The financial crisis that hit Russia in August 1998 combined a devaluation of the ruble, default on domestic and foreign debts, and a collapse of the stock market and major commercial banks. It effectively deprived most Russians of their savings and undermined their trust in financial institutions.

A nationally representative sample of Russians, interviewed shortly after the 1998 crisis, had suffered a widespread deterioration in welfare compared with their position two years earlier. Current expenditures had generally contracted more than incomes. Even poor households had cut spending relative to income, probably because they not only had less money, but also feared worse times ahead.

Average household income was 20 percent lower in real terms. The share of wages in total income fell from 41 percent to 36 percent and the share of income from government transfers rose. However, the average amount of government transfers decreased by 18 percent in real terms. The share of home production in income increased from 15 percent to 21 percent, and the real value of income from this source also rose. This was evidently part of a private coping mechanism. Help from relatives was 40 percent lower in absolute terms.

Total household expenditure fell by 25 percent, while the poverty rate increased sharply, from 22 percent to 33 percent just after the crisis. The data suggest that the crisis affected urban households more than rural ones. The fall in mean expenditure was about 27 percent in urban area and 21 percent in rural areas.

How did the social safety net respond to such a shock? There was less money available—on average, government transfers fell by 18 percent between 1996 and 1998. Allocation improved, however. Transfers increased by almost 100 percent for households with expenditures of less than half the poverty line, even though the number of households in this group doubled. Payments to other poor households also grew appreciably. The main increase was in pensions. The average monthly pension received by households from the poorest group rose from 28 to 142 rubles, up more than a fivefold in real terms. Family allowances and social aid to poor households declined, though not enough to outweigh the gains in pensions. The safety net’s response reduced the impact of the crisis by helping some previously poor families escape poverty, but it fell far short of what was needed to protect living standards.