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Russia's Financial Markets Boom, Crisis and Recovery 1995-2001: Lessons for Emerging Markets Investors

Editor

Listed:
  • Morten Balling
    ()

Author

Listed:
  • Ralph Süppel

Abstract

From 1995 to 2001 Russia witnessed an asset market boom, a deep financial crisis, and a surprisingly forceful recovery. An event study of this episode provides important insights for Emerging Market investment and Russia's medium-term prospects. The initial surge in bond and stock prices in 1995-97 owed to a highly ambitious monetary stabilization program, which compressed inflation much faster than other transition economies. Due to high dollarization, disinflation was based on the exchange rate. The program produced rapid real appreciation and a persistent need for capital inflows, while weak economic structures and lack of domestic political support prevented accompanying fiscal consolidation and foreign direct investment. The gap between stabilization ambition and structural reality made the currency increasingly vulnerable. Also, the program did not provide a politically viable "emergency exit" from the exchange rate target corridor. Devaluation was postponed through heavy international support. The ultimate crisis escalation in August 1998 resulted in a partial government default and steep devaluation. However, the economy responded from 1999 with relief to the real depreciation, entering a phase of sustained expansion. Also, the crisis escalation united the political spectrum around a new fundamental consensus on economic policy. Post-crisis governments prioritized fiscal consolidation over disinflation. The more stable political and economic environment spurred broader economic reform from 2000, particularly in the areas of public finances and investment conditions. Together with persistent commitment towards international integration this heralds a long-term convergence of Russia's economic structures with those in Central and Western Europe.

Suggested Citation

  • Ralph Süppel, 2003. "Russia's Financial Markets Boom, Crisis and Recovery 1995-2001: Lessons for Emerging Markets Investors," SUERF Studies, SUERF - The European Money and Finance Forum, number 2003/5 edited by Morten Balling.
  • Handle: RePEc:erf:erfstu:27
    as

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    References listed on IDEAS

    as
    1. David T. Llewellyn, 2002. "The Future for Small & Regional Banks in Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures," SUERF Studies, SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling.
    3. Rolf Skog, 1997. "Does Sweden Need a Mandatory Bid Rule? A critical analysis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    4. Peter R Haiss & Gerhard Fink, 1998. "Seven Years of Financial Market Reform in Central Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    5. John Calverley & Sarah Hewin & Kevin Grice, 2000. "Emerging Stock Markets After the Crisis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Russia; Transition Economies; Emerging Markets; Financial Crisis; Debt Restructuring;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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