Seminar Paper, 2010, 18 Pages
Figure 1: Russian Merchandise Trade Balance 1994-2000 …………….…....5
Figure 2: CPI Inflation: Percent Change over Previous Year 1995-2000..….6
Figure 3: Exchange Rate Ruble/US $ 1995-2000…….….………….………....6
Figure 4: Lending Rate 1996-2000 ……………………………………………10
Figure 5: The Russian Stock Market 1996-2001 …………..……..…………..12
Figure 6: Real GDP Growth 1995-2001 ………………………………………13
Central Bank of Russia (CBR)
International Monetary Fund (IMF)
Gosudarstvennoye Kratkosrochnoye Obyazatyelstvo (GKO)
Gross Domestic Product (GDP)
Russian Trading System (RTS)
„The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for
opportunity. In a crisis, be aware of the danger - but recognize the opportunity.“1
John F. Kennedy, April 12, 1959
Once again Russia’s positive economic development outlook has been thrown into question by the global financial crisis. The country has faced a whole lot of economic problems in the past months. Russians have withdrawn 290 billion Dollars from the country’s banks in fear of a financial collapse. At first sight on the past two years’ events on Russia’s financial market one may have had an impression of a „déjà-vu”:
Since August 2008: the Rouble has dropped about one third against the Euro over 30 percent and against the Dollar even more than 40 percent. 2 The incoming foreign investment of 28 billion Dollars which broke all records right in the year before has now shrunk up to a few billion. The country’s two stock markets, the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX), have fallen 78 percent and 67 percent respectively since their highs in May 2008. 3 It appears as some cynical 10 th anniversary of 17 th of August 1998: when the Russian Government announced the gradual devaluation of the Rouble, the default on domestic and foreign debts, and declared a moratorium on payment by Russian commercial banks to foreign creditors. So the Rouble has dropped to the Dollar more than 300percent in the following months and was six times lower only a year after.
At the outset this paper sets the currency crisis into the framework of the macroeconomic theory and provides a historical overview by putting the 1998 crisis into its timeframe and showing the impacts on the Russian economy. Furthermore the following questions are discussed: Why did the Rouble collapse? Was this a home-made crisis or was it caused by exogenous factors such as the foregone turmoil on Asia’s financial markets?
Finally it shows what the conditions under which an economy can become vulnerable to a currency crisis are, what are and the right and the wrong options to resolve it and the lessons learned.
A currency crisis as a type of financial crisis is defined as a speculative attack on country’s currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of that country. That leads to depreciation of the exchange rate substantially during a short period of time. 4 There have been many currency crises during the post-war era which are often classified and categorized as first-, second- or third -generation models. 5 In first-generation models the collapse of a fixed exchange rate regime is caused by unsustainable fiscal policy. A sudden speculative attack on a fixed exchange rate, can result from rational behaviour by investors who correctly foresee that a government can sell the currency to support it at the fixed rate and by running an excessive deficit, causing it to run short of liquid assets or „harder“ foreign currency. The Investors are willing to continue holding the currency as long as they expect the exchange rate to remain fixed, but when they anticipate that the peg is about to end, they flee the currency en masse. 6
The second generation of models of currency crises doubts about whether the government is willing to maintain its exchange rate peg lead to multiple equilibria. It suggests that in possible self-fulfilling prophecies investors attack the currency because they expect other investors to do so. 7 But those two concepts do not capture every aspect of the Russian crisis. Specifically, these models do not address the conduct of monetary policy.
How crises can have real effects on the rest of the economy because of interdependencies in the banking and financial system and various mechanisms is explained by the third generation models. Hence government guarantees lead to the possibility of self-fulfilling speculative attacs, liquidity exposure leads to the possibility of a bank run, firms’ balance sheets affect their ability to spend, and capital flows affect the real exchange rate. Enterprises face a liquidity problem because they finance risky longterm projects with foreign loans but have access to limited amounts of internationally accepted collateral. 8
4 Burnside, Eichenbaum, Rebelo (2008), p.1
6 Komulainen (1998), p.17
7 Burnside, Eichenbaum, Rebelo (2008), p.4
8 Burnside, Eichenbaum, Rebelo (2008), p.5
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