Financial globalization and the Russian crisis of 1998, Vol. 1 of 1

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Financial globalization and the Russian crisis of 1998

Author:	Pinto, Brian; Ulatov, Sergei;	Collection Title:	Policy Research working paper ; no. WPS 5312
Country:	Russian Federation;	Date Stored:	2010/05/17
Document Date:	2010/05/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	Europe and Central Asia
Report Number:	WPS5312	SubTopics:	Access to Finance; Emerging Markets; Currencies and Exchange Rates; Debt Markets; Banks & Banking Reform
Volume No:	1 of 1

Summary: Russia had more-or-less completed the privatization of its manufacturing and natural resource sectors by the end of 1997. And in February 1998, the annual inflation rate at last dipped into the single digits. Privatization should have helped with stronger micro-foundations for growth. The conquest of inflation should have cemented macroeconomic credibility, lowered real interest rates, and spurred investment. Instead, Russia suffered a massive public debt-exchange rate-banking crisis just six months later, in August 1998. In showing how this turn of events unfolded, the authors focus on the interaction among Russia's deteriorating fiscal fundamentals, its weak micro-foundations of growth and financial globalization. They argue that the expectation of a large official bailout in the final 10 weeks before the meltdown played an important role, with Russia's external debt increasing by $16 billion or 8 percent of post-crisis gross domestic product during this time. The lessons and insights extracted from the 1998 Russian crisis are of general applicability, oil and geopolitics notwithstanding. These include a discussion of when financial globalization might actually hurt and a cutoff in market access might actually help; circumstances in which an official bailout could backfire; and why financial engineering tends to fail when fiscal solvency problems are present.


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