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. Last Updated: 07/27/2016

Default's Lessons Learned

It's always a shame when people lose money. The crash of the ruble that rocked Russia five years ago this week cost a lot of people a lot of money. But even the default had a silver lining.

On Aug. 17, 1998, the government and the Central Bank abandoned their support of the ruble, which had cost the country billions of dollars over the previous six months. This led to a devaluation that was disastrous for millions of Russians. But the crash of the ruble also increased the competitiveness of Russian industry and spurred production.

In early 1998, the economists were telling us that most of Russia's coal industry would have to be shut down. Mining equipment was outdated, they said. Management didn't know how to manage, and workers didn't want to work.

Fortunately for the miners, the World Bank money earmarked for pit closures went missing somewhere along the way. Once in a while, the embezzlement of public funds is a good thing for society. The government never got around to closing all of the pits on its hit list before the default. Almost overnight, the productivity of coal mining companies increased. The mining equipment, managers and workers were the same as before. The only thing that had changed was the value of the ruble.

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When expensive restaurants began to go under, the door opened for all sorts of more popularly priced places, including a new trend: a restaurant/book store hybrid. The publishing industry also revived, by the way.

The positive effects of the default were not limited to the economy, either. For starters, it punished the pride of New Russians who truly believed that they alone were responsible for their own success. The default proved that what the system had given them it could also take away.

If you were here, you will remember how the city looked in the days after the crash. The boutiques were still open, but they were empty, and signs in the windows announced ever-growing discounts. The streets were still filled with luxury cars, but the people behind the wheel wore a shocked, fearful look. The smugness and swagger had vanished.

The default affected everyone, of course, but the poor lost proportionally less because they owned no stock and had no money in the bank to begin with. The price of potatoes rose only slightly. Many people saw no money for months. What difference does the exchange rate make when your wallet's empty? It's not hard to understand why the majority of the population reacted with malicious and unconcealed delight to the collapse of banks, the fall of business empires and the staggering losses suffered by speculators on the financial markets.

The middle class probably learned the most from the default. People are inclined to think well of themselves. We're all convinced that if we have a good job and earn a good salary, we have our own hard work and talent to thank. Before 1998, the Russian middle class didn't give much thought to the fact that huge numbers of deserving and talented people were barely able to make ends meet. They concentrated on enjoying life. When the default hit, the middle class got to thinking. They had been told that they were the foundation of the new economic system. And the system had turned around and kicked them in the teeth. Middle-class professionals lost their savings and their jobs just like the proles. The system had proven unfair and unpredictable. The middle class was outraged, and it nursed a grudge. This feeling was especially prevalent among the young, those just finishing school or pursuing a university degree.

Puzzled sociologists talk a lot these days about the growing leftward trend in the middle class and the renewed popularity of radical ideas among the young. This turn to the left is nothing new; it began in August 1998. And there is no turning back. People have learned to think critically. They realize that their position in society depends not only on their own particular virtues, but also on rules of the game that are much less fair than apologists for the system would have us believe. For many Russians, the default of 1998 brought the era of illusions and naive hopes to an end, and for this we should be thankful.

In the last year or two, the situation in Russia has begun to look suspiciously like it did just before the August 1998 crash. The streets are once more filled with a suspiciously large number of luxury cars. Shop windows give rise to all sorts of ominous thoughts. Are we really in for another crash? I hope not. One default was enough to teach Russia the lessons it needed to learn.

Boris Kagarlitsky is director of the Institute of Globalization Studies.