obligations into short-term currency ones" ^{[44, p. 119]}. Thus, the Russian side assumed the currency risks of non-residents working with T-bills.

Professional speculative work in the chain "currency-ruble-GKO-ruble-currency under forward contracts" made it possible for foreign players to make profits from 50% per annum in foreign currency (the author's personal archive contains the relevant memories of participants in the events).

By the end of 1996 The government managed to reduce inflation to 21.8% compared to previous years (131% in 1995 and 216% in 1994) due to strict control over the money supply (its increase was 32.5% against 126% in 1995 and 200% in 1994) ^{[34, p. 10]}, lowering it below the level "prohibitive for industrial investments" ^{[24, p. 308]}, which gave a chance to attract resources to the real economy sector.

In March 1997, changes took place in the composition of the Government, which was no longer formed on the basis of a political coalition, but on the principle of a "team government" aimed at ensuring sustainable socio-economic growth. A. B. Chubais and B. N. Nemtsov took the key positions in it together with V. S. Chernomyrdin. Representatives of the "red directors" were also absent from the new Cabinet, in which the elimination of line ministries in the new government structure played an important role.

One of the first measures of the new Government was the first direct intervention of the executive branch in the economic activities of natural monopolies in the field of pricing since 1991 (Presidential Decree No. 426 dated 04/28/1997), which to some extent served to reduce the volume of non-payments between enterprises, and consequently in the budgetary sphere.

Improving the regulation and technological effectiveness of the banking system

The unstable situation of the country's banking system, as shown by the crisis of August 1995, and the continued and encouraged by the Government to reduce the budget deficit, the expansion of banks' participation in speculative transactions with GKO-OFZ (their main holders were banks – 64.4% ^{[45, p. 49]}), required the Central Bank to take preventive measures.

On October 1, 1997, the Central Bank put into effect a new edition of Instruction No. 1 regulating all activities of credit institutions, in which, in order to increase the reliability of the banking system and establish more effective control over it, the package of banking regulations was significantly tightened. Instead of 8 previously operating ones, of which 3 were advisory and were used only for the "analytical work of Central Bank institutions" (Toolkit. The Central Bank of 05/5/1991, as amended. from 17.03.93, 28.05.93, 07.07.93, 02.07.93 ¹ 1), 19 mandatory standards have been introduced (Toolkit. The Central Bank of 1.10.1997 No. 1), which gave the Central Bank "into the hands" of strict levers for regulating the activities of credit institutions. At the same time, an Instruction was adopted regulating bank reporting in order to implement international accounting standards and forming an analytical database for the Central Bank to assess the financial condition of banks in terms of their liquidity, solvency and profitability (Toolkit. Central Bank of 1.10.1997 No. 17). All this together with the previously taken steps to introduce harsh measures of influence on credit institutions (Tools. The Central Bank dated 03/31/1997 No. 59 and dated 09/11/1997 No. 65) created, unlike the previous period with very mild control and limited opportunities for operational influence on the part of the Central Bank, an effectively functioning set of tools for prudential regulation and supervision of the Russian banking system.

The size of the authorized capital for the newly created banks was also increased: on October 22, 1997, it was set at an amount equivalent to 100 thousand euros (Telegraph. The Central Bank dated 10/22/1997 No. 1-U), and from January 1, 1998 (after the denomination), the Central Bank abandoned the practice of equating the authorized capital to foreign currencies and determined its size at 33 million rubles for banks with a general license and 26.4 million rubles for the rest (Specified. Central Bank of 5.01.1998 No. 129-U).

The most important event in the development of the country's banking system was the introduction of the Central Bank in February 1997 in the Moscow region, which concentrated the largest number of banks, of an automated settlement system built on a multi-trip principle (Regulation of the Central Bank of 02/24/1997 No. 416) with several packages of payments per day, used to date. The IO of the head of the Central Bank, T. V. Paramonov, publicly announced the development of this system back in 1995 ^[5].

By the end of 1998, the Central Bank completed the construction of an all-Russian two-tier payment system, the architecture of which is based on the principle of "everyone with everyone" settlements at the intraregional and interregional levels ^{[40, p. 481]}.

On August 4, 1997, the ruble was denominated with a coefficient of 1000:1, which became possible due to the reduction and stabilization of inflation. The exchange of old banknotes for new ones "without three zeros" began on January 1, 1999 and lasted for 4 years. Coins were also replaced, including pennies. The result of the denomination was the simplification of cash payments and a decrease in their nominal amount, accounting was significantly facilitated, which had a positive effect on reducing the volume of work of credit institutions in the cash sector and reporting.

At the end of August 1997, to improve the quality of banking activities, an internal control system was introduced in each credit institution – a set of measures to monitor the implementation of laws and regulations, reliability of reporting, and efficiency, including personal responsibility of specially designated specialists and managers (Regulation of the Central Bank of 08/28/97 No. 509).

Deepening the crisis situation

By the autumn of 1997, with a steady increase in the cost of debt servicing by the end of the year, the growth rate of public debt decreased: by October, over the past 8 months, the volume of GKO-OFZ increased by only 4.3% (from 15.8% to 16.5% of GDP) ^{[11, p. 38]}, in total for the whole year, the debt on GKO-OFZ increased by about 1.5 times, the volume of their placement amounted to 438.4 trillion rubles ^{[37, p. 40, 43]}. Some economic and political stabilization allowed the President and the Government to set goals for economic growth through attracting investment, changing industrial policy in order to increase the competitiveness of production ^[12].

The international financial crisis that broke out in the middle of the summer of 1997 in emerging markets changed the whole situation. As noted in the report of the Ministry of Finance, the outflow of foreign capital, which became massive in the first half of 1998, began in Russia (On the results of the work of the Ministry of Finance of the Russian Federation in 1998 // Ministry of Finance. 1999. April 12).

The situation was significantly aggravated, wrote O. V. Mozhaiskov, Deputy chairman of the Central Bank in 1998-2013, by the fall in world prices for hydrocarbons, the main article of Russian exports ^[27].

In the last months of 1997, the ratio of budget revenues from the sale of GKO-OFZ to the increase in bond debt (an indicator of budget efficiency) sharply decreased, its value (-13%) became negative ^{[45, p. 48]}.

The withdrawal of funds by foreign holders of GKO-OFZ began, which led in November-December 1997 to a twofold increase in the profitability of their placement with an increase in turnover in the secondary market to 30% ^{[50, p. 47]}, as well as to an "overheating" of the foreign exchange market associated with voluminous "dumping" of rubles by non-residents.

Stabilizing the situation, the Central Bank was forced to intervene in the foreign exchange market, reaching 3.5 billion USD, and on November 10 it raised the bank standard for mandatory reserve of liabilities in foreign currency by 1.5 times (from 6% to 9%) ^{[1, p. 118]}. On the same day, the Government and the Central Bank issued a statement with the intention to pursue a policy in the foreign exchange market that would ensure in 1998-2000 a rate of 6.2 rubles/USD with a maximum deviation tolerance of no more than 15% (Statement of the Government and the Central Bank of the Russian Federation "On Exchange Rate Policy" dated 11/10/1997).

In an effort to keep rates low on the GKO-OFZ market, the Central Bank in November also sharply increased its package of these securities. As a result, in just one month, the Central Bank's foreign exchange reserves decreased by 26.6%. In December, the Central Bank abandoned this policy, as a result of which the yield of government securities to maturity rose sharply to 40% ^{[11, p. 38]}. Subsequently, all these steps were recognized by a number of experts as erroneous ^{[37, pp. 9-10]}.

The ongoing budget crisis in Russia forced the Government to carry out new issues of short-term obligations when fleeing from the market of non-residents. Thus, the share of T-bills issued from January to August 1998 amounted to 74.4% in the total portfolio ^{[44, p. 119]}.

Yu. M. Luzhkov (at that time the mayor of Moscow) argued that the state, by its direct dictate, imposed on banks the obligation to buy T–bills, "moreover, medical insurance funds, pension funds, too, insurance companies, too" ^{[20, p. 47]}.

On February 8, 1998, the Central Bank held a meeting with 20 leading bankers of the country on the issue of the accumulating problem of public debt, at which, based on the results of an analysis of the dynamics of repayment of T-bills by bankers, it was concluded that there was a danger of default in September and, in order to avoid a crisis, devaluation of the ruble to the exchange rate of 9 rubles/USD ^{[16, p. 525]}. The Central Bank and the Ministry of Finance abandoned this path, considering, according to S. K. Dubinin's explanation, that this would "put an end" to the Russian banking system, in which banks borrowed from non-residents played an important role (cit. according to: ^[28]).

In March, the jump in government debt compared to February was more than twofold, and since April, new fundraising, the Central Bank noted, could no longer cover the volume of government obligations "even for debt refinancing" ^{[46, pp. 41, 42]}. Attempts to increase the amount of placements led only to an increase in the profitability of new issues, "further reducing the volume of borrowings" ^{[11, p. 41]}, and the Ministry of Finance was forced at regular auctions of T-bills instead of refinancing "old obligations to repay part of them from the budget to the detriment of planned allocations for the most necessary" ^{[53, p. 75]}.

The New Government

On March 23, 1998, the Cabinet of V. S. Chernomyrdin resigned, and a number of Government members, for example, the Minister of Foreign Economic Relations and Trade M. E. Fradkov and the Minister without portfolio, responsible for economic forecasting and investment policy, E. G. Yasin, continued their duties in the next Cabinet.

The approval of the new Prime Minister S. V. Kiriyenko lasted for a month and took place on April 24, 1998 at the third vote in the State Duma with the threat of its dissolution.

On April 30, a new Government structure was approved, which significantly reduced the number of members: there were no posts of first deputy Prime Ministers, and the number of deputies decreased to three from more than a dozen.

The new Cabinet, with the task of economic growth officially announced by the President, faced the primary problem of reducing the severity of the budget crisis and preventing the default of public debt.

An attempt in May 1998 to replenish the budget by about 2 billion USD through the sale of 75% of Rosneft shares ended in failure due to a sharp drop in the value of shares during the financial crisis.

The Central Bank noted that in the first half of 1998, budget revenues were dominated by funds received from the sale of government securities ^{[46, p. 41]}.

On May 7, at a Government meeting, Chairman of the Central Bank S. K. Dubinin announced a catastrophic increase in public debt and the threat of a crisis in the national financial system (cit. according to: ^[29]). It should be noted that with a sharp increase in public domestic debt in 1997 and the first half of 1998 (from 365.5 trillion non-denominated rubles to 607 billion rubles), the direct debt of the Central Bank of the state, according to the Gaidar Institute, was reset from January 1, 1998 ^{[36, p. 29]}.

In May, the Government is taking steps at a high pace to reduce the severity of the budget crisis (e.g.: Post. Government dated 05/12/1998 No. 438, Presidential Decree dated 05/14/1998 No. 554). The Government's program of activities to ensure savings in public spending was adopted (The main activities of the Government of the Russian Federation to ensure savings in public spending (Approved by Presidential Decree No. 597 dated 05/26/1998)), a new head of the Tax service of Russia, B. G. Fedorov, was appointed, who initiated the introduction of a package of bills to the State Duma on June 24 (rejected by it in July), concerning the income tax of business entities, the sales tax at the rate of 5%, the single imputed income tax and VAT.

Work was also underway to attract external funds. Russia began to place Eurobonds: on June 10, 1998 – five-year ones in the amount of 1.25 billion USD, and on June 24 – 2.5 billion USD. This gave the Government hope that in the case of replacing short-term GKO-OFZ with Eurobonds with a longer term, it would be possible to reduce both the cost of servicing the national debt and the ratio of expenses on it to budget revenues ^{[44, p. 118]}.

There were successful negotiations with the IMF on the allocation of financial assistance, which were headed by the Russian side, appointed on June 17 by the special representative of the President A. B. Chubais. An important role in the negotiations was played by A. L. Kurdin, who was at that time the governor of the IMF from Russia ^[8]. On July 20, 1998, the IMF Board of Directors decided to provide Russia with a loan in the amount of USD 11.2 billion. On the same day, the Government and the Central Bank announced a coordinated policy of economic and financial stabilization (see: Post. Government dated 06/20/1998 No. 85). On July 24, the first (and last) tranche of the IMF loan in the amount of USD 4.8 billion was received, and on August 7 – USD 0.3 billion from the World Bank.

N. C. Simonov, referring to the IMF report published on September 30, 1998, claims that most of this loan was spent on the conversion of Sberbank's ruble funds in July 1998, which decided "not to extend its significant portfolio of treasury bonds due in the last two weeks of July, thereby forcing the Government to borrow at relatively high interest rates to service it and undermine the confidence of other investors that the Government will be able to extend its debt in the future [quote from the IMF report – I. B.]" ^{[41, pp. 535-536]}.

 Foreign researchers expressed themselves more cautiously: in their opinion, during the second half of July and the first weeks of August, the Central Bank lost 10.5 billion USD, which far exceeded the tranches received from the IMF and the World Bank ^{[56, p. 11]}.

M. Gilman, who worked as an IMF representative in Russia in 1996-2002, argued that neither the IMF nor even the Government expected this repayment in the amount of 12.4 billion rubles from Sberbank, which was a subsidiary of the Central Bank, and the resonance in the market forced the Ministry of Finance to cancel all primary auctions of T-bills starting from July 28 ^{[9, p. 270]}.

The crisis moment

The July results of the Government's work on debts "turned out to be catastrophic": GKO-OFZ was placed in the amount of only 13.8 billion rubles, despite the fact that, in general, 38.8 billion rubles were required for payments on the state debt ^{[9, p. 270]}, i.e. it became no longer possible to refinance debts through new borrowings and, as E. G. recalled. Yasin, "it was clear that it was pointless to hold the situation any longer" ^{[53, pp. 76, 77]}. On July 25, the ministers – members of the previous Cabinet of Chernomyrdin, who had continued to fulfill their duties in the Kiriyenko Government up to that point, resigned (Presidential Decree No. 888 of July 25, 1998).

In early August, due to a decrease in quotations of government securities that are collateral for international loans to Russian banks, additional requirements arose to increase their collateral (margin call), and the level of debt owed by Russian banks to non-resident banks was about 10% of their liabilities ^{[46, p. 96]}. All this required a massive "dumping" of bank securities portfolios and the conversion of rubles held in accounts into foreign currency, which led to a financial "explosion" in the market, problems with liquidity and solvency of credit institutions.

The general attitude of investors was to "be the first when everyone runs to the exit" ^{[9, p. 272]}.

A. B. Chubais, in one of his interviews, cited the contents of the "key" meeting with S. V. Kiriyenko (the main participants of which, according to the memoirs of O. G. Dmitrieva, Minister of Labor and Social Policy in 1998, were "Kiriyenko, Dubinin, Aleksashenko, Chubais and someone else" (cit. according to: ^[17])): "The deterioration of the situation throughout the week and a sharp breakdown on Friday [August 14, 1998 – I. B.]: 1. The upper limit of the corridor [ruble/USD – I. B.], set for 3 years, has been broken! 2. Margin call has not been paid... 3. The slowdown in payments in the banking system begins to develop into a complete stop. Tax revenues to the budget are falling sharply ... 4. Reduction of Central Bank reserves – about 1.5 billion USD was spent during the week, and only on Friday [August 14 – I. B.] 1 billion USD was spent" (cit. by: ^[2]).

On August 17, 1998, the Government and the Central Bank announced (the Statement of the Government and the Central Bank of the Russian Federation "On changing exchange rate policy" dated 08/17/1998; the Statement of the Government and the Central Bank of the Russian Federation "On exchange Rate Policy" dated 08/17/1998) the expansion of the boundaries of the "currency corridor" to the level of 9.5 rubles/USD, a three-month moratorium on servicing external debts of economic entities, including payments to non-residents for repayment of loans and insurance payments on loans secured by securities, and, most importantly, the refusal to service T-bills, the volume of which at that time amounted to about 217 billion rubles, i.e. more than 34 billion USD. The government also refused to pay domestic debt: ruble-denominated GKO-OFZs with maturities by the end of the year were reissued into new OFZs with a fixed coupon income, and the ruble exchange rate risk was assigned to the owners of the securities (Post. Government of August 17, 1998 No. 980).

Also, the Board of Directors of the Central Bank suspended for three months operations on payments to non-residents of debts on loans with a term of more than 180 days, REPO transactions, term currency contracts and deposits (Decision of the Board of Directors of the Central Bank of the Russian Federation "On ensuring economic stability and stability of the financial system in the Russian Federation" dated 08/17/1998; Instruction of the Central Bank dated 09/04/1998 No. 344-U).

The total amount of Russia's frozen domestic debt amounted to 265.3 billion rubles (42.2 billion USD at the exchange rate on August 14, 1998). OFZs in the amount of about 75 billion rubles with maturities exceeding 1999 remained in circulation ^{[24, p. 414]}.

The ruble/ USD exchange rate began to rise sharply: already at the end of August by 1.45 times, and a week later by another 2.23 times (Archive of exchange rates of the Central Bank of the Russian Federation). In September 1998, consumer prices jumped by 38.4%.

As the participants of the events recalled, the population "stood in queues at various banks and currency exchange offices in order to save their money, exchange [rubles – I. B.] for dollars or withdraw [funds – I. B.] to the maximum from banks" (cit. according to: ^[43]). As a result, the outflow of household deposits from the banking system "for home storage" amounted to 55.2% in foreign currency and 7.4% in rubles (while depositors transferred more than 40% of ruble deposits from commercial banks to Sberbank) ^{[46, p. 98]}.

According to sociologists, the peak of the crisis, default, became a "bifurcation point" ^{[6, p. 23]}, in which the majority of society felt a loss of support and trust in state institutions.

The resulting panic had to be, as A. B. Chubais recalled, "introduced into some controlled framework" (cit. according to: ^[2]), and on August 21, 1998, the Central Bank offered banks, through agreements with Sberbank, to provide "100% guarantees of the state to each depositor" (Statement of the Central Bank of the Russian Federation "Guarantee for personal deposits" // Rossiyskaya Gazeta. 1998. August 21st. ¹ 2027).

On August 21, the State Duma passes a resolution calling on the President to resign from his post (Post. State Duma of 08/21/1998 No. 2896-II DG). On August 23, Boris Yeltsin dismisses Kiriyenko's Cabinet and appoints Deputy Prime Minister V. S. Chernomyrdin. The "managerial, technocratic" Government, as Yeltsin called it ^{[13, p. 313]}, played its historical role by making tough decisions to prevent the devaluation of the ruble and default and, due to failure in this, taking responsibility for a difficult political decision.

On August 26, the Central Bank, in an effort to preserve sharply reduced foreign exchange reserves and not being able to support the ruble, stopped exchange operations for an indefinite period (Specified. Central Bank dated 08/26/1998 No. 328-U).

In September, the one-day interbank lending rate reached 450% per annum, which practically meant the suspension of banking operations to maintain the liquidity of credit institutions, and in the "center of the crisis of the payment system, unable to fulfill obligations to customers," were the largest banks, whose demand-side obligations to liquid assets "as early as August 1, 1998. they were approaching 500%" ^{[25, pp. 13-14]}. The Russian banking system has entered a large-scale crisis.

The default to a certain extent reduced the problem of public debt, the restructuring of which amounted to 80.5% of the cost of servicing it ^{[46, p. 41]}, allowing the Deputy Prime Minister and Minister of Finance of Canada K. Freeland later called the incident "the most profitable deal of the century for Russia" (cit. according to: ^{[9, p. 17]}).

The crisis raised the issue of creating a state system of guaranteeing bank deposits to the population ^{[25, pp. 106-109]}.

The contraction of the securities market has turned Russian banks from dominating participation in speculative activities to working with the real sector of the economy.

Financial losses also caused significant damage to oligarchic industrial and financial groups, reducing their ability to influence the economy and politics ^{[24, p. 424]}. But it should be noted that the owners of some of the largest collapsed banks belonging to these groups, for example, ONEXIM Bank, Menatepa, SBS-Agro transferred businesses to other credit organizations belonging to them ^[29].

The negative socio-economic consequences of the crisis were significant. The country's GDP decreased by 4.9%, inflation by the end of the year amounted to 84.4%, industrial production fell by 5.2%, the exchange rate rose to 20.62 rubles/USD ^{[38, p. 10]}; only by the end of 1998 77 banks collapsed (Credit institutions that ceased to exist // banki.ru ), the total capital of the country's banking system in foreign currency equivalent, it decreased by 5.6 times and in volume as of January 1, 1998 (119.2 billion rubles) it was equal to the amount of GKO-OFZ frozen by default (119.6 billion rubles) ^{[46, p. 96]}; there was a collapse of both the interbank and Russian stock markets – the RTS/RTSI index collapsed by 90% in relation to the beginning of October 1997 ^{[24, p. 423]}; confidence fell both within the country and and outside of the governing structures of the state; the volume of tax revenues has sharply decreased: only in Moscow in the last two weeks of August 1998, it decreased almost 3 times compared to the first half of the month (and by 60% compared to August 1997) ^{[20, p. 46]}; the possibilities of financing the state budget deficit for borrowing; 38.2% of the country's population were below the poverty line ^[42]; there was a general increase in socio-economic discontent of society: By January 1999, the Levada Center recorded the lowest level of the social sentiment index since 1995 ^{[7, pp. 233-234]}. Moreover, the greatest losses both in savings and in the compression of opportunities for activity were incurred by people who had previously successfully adapted to market relations, since they were the ones who either were employed in previous years of reforms, and the crisis, even if they did not lose their jobs, devalued their ruble salaries, or owned small and medium-sized enterprises that collapsed in the crisis businesses located mainly in the ruble zone of the economy and were sources of personal funds that ensure the social level of the owners.

Banks after the peak of the crisis

The tactics of Russian banks in the first weeks after the crisis depended on three interrelated factors: the degree of "immersion" of a credit institution in government securities at the time of default, the ratio of its ruble and foreign currency liabilities/assets and violations (up to a complete stop) of customer payments, despite the fact that the bank's problems created problems for its customers and vice versa – the "collapse" of each of the customers deprived the bank of liabilities that were so necessary at a time of crisis.

Therefore, banks, as far as they were able, focused on the client business, showing ingenuity here: from using purely banking instruments, for example, providing overdrafts secured by credit and debit debts, selling and discounting their bills of exchange for debtor/creditor settlements and to creating informal councils under the board of the most significant clients to regulate the size of and the sequence of daily client payments in order to prevent the bank from having the so-called "300th form" – reporting on the inability to make client payments due to lack of funds in the correspondent account (the author's personal archive contains the relevant memories of participants in the events).

Banks that placed foreign currency bonds found themselves in an extremely critical situation. As a result of the incident, only two of the six pre–crisis issuers survived - Vneshtorgbank and Alfa-Bank.

The latter's ability to continue servicing its obligations can be attributed to two reasons: the bank's merger a month before the acute phase of the crisis with a group of Alfa Group investment companies, which by that time were already managing significant funds, which made it possible to show itself financially sound in the first days of the crisis, and, as a result, a sharp increase in customer The database has been in operation since the very first days of default – only in September 1998 the number of open accounts in it increased fourfold (The history of Alfa-Bank // Alfa-Bank).

The analysis conducted "hot on the heels" by G. Y. Trofimov of whether the Russian public debt was a deliberate "financial pyramid" and, if so, from what point, convincingly showed that:

- it cannot be said that the Russian authorities deliberately promoted the implementation of the "financial pyramid" scheme at the macro level;

- the issuance of short-term foreign currency obligations was the most unprofitable and the most risky strategy for managing public debt;

- such omissions of the authorities are quite understandable due to the lack of a targeted policy on public debt management;

- with the first manifestations of the crisis at the end of 1997, the strategy of taking currency risks by the state could already turn debt policy into building a "pyramid" with increasing rates and degree of risk ^{[44, pp. 115, 118, 119]}.

A. N. Illarionov also wrote in his research about the ruinous acceptance of currency risks by the state through a "currency corridor" and "encouragement of virtually unlimited borrowing abroad" ^{[15, pp. 46-47]}.

Actions to overcome the consequences of the crisis

Despite V. S. Chernomyrdin's close interaction with the main political forces, a joint statement with the Chambers of the Federal Assembly on the current situation in the country and ways of further socio-economic development (Statement of the trilateral commission of the Chambers of the Federal Assembly and the Government of the Russian Federation "On the main directions of socio-economic development of the Russian Federation" // Federation Council of the Russian Federation. 1998. September 2), the State Duma, following tough debates ^{[14, pp. 168-180]}, twice did not approve his candidacy for the post of Prime Minister, and on September 11, 1998, at the suggestion of G. A. Yavlinsky, the Council of Ministers was headed by E. M. Primakov – according to the author of the idea, "a responsible figure for preparing the most important decisions ... a man of dialogue… [which – I. B.] will be able to generate trust among the citizens of Russia" ^[10].

V. V. Gerashchenko became Chairman of the Central Bank again on the same day. A number of ministries and departments that were absent from Kiriyenko's Cabinet were restored to the Government structure.

The first actions of the new management of the Central Bank were measures to alleviate the situation with the suspension of payments in the banking system, for which offsets were carried out in the five largest regions of the country (Indicated. Central Bank dated 09/17/1998 No. 351-U and dated 09/18/1998 No. 353-1U). For example, in Moscow, accounts receivable of business entities amounted to 170 billion rubles, and accounts payable – 194 billion rubles ^{[20, p. 46]}.

The Central Bank again, almost 7 years after the start of reforms in the country, had to return to the issue of limiting cash payments between legal entities (Specified. CB dated 7.10.98 No. 375-U).

The payment stoppage was so catastrophic that the authorities of Moscow, the largest conglomerate of banks, together with the Economics Department of the Russian Academy of Sciences, headed by Academician D. S. Lvov, urgently organized on September 24 a conference "Resolving the problem of non-payments in the interests of the Russian people", where aspects of overcoming the crisis and further development of Russia were discussed, which became a publicly presented program for changing the socio-economic situation.the economic course ^[30], which was based on the dirigiste model of economic management, which does not imply curbing inflation. At the same time, an alternative stabilization program was announced by a group of liberal economists headed by E. T. Gaidar (in the program "Time" of Central Television on October 1, 1998 ^{[24, p. 427]}).

It should be noted that the Primakov Government, in its activities, making mostly liberal decisions, demonstrated a balance between these policies.

On September 24, 1998, V. V. Gerashchenko published the Central Bank's vision of what is happening, the forecast and the program for the restoration of the country's banking system.

The Central Bank saw the most dangerous development in the continuation of the ruble's fall to the level of 30 rubles / USD or more, which could create "a threat of a return to intense inflation ... as well as undermining confidence in the ruble and consolidating the windfall of those who accumulated foreign currency funds, actually working against the national currency."

The Central Bank planned its activities in two blocks: "deep restructuring of the banking system and curbing the devaluation of the ruble" and "non-inflationary development of the country's financial system aimed at launching financial markets and reorienting the banking system from operations with public debt to intensify work with the real sector of the economy and the population." A specific action program was proposed in each of the blocks.

It was emphasized that "going for a limited issue in order to finance the critical needs of the budget system and overcome the payment crisis, the Central Bank cannot support the idea of an issue-based solution to all problems of the budget and banking system…[that – I. B.] is capable, instead of solving problems, of only completely destroying the country's financial system" ^[32].

It should be noted that even before the publication of its position, the Central Bank began implementing the outlined program: the write-off of repo debts from banks stopped, loans in the amount of 10.6 billion rubles were already provided to the largest banks, a number of mandatory banking standards were significantly relaxed, 69.3% of the total number of budgetary institutions and organizations ^[32].

Since September 1998, exchange-traded currency trading using the Electronic Lot Trading System was resumed, and in December their volume amounted to 3.9 billion rubles. USD with 226 participating banks (at the beginning of 1998 there were only 67 of them) ^{[46, p. 68]}.

In an effort to quickly create a reliable system for guaranteeing deposits of the population through the conclusion by banks of special agreements with Sberbank, the Central Bank, in addition to transferring government securities from its assets to Sberbank in the amount of its deposit obligations (Decision of the Board of Directors of the Central Bank of the Russian Federation "On measures to protect deposits of the population in banks" dated 1.09.1998), decided to transfer to it also, the mandatory reserves of the banks that have concluded agreements (Indicated. The Central Bank dated 11/27/98 No. 426-U), which created special supervisory boards and commissions on depositors' complaints (Specified. Central Bank dated 09/22/98 No. 356-U).

Given the accumulation of current problems in banks related to liquidity, delinquencies, non-repayment of customer loans and failures in interbank interaction, insufficient capital, numerous violations of mandatory standards, the Central Bank has taken a number of steps to mitigate the situation: introduced the practice of marginal standards, providing a credit institution with a "time lag" to correct (Specified. The Central Bank of 30.10.98 and ed. dated 02/04/1999 No. 393-U), changed the amount of mandatory reserves (Specified. The Central Bank of 17.11.98 No. 414-U), including those created in connection with the depreciation of securities (Telegraph. The Central Bank dated 03/05/99 No. 84-T) regulated the fulfillment of mutual obligations between banks (Specified. Central Bank dated 12.10.98 No. 380-U).

 The Central Bank's actions to set limits for banks on gaps between foreign currency obligations and requirements ("open currency position") and increased reserves for foreign currency deposits (Specified. The Central Bank of 17.09.1998 No. 350-Y and of 30.10.98 No. 395-Y), allowed by the end of 1998 to accumulate very significant amounts of ruble funds in correspondent accounts with the Central Bank ^{[38, p. 30]}, which provided the regulator with additional resources to help resolve the current problems of the banking system.

On November 17, 1998, the Government and the Central Bank issued a statement on the planned steps to stabilize the socio-economic situation, and the Central Bank also announced its vision of monetary policy for 1999. The main principles were the creation of viable banking and industrial market structures, the normalization of economic turnover and its provision with cash. "The most important condition for economic recovery" was designated "increasing the organizing role of the state in ensuring production efficiency", including through the creation of corporations with state participation, which assumed "qualitatively improving the situation with tax payments, guaranteeing mutual settlements, timely repayment of loans, maintaining the necessary level of liquidity" (Statement of the Government and the Central Bank of the Russian Federation "On Policy exchange rate" dated 08/17/1998). It was planned to control macroeconomic indicators – to keep the economic recession within 3% in 1999 and inflation at a level limiting price growth to no more than 30% (The main directions of the unified state monetary policy for 1999 // Bulletin of the Bank of Russia. 1998. December 4th. ¹ 84).

The joint documents of the Government and the Central Bank and the previously published action plan of the Central Bank marked the transition of the executive branch to the implementation of the course of state-controlled market relations.

On the same days, the Government and the Central Bank decided to create the Agency for the Restructuring of Credit Institutions OJSC, whose task was to restore the country's banking system through the restructuring of banks with unstable financial condition by combining, absorbing unstable stable ones, increasing capital and attracting new owners, replacing ineffective management (Statement of the Government and the Central Bank of the Russian Federation "On restructuring of credit institutions" dated 11/21/1998).

The Law on the country's Budget, adopted on November 26, 1998, provided for the first time at the legislative level federal funds for state support of innovation and investment activities, allocated on a competitive basis on the terms of repayment, payment and urgency (Federal Law No. 181-FZ of 11/26/1998).

In the tax sphere, the Government has begun to offset the debts of enterprises with budgets of all levels and conclude agreements with large taxpayers. For example, the agreement with Gazprom granted the company the right to link its payments to the budget with the amount owed to it by budget organizations ^{[24, p. 441]}.

On September 30, 1998, the Central Bank, in order to improve the situation with the capitalization of banks, lifted the previously existing ban on paying contributions to the authorized capital of credit institutions in foreign currency (Specified. The Central Bank dated 30.09.98 No. 365-U), and on December 31 allows non-monetary funds to be contributed to the authorized capital (Specified. Central Bank of 31.12.98 No. 474-U).

The Central Bank paid great importance to regulating foreign exchange transactions, including in order to reduce the withdrawal of money abroad: in the first months of the post-crisis 1999, currency control, traditionally exercised by banks over foreign economic transactions of clients, was strengthened (Indicated. The Central Bank of 12.02.99 No. 500-U), introduces a number of restrictive measures for the purchase of currency by Russian economic entities (Specified. The Central Bank of 12.03.99 and ed. No. 511-U dated 05/19/1999 and No. 543-U dated 04/14/99), and in July, measures were implemented at the legislative level to prevent payments to global offshore zones (Federal Law No. 126-FZ dated 07/5/1999), which significantly (by 2 times in the second half of 1999) reduced the withdrawal of funds from Russia ^{[47, p. 72]}.

Conclusion

The implementation of a coordinated policy by the Government and the Central Bank, balanced by "liberal pragmatism", on the one hand, as well as moderate state participation and regulation, on the other, laid the foundation for economic stabilization, which, in turn, played a positive role in saving money in the country for the purpose of investing it.

The devaluation of the ruble (as well as the rise in world oil and gas prices) provided an opportunity for growth in export-oriented and import-substituting industries of the country ^{[38, pp. 134, 331]}, gave domestic producers a chance to replace imports with significantly cheaper, although perhaps still less high-quality, domestic products. Taking into account the dollarization of private savings, as evidenced by the previously mentioned mass withdrawal of funds from foreign currency deposits of citizens after default, devaluation also provided an opportunity not to significantly reduce the growth of effective demand ^{[19, pp. 195-196]}.

The growth of industrial production, which began in the country, and consequently profitability in the real sector of the economy, the Central Bank's implementation of a balanced monetary policy of a restrictive nature, the adoption at the end of December 1998 of the Law on Priority Measures for Budget Execution, including the mandatory sale of 75% of foreign exchange earnings by exporters (Federal Law No. 192-FZ dated 12/29/1998), an increase in the monetary component in the calculations of economic entities ^{[47, pp. 50-51]} made it possible for the Government to take a non-lenient course to increase tax collection and approve at the end of February a balanced surplus budget for 1999 (excluding public debt servicing costs) (Federal Law No. 36-FZ of 02/22/1999).

On May 27, 1999, the Central Bank approved a new version of Instruction No. 1 regulating the activities of banks, changing the system of mandatory standards and reducing their number to 16 (Toolkit. Central Bank dated 05/27/1999 No. 1).

1999 showed industrial growth of 8.1%, and GDP – 3.2% ^{[38, p. 332]}, and the change in GDP was provided by a 28% increase in industrial production, 5% increase in agricultural and forestry production, 7% increase in construction work, 11% increase in transport and communication services ^{[47, p. 12]}.

The "blood movement" in the economic sphere has restored the life of the banking sector: assets increased by 51.5%, household deposits in rubles by 43.1%, and in foreign currency by 61.9%, funds raised by banks from legal entities by 66.7%.

Moreover, the default and the subsequent measures taken by the Government and the Central Bank forced credit institutions to "turn their faces" to the real sector of the economy, bank loan investments in which increased 2.5 times in 1999, amounting to 239.6 billion rubles ^{[47, pp. 86-88]}. The attitude of the population towards the banking system also began to change: people began to master new banking products: consumer loans, credit cards ^{[6, p. 29]}, which positively influenced the growth of consumption.

All this makes it possible to designate the last months of 1999 as the end of the second stage – 1996-1999 – of the development of the banking system of the New Russia. And this allows us to talk about the end of the crisis four years. "Historically, it is obvious that Russia has won" ^{[9, p. 16]}. Post-crisis stabilization provided an opportunity for the country to enter the next socio-economic historical period, which began in 2000 with the development of the Gref Program