Russian Financial Crisis

After the demise of the USSR in the latter part of the 20th century, the Russian economy was faced with the daunting task of completely rebuilding itself on political, philosophical, economic, strategic, and virtually all other grounds. While initial attempts at doing so had unsurprisingly brought about an economic crisis of sorts - Russia was mired in poverty and economic helplessness throughout most of 1991-1993 period - the country had a brief respite from economic maladies during the middle of the '90s, when foreign direct investment, coupled with political stimulus packages, worked to create what appeared to be the beginning of a new free market.

Unfortunately, though, Russia's crisis in 1998 has much of the same song and dance as other the Asian crises that wreaked havoc over an entire continent for much of the late '90s. As a developing nation, Russia - like the countries who eventually succumbed to the Asian currency crisis - was eager to establish relationships with already developed nations, nations that were looking for high growth investment opportunities. Accordingly, Russia sold debt to foreign investors, and allowed them to enjoy virtually unrestrained investment opportunities.

The result was that the Russian economy had become excessively dependent upon a sound global economy, as its capital flow model was based primarily on the existence of a demand for exports. When the currency crisis plagued Asian countries, though, Russia found that its strategy of using international investment to provide the fuel for internal growth was potentially doomed. The crisis in Asia resulted in plummeting prices for Russia's two most valuable sources of capital flows: energy and metals. Still a fragile economy, the rapid decline in the value of those two capital sources catapulted the entire economy into chaos: GDP tumbled, unemployment soared, and perhaps most painful, investors liquidated their Russian assets. The result was that the government was simply unable to pay back the debts it had issued, and IMF intervention was necessary.

As with all currency crises, the foreign exchange market was perhaps the greatest and most lethal predator of all, as its stranglehold on the market exchange rate ultimately dictated the crisis-enduring country's ability to access external help in its hour of need. On August 12 of 1998, Russia's central bank acknowledged this very fact, lamenting that the interbank market virtually paralyzed the ruble due to a lack of confidence and an unwillingness to create a liquid market for the currency. Russian Prime Minister Kiriyenko was particularly bothered by this, as he claimed there was no fundamental reason for the market to behave in a manner that resulted in such profound devaluation. Market uncertainty was reflected not only in the lack of liquidity, but in the excess volatility that ensued in its wake: the ruble made triple digit percentage moves on a regular basis, and given the decentralized nature of the foreign exchange market, its value was both erratic and subjective. Ultimately, the country relied on IMF assistance and massive changes in both fiscal and monetary policy to create a viable internal economy.

Today, Russia is still in the midst of rebuilding itself internally. Like many developing nations, its primary obstacle centers around the task of creating an infrastructure that allows creativity and entrepreneurial endeavors to flourish, but is not excessive to the point where it stifles growth. As the country rebuilds itself, it is slowly but surely inching its way back into the global economy and the powerful foreign exchange markets.