Playing a Few Hands at Russian Roulette: Anatomy of the Russian Currency Crisis

Abstract

There are two schools of thought on causes of financial crises. One views such occurrences as homegrown, a consequence of structural weaknesses of the banking and corporate sector in the countries concerned. The other is of the view that financial crises are brought on by investors' panic reactions triggered by rapid accumulation of short-term debt as a result of capital market liberalization. Judging from the immense amounts of research papers written in the aftermath of the financial crises that gripped the attention of the global community while ravaging the world economy in the 1990's, it seems that there is no single cause or trigger of such events. Rather, financial crises are the offspring of a myriad array of factors and dynamics. These include, but are not limited to, globalization and financial liberalization of the economy; investment boom and bust; dollar-pegs and over-valuation of the currency; rapid increase of non-performing loans in the banking sector; corporate sector weaknesses; large-scale short-term borrowing from foreign banks; depletion of foreign exchange reserves. In an attempt to illustrate and uncover the many layers and intricacies of the Russian financial crisis, we will attempt to show various trends of the Russian economy, contagion between Asian and Russian crises, micro-and macro-economics disequilibrium, and argue that models of first and second generation best describe the domino effect of the Russian currency crisis.