Introduction Ch. 1. The characteristics of financial crisis situations Ch. 2. The identificators of currency crisis Ch. 3. The essence of financial crisisies of 1997-1998 Ch. 4. The Russian financial crisis of 1998 be seen from an exchange rate point of view Ch. 5. What effects did the Russian financial crisis of 1998 have on the exchange rate, and what were the causes of the crisis Ch. 6. Could the Russian financial crisis of 1998 have been forseen, and how did it affect the exchange rate during the period of the crisis Ch. 7. Recommendations Conclusion Bibliography
INTRODUCTION
Actuality and Scientific Value. The decade of the 1990s was certainly marked by a rather unusual number of financial and economic crises with the Asian Crisis of 1997 and the Russian Crisis of 1998 as perhaps the most prominent such cases. These crises naturally renewed interest in the study of the relevant causes, consequences, and cures for such episodes. In the wake of these recent events, one very important question has been the need and the feasibility of predicting such crises. Purpose of Research. The given paper will be aimed at deriving lessons from the Russian financial crisis through examining the root causes of macroeco-nomic and financial sector indicators spanning the period 1997-1999. Subject of Research - the financial crisis in Russia of 1998. Objects of Research. The significant variables of Russian economy at 1998 state - foreign direct investment, inflation, world oil prices, real interest rates, current account, foreign exchange reserves, stock prices, real exchange rate, and export growth will be examined in the work. Tusks of Research: - to study the conception of financial crisis in economics; - to give a notion of the financial crisis of 1998 in Russia; - to study the causes of the financial crisis of 1998 in Russia; - to give characteristics of the financial crisis of 1998 in Russia; - to describe the process of the development of the financial crisis of 1998 in Russia; - to work out recommendations on regulation techniques of the financial crisis. The theoretical base of research composed the following works. While the different types of crises could range from “garden variety“ cur-rency crises to rather esoteric real estate bubbles, studies of such crises exhibit empirical and theoretical commonalties which will be highlighted below (for types of crises, see IMF World Economic Outlook, 1998). Also, these crises can have significant social costs as noted in Shabbir (1999). In an attempt to note possible empirical regularities, Kaminsky et al (1998, Vol. 45, No 1) reviews about twenty-five relevant studies. Due to the disparate nature of the studies in terms of their methodologies and specifications, the overall empirical results do not provide “a clear-cut answer concerning the usefulness of each of the potential indicators of currency crisis“. Kaminsky et al (1998, 90) also presents an extension of previous work which employs the 'signals' approach to identifying and predicting currency crises. Based on empirical results for a sample of fifteen developing countries and five industrial ones during 1970-95, the authors report that the variables with the best track record in anticipating crises include output, exports, real exchange rate deviations, equity prices and the ratio of broad money to gross international reserves. Epitomized by Krugman (1979, 99), the First Generation Models tend to focus on the role of economic and financial 'fundamentals' such as the unsustainable fiscal policies in the face of the fixed exchange rate as the major cause of an eventual currency crisis. Given a fixed exchange rate regime, the persistent need to finance government budget deficits through monetization would surely lead to a reduction in the international reserves held by the Central Bank. Since such reserves are finite the speculative attack on the currency is the eventual outcome of this scenario. This rather simple model suggests certain 'fundamental' imbalances such as the gradual decline in international reserves, growing budget and current account deficits, domestic credit growth, and gradual exchange rate overvaluation as the potential early warning indicators of speculative attacks. The development of the so-called Second Generation Models of the currency crises were motivated by the EMS currency crisis in 1992-93 where some countries such as the UK and Spain suffered crises despite having adequate international reserves, manageable domestic credit growth and non-monetized fiscal deficits - characteristics that ran counter to the necessary conditions asserted by the first generation models. Obstfeld (1994, 190) and Krugman (1998, 67) addressed the concerns raised by these counter-examples. The main innovation of these Second Generation Models lies in identifying the role that the 'expectations' of the market agents may play in precipitating currency crises. These models allow for “multiple equilibria“ and, under certain (generally untenable) circumstances of perfect information-based decision making, could argue that predicting crises may not be feasible due to the 'self-fulfilling' nature of the expectations of the crisis. Finally, the Third Generation Models are based on the notion of 'contagion' where the mere occurrence of a crisis in one country increases the likelihood of a similar crisis elsewhere As described in Masson (1998, Working Paper 120), three related scenarios can be identified to represent the paradigm of contagion: 'monsoonal effects', 'spillover effects' and 'pure contagion effects'. The basis Resources of the analytical part of research includes: - The Analytical Report & Macroeconomic Analysis by short-term forecasting institute of economic forecasting of the Russian Academy of Science; describes bank system of Russia per 1996-2000 and presents models of functioning, the tendency, prospect of development - The World Economic Outlook Review (1998) presents the IMF staff’s analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries. It focuses on major economic policy issues as well as on the analysis of economic developments and prospects. It is usually prepared twice a year, as documentation for meetings of the International Monetary and Financial Committee, and forms the main instrument of the IMF’s global surveillance activities. - Financial Stability Review Financial Crisis Management Articles 1998 (1999). The Financial Stability Review is essentially aimed at financial sector players and observers, such as decision makers, academics and market participants. It reviews developments affecting financial institutions, markets and their infrastructures from a cyclical and structural perspective. - The annual report of the Central Bank of Russia (1998). The transformation of financial systems has highlighted several potential sources of instability, such as financial bubbles, bouts of market volatility and changes in the allocation of risk between participants. At the very heart of the financial system, central banks play a decisive role in preserving its stability. For this reason, they carry out a thorough analysis of the soundness of the financial system's various components, based on a close dialogue with its main relevant players. Aimed at encouraging analysis and exchanges of views, the Financial Stability Review is divided into two parts. The overview provides a detailed account of recent developments in the international environment and the financial system addresses financial vulnerabilities and sheds light on the initiatives designed to enhance financial stability. Hypothesis of research: Can we state that political crisis in complex with macroeconomical factors initiated the financial crisis in Russia of 1998? What factor was more essential? Structure of Research. The given research includes presentation, introduc-tion, two chapters (theoretical and analytical ones), conclusion, list of references and appendix. Analysis part was devoted to studying of all the questions enlightened the main characteristics of the financial crisis in economics; the basic features of financial crisis of Russian economy in 1998; the state of the Russian economy in 1998, of the bank system and inner market state. The research examined the default identifications in 1998 in bank system and causes of financial crisis of Russian economy in 1998. In Conclusion the lessons from the situation of Russian default of 1998 will be identified.
METHODOLOGY
Methodology of research embraces the following stages: 1. Statement of theory of hypothesis. 2. Obtaining the data: a) Primary data (interviews, periodical materials); (Appendix 2) b) Analytical foundation (statistics, analytical reports). (List of resources) The tested 10 indicators are selected on the basis of currency crisis theories and further empirical literature. In addition to the traditional macroeconomic variables, we include several indicators describing the vulnerability of domestic banks. These indicators include the growth of bank deposits, the ratio of the lending rate to the deposit rate, and the ratio of bank reserves to assets. We also employ variables that indicate vulnerability to a sudden stop of capital inflows. These variables are public debt, broad money to reserves, and private sector liabilities. 3. Estimation of the parameters of the data. The basic tool for this purpose is served by the financial analysis, through which it is possible objectively to estimate the internal and external attitudes of analyzed object. As it was mentioned earlier, the recent efforts at devising an early warning system for an impending financial crisis have taken the form of two related ap-proaches. The first approach estimates a probit or logit model of the occurrence of a crisis with lagged values of early warning indicators as explanatory variables. This approach requires the construction of a crisis dummy variable that serves as the endogenous variable in the probit or logit regression. Classification of each sample time point as being in crisis or not depends on whether or not a specific index of vulnerability exceeds an arbitrarily chosen threshold. For example, for currency crises, the index of vulnerability is sometimes based on a weighted average of percentage changes in nominal exchange rates, gross international reserves and short-term interest rate differentials (e.g. local versus US rates when dealing with crises in the Philippines). Explanatory variables typically would be variables in the real sector of the economy, financial variables, external sector and fiscal variables. This approach has the advantage of providing a framework for statistically measuring the magnitude and significance of the effects of various potential explanatory variables on the onset of a crisis. The estimated model also allows the estimation of the probability of occurrence of a crisis in the future given projected or anticipated values of the explanatory variables. Negative aspects of the approach partly derive from the following: 1. The model does not address the independence of crisis occurrence from period to period - except indirectly through serial correlations that exist in the explanatory variables. 2. Additional serial correlations may even be introduced inadvertently through the explicit manner in which the crisis dummy variable is constructed. For example, the use of exclusion windows (where the crisis variable automatically is set to zero for k periods immediately following a time point rated to be in crisis) establishes perfect correlation between a crisis time point, and the next k periods following it. In general, any serial correlation in the crisis dummy variable which is not taken into account in the probit or logit regression would cause the estimates of the model to be inconsistent. 3. Another source of inconsistency: errors in the construction of the crisis dummy variable leading to misclassification of time points - either a false signal of a crisis or a missed reading of a crisis. 4. The method does not provide a direct measure of the weakness or intensity of the signal of each explanatory variable regarding the onset of a crisis. The second method uses a signaling approach to get a more direct measure of the importance of each candidate explanatory variable. The approach constructs a similar binary variable from each explanatory variable - thus imputing a one (for crisis) or a zero (no crisis) signal from each explanatory variable at each point in time in the sample. A signal-to-noise is then computed for each explanatory variable over the whole sample period - as a quantitative assessment of the value of the variable as a crisis indicator. This signal-tonoise ratio is defined as the ratio of the success rate of crisis predictions relative to the false alarm rate. More specifically, this approach allows a direct ranking of variables as crisis indicators and provides a quick focus on the source of the crisis (assuming an encompassing set of indicators). But the approach does not take into account strong correlations among indicators, provides no framework for statistical testing or calculation of crisis probabilities in the future, and is still open to misclassification errors that can bias the conclusions of the analysis. Probit and logit models, pioneered by Frankel and Rose (1996), use limited dependent variable models known as probit or logit regressions to identify the causes of crises and to predict future crises. This approach defines a crisis indicator equal to one or zero depending on whether a currency crisis does or does not occur within the specified time period. Frankel and Rose (1996) attempted to find out how international debt structure and external factors affected the probability of currency crises. They used a number of external, internal and foreign macroeconomic variables in a multivariate probit model specified for 105 developing countries, covering annual data from 1971 to 1992. They defined a crisis as at least 25% depreciation of the nominal exchange rate that also exceeds the previous year's depreciation level by at least 10% and constructed a dummy crisis variable according to that rule. Results of their model indicate that the significant variables are output growth, foreign direct investment/total debt, reserves, domestic credit growth, external debt and foreign interest rates. Sachs, Tornell and Velasco (1996) also used a probit model to analyze currency crises, particularly the Mexican Tequila Crisis of 1995, using a sample of 20 emerging countries that were vulnerable to contagion effect. They used the weighted sum of the percent decrease in reserves and the percent depreciation of the exchange rate as their crisis index. (International Journal of Applied Econometrics and Quantitative Studies Vol.1-4(2004)
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RESOURCES
28. Bank system of Russia per 1996-2000: models of functioning, the tendency, prospect of development: the Analytical report / the Center of the macroeconomic analysis and short-term forecasting institute of economic forecasting of the Russian Academy of Science // [E-resource] - Access: www.forecast.ru 29. IMF World Economic Outlook, 1998 // [E-resource] Access:www.imf.org 30. Financial Stability Review Financial Crisis Management Articles 1998 // Issue 5, Autumn 1999. 31. Russia’s Economic and Financial position in 1998 // The annual report of the Central Bank of Russia (1998) [E-recource] - Access: www.cbr.ru
Statistics and materials of periodicals
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