The Russian Federation
From Financial Pariah to Star Reformer
This chapter traces Russia's descent into bankruptcy, from the collapse of the Soviet Union in 1992 to the sovereign default in August 1998, and the recovery strategy that followed. It ascribes the rapid accumulation of debt before the crisis to the macroeconomic stabilization strategy that was meant to contain the spurt of very rapid inflation as the Soviet Union disintegrated. Russia followed an orthodox strategy of tight money and a relatively fixed exchange rate, the latter acting as a nominal anti‐inflation anchor. However, the government also ran unconstrained fiscal deficits, which it financed by borrowing from domestic and foreign sources. By the eve of the crisis, as domestic wealth holders increasingly moved their funds offshore, foreign investors were still lending directly through purchases of international bond issues and domestic currency Treasury bills and bonds, for which they often hedged the risk of exchange rate devaluation through currency swaps with local banks.
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