Explaining Russia's Currency and Financial Crisis

Authors: Chapman S.A.¹; Mulino M.²

Source: MOCT-MOST: Economic Policy in Transitional Economies, Volume 11, Number 1, 2001 , pp. 1-25(25)

Publisher: Springer

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Abstract:

The paper attempts to sketch a framework for understanding Russia's August 1998 financial and currency crises with reference to the main theories put forward so far. Our thesis is that, while not fitting easily into any pre-existing framework, the Russian crises shares many features of ‘first-generation’ models inasmuch as it was largely due to inconsistencies among an overvalued peg, tight money, and an evident inability to address the fiscal deficit. In other terms, it derived from the incompatibility between standard IMF stabilisation policies and the difficulties that Russia was facing as a transition economy. On the other hand, by touching both currency markets and the banking sector, the Russian Episode shares also important features of the ‘twin crises’ framework.

The analysis considers the role of exchange rate movements and capital flows on Russia's rising vulnerability, fiscal problems and the building up of the public debt. It assesses the state of the Russian Banking sector and discusses the contagion effects of the Asian crisis and policy response. It shows how the core of the Russian crises lies in an unsound, IMF-backed, defence of the rouble, which in 1998 had become increasingly unsustainable.

Keywords: Russian transition; financial crisis; bank run; adjustment policies

Language: English

Document Type: Regular paper

Affiliations: 1: LUMSA, Rome 2: University of L'Aquila

Publication date: 2001-01-01