Case Study of a Currency Crisis: The Russian Default of 1998

This paper uses a currency crisis framework to analyze the currency devaluation and debt default of post-Soviet Russia in August 1998. The authors show that even though the Russian economy recorded positive growth immediately preceding the default, the atmosphere was reflective of an impending crisis. The authors then consider the symptoms of a currency crisis -- specifically public and private debt responsibilities, devaluation expectations, and contractionary monetary policy -- and show that they were present in Russia at that time. Three generations of currency crisis models are reviewed, followed by speculation that the Russian default was a product not only of fiscal deficits but also of a fragile financial system and contractionary monetary policy. The authors address the possibility that the usual prescription for a currency crisis, that is, increasing interest rates, may have accelerated the default and that a case-by-case prescription may afford a better solution than a blanket policy of increasing interest rates in the face of devaluation.