The Russian Crisis

The Russian Crisis

Why did the Russian economy go into a nosedive? Should one blame Russia? Or the capitalist system and especially financial markets?

The crisis built up as the Russian government failed to collect the taxes it needed to finance its expenses. It filled the gap by borrowing money. Originally, this expansion of government debt did not cause apprehension. The level of indebtedness—while increasing fast—was actually quite low by international standards. Also, for most of the time, Russia exported more than it imported. Foreign currency reserves seemed sufficient. Government bonds sold easily because of the high interest Moscow was willing to pay. They also attracted foreign buyers, and many Russian banks borrowed from Western banks (in Western currencies) in order to purchase these high-yielding papers, Western bankers were willing to “roll over” debt when it became due, which was often, as most of the government debt was short term. But the Asian crisis changed the mood of investors. They hesitated to roll over credits and if they did, they demanded a stiff price. Already-high interest rates on government bonds increased further. Servicing this debt became excessively costly.

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