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

Listed editor(s):
  • Morten Balling

Registered editor(s):
Listed author(s):
  • Ralph Süppel

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.

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This book is provided by SUERF - The European Money and Finance Forum in its series SUERF Studies with number 2003/5 and published in 2003.
ISBN: 978-3-902109-19-4
Handle: RePEc:erf:erfstu:27
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References listed on IDEAS
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  1. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework: Institutional Constraints and Incentive Structures," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  2. David T. Llewellyn, 2002. "The Future for Small & Regional Banks in Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  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. John Calverley & Sarah Hewin & Kevin Grice, 2000. "Emerging Stock Markets After the Crisis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  5. 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.
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