8 - Currency crises in Russia and other transition economies

Summary

Recent currency crises have affected not only east Asian countries but transition economies as well. The Russian crisis of August 1998 was perhaps the most spectacular example. It was preceded by a series of currency crises in Bulgaria and Romania in 1996 and in Ukraine and Belarus in 1997–8, and was followed by similar crises in Kyrghyzstan and Georgia in late 1998 and in Kazakhstan in early 1999. Did these crises result from financial contagion that spread across the global economy? Or were they caused by national institutional factors similar to those in east Asia? This chapter argues that neither of the above explanations are completely true. It proposes a third explanation: currency crises in transition economies resulted primarily from domestic policy mistakes, but of a different nature from those in east Asia.

The argument will be developed in the following five sections. The first section will critically review the prevailing approaches to examining the Russian currency crisis, and evaluate their respective explanatory values. On the basis of the theoretical review, the chapter will proceed to a detailed discussion of the macroeconomic background and causes of the August 1998 crisis in Russia in the second section. The third section will extend the argument to a broader analysis of currency and financial crises in other transition economies. The penultimate section will explore the sociopolitical factors that underlay the mis-management of exchange rate policy.