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"The crisis began on the 2" July 1997, when Thailand devaluated its currency, the bath, which caught almost all observers by surprise" (McLeod, Ga
aut, 1998). The crisis in Thailand could never have been restricted to its foreign sector, and the ensuing banking crisis spread the problems throughout the economy. The crisis conditions were quickly transmitted onto neighbouring countries, Malaysia, Indonesia, Korea. "Countries which had previously been magnets for foreign investment suddenly witnessed unmanageable outflows, as confidence in their ability to restore their economies to stable growth evaporated. (McLeod, Ga
aut, 1998) and thus resulted in a decrease in foreign reserves and has wo
down investor confidence, "setting back prospects for economic growth." (Cooper, 1999). The Asian economies according to McLeod and Ga
aut, (1998) were "stagnating", the situation took on a tu
for the worse at the end of August 1998, "when for reasons which were primarily domestic, the Russian Gove
ment defaulted on its debts." (Copeland, 2000).
A link can be seen between the 1997 Asian financial crisis and the Russian Currency Crisis of 1998. Cooper (1999) identifies that "the Asian financial problems and other factors created uncertainty in emerging capital markets on the part of investors", and slumping oil prices made hard currency revenues scarcer, bringing the crisis to a head. Before the Russian financial Crisis of August 1998, Russia started to experience a lack of Foreign investment into the country as a consequence of the lack of confidence, resulting in a falling Gross Domestic Product, high inflation, rising unemployment and high interest rates. Hence, this had an affect on the exte
al economic indicators which included the exchange rate between the U.S Dollar and the Russian Ruble, the decline of foreign reserves in Russia.
The financial Crisis in Russia began during August 1998. "On August 17, 1998, the Gove
ment of the Russian Federation and the Central Bank of Russia announced the gradual devaluation of the Rouble, the imposition of a repayment moratorium on certain loans to foreigners and the compulsory restructuring of approximately $40 billion of outstanding short term treasury securities." (McArdle, 1998). The announcement led to a rapid decline in the value of the Rouble and a decline in confidence in the Russian Financial System as stated by (Terterov, 2003).
The crisis which was under the then-Premier Sergei Kiriyenko hand, also led to the default of Russia on gove
ment domestic debt forcing "its restructuring, and placed a 90-day moratorium on commercial exte
al debt payments. Those actions led to Yeltsin's dismissal of Kiriyenko on August 25,"(Cooper,1999). The aftermath of the crisis set back the living conditions, and the efforts of establishing a market economy.
Cooper in his study on the russian economy believes that "The Russian economy requires new investment, both foreign and domestic, to replace outdated and wo
-out capital assets and to build new infrastructure. But the crisis has undermined investor confidence, setting back prospects for economic growth."
Saxton (2002) in his studies identified different reasonings as to why currency crisis' occur. He blames the inconsistency of monetary policy in the affected countries and researches the link between Russia's financial Crisis and the inconsistency of the monetary policy. He emphasis the fact that the "A currency crisis is a situation in which a currency experiences heavy selling pressure (also called exchange market pressure or a speculative attack). There are a number of possible indications of selling pressure. One is substantial losses in the foreign reserves held by a country's monetary authority (the central bank or other body that issues the foreign currency)", which can be seen in the case of Russia's financial crisis in 1998. When looking at Cooper's (1999) study on the Russian financial crisis, he found that the foreign reserves had decreased, "commensurate with the sharp depreciation of the ruble has been the decline in Russian gove
ment holdings of foreign reserves, including foreign currencies". One of the major reasons as to why these crisis' occur is the lack of foreign reserves as seen in Cooper's (1999), Saxton (2002) and Chiodo and Owyang (2002) studies.
Three different generation models have been studied and developed by various economist which can be applied to financial crisis.
The first model was developed by Kingman (1979) and Flood and Garber (1984) which relies "on gove
ment debt and the perceived inability of the gove
ment to control the budget as the key causes of the currency crisis." Their studies argue that a speculative attack on the domestic currency can result from an increasing current account deficit (indicating an increase
in the trade deficit) or an expected monetization of the fiscal deficit.
The second generation models which were studied by Obstfeld (1994), Eichengreen, Rose,
and Wyplosz (1997), argue the "usefullness in explaining self-fulfilling contagious currency
crises". One possible scenario suggested by these models involves a devaluation in one
country affecting the price level (and therefore the demand for money) or the current account
by a reduction of exports in a neighboring country. In either case, devaluation in a
neighboring country becomes increasingly likely. The third model which is the most recent
studies by Krugman (1999) analyses the effects of monetary policy in a currency crisis as also
seen with Saxton's(2002) studies and research.
Komulainen (1999) in his research about the Russian Crisis also uses the different crisis
theory models. He states that First generation theories are based on monetary and fiscal
imbalance where as the second generation theories take into account investor expectation on
ment behaviour. These
expectations render the currency crisis self-fulfilling. The most recent theories explain the
spillover and contagion effect, underdevelopment of banking sector and market segmentation
and herding behaviour. These were devised mostly to explain the Asian crisis.
As seen with the three generation models different theories explain different crises'. For the
Asian crisis, new currency crisis theories might be most suitable. These are particularly
based on inadequate regulation of the banking or financial sector, which then after
liberalisation of capital markets, cause over-lending and over-investments in the economy.
When looking at Russia's financial crisis, the weakness in the economy of lack of foreign
reserves (Cooper, 1999) and a lack of Foreign investment rendered the country inefficient and
inclined to crisis.
"The acute reason for the currency crisis was the long-term deficit of the federal budget. This
rendered the stock of debt" (Komulainen, 1999)
Sipila (1998) argued that the Russian "crisis was not a traditional first-generation crisis
although the budget deficit was crucial in the developments. In a way the budget deficit is
even more important than it is in the first-generation models as in a transition economy.
especially Russia, the threat of resorting to inflationary financing was considerable."
Many aspects of this situation however have similarity to a second-generation crisis because
of a lack of a consistent policy in the country. Having said that, a problem can be seen with
the first generation approach which is that the Central Banks do not intervene into the markets
to protect the currency, for this reason economists devised other models.
Russia's Exchange Rate Crisis
As discussed earlier, exte
al economic indicators affected the extend of the crisis. The graph below shows the fluctuation of the exchange rate of the US Dollar and the Ruble during and after the crisis. One of the factors which contributed to the fluctuation of the exchange rate of the Ruble was the level of foreign direct investment as identified by Cooper (1999)
Source: Chiodo and Owyang (2002)
"Russia is a particularly attractive market for FDI due to the country's seemingly endless supplies of many of the world's most vital resources, improved economic and political performance under Putin, the pro-global economies of his gove
ment and major Russian corporations." (Terterov, 2003, p. 189)
The lower a country's debt the more attractive the country is to FDI .The public debt of Russia in 2003 was 34.80 % of GDP, the lowest level since 2000, however the Gove
ment debt which build up by 1998, demotivated foreign invesment into Russia as a result of the Asian Financial Crisis of 1997.
Since the two financial crisis' investors have become more cautious and more risk-averse towards emerging markets.
Factors affecting exchange rates
The Swiss Bank Corporation (1987) assesses that the factor affecting the exchange rates are "High inflation rales (caused by too generous a growth of the money supply) that lead to a weakening of the currency".
High inflation has an unfavourable effect on foreign investment because it creates downward pressure on real retu
s. Countries with lower inflation are more attractive for FDI. Overall annual inflation in Russia reached 11.7% in 2004, the lowest level since the 1998 Crisis (The Russian Jou
al "Inflation Rate to Reach 10% in Russia in 2005", April 2005).
Copeland (2000) argues that clearly the factors that determine exchange rates are the supply and demand but again these are made up of three categories which include Exporters, Foreign Investors, and Speculators.
In the market for foreign currency, the demand is smaller and the supply is greater when price rises. This is, because when the foreign currency, the dollar, is expensive (the Ruble cheap), imports and foreign investments are less attractive and, given market expectations, so is speculation on a rise in the price of dollars. Conversely, exporting and investing in Russia are more profitable at a low Dollar Price.
Most theoretical models of exchange rate exposures, such as Marston (2000), suggest that the firm's exchange rate exposure is a function of its net foreign currency revenues.
Russia today, ten years after the crisis, to have an overview of the change during the crisis and after it. Even though the Russian economy has experienced growth in the last eight years, as seen in the table below, there is still a need for Investments. These will improve the infrastructure, and create reforms for the financial system.
Source: Federal State Statistic Service (2008)
The paper has examined the events that led to the Russian Financial Crisis. Three type of models exist to explain this event.
After reviewing the three generations of currency crisis models, we conclude that four key ingredients can trigger a crisis: a fixed exchange rate, fiscal deficits and debt, the conduct of monetarypolicy, and expectations of impending default. The Russian default of 1998, shows that the prescription of contractionary monetary policy in the face of a currency crisis can, under certain conditions, accelerate devaluation. The literature has shown that the Asian financial crisis contributed to Russia's default, however the first and second generation models by Krugman (1979),Flood and Garber (1984) Obstfeld (1984) and Eichengreen, Rose, and Wyplosz (1997) do not capture every aspect of the crisis. The most important factor they ignore is the consistency and implemenation of the monetary policy.
With the case of Russia, the debt default, the lack of investor confidence, the inconsistent policies and exte
al economic indicators have all contributed to the collapse of the Russian Ruble agains the U.S Dollar.
1. Анализ производственно-хозяйственной деятельности организации 5
1. Проявление концепта "труд" в английской и русской фразеологии 8
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