The these in ationary spells helped close balance-of-payments

The relative stability accomplished in 1994–1995 proved unsustainable. The money supply had been taken under control but the underlying scal dis- equilibria continued. These equilibria were partly reduced and nanced by issu- ing Treasury securities to private investors rather than by central bank lending. However, domestic nancial markets remained shallow and foreign purchasers required high risk premia. Soon, the slow pace of scal adjustment and structural reforms, and continued output decline undermined the sustainability of such – nancing. The contagion effect from the Asian crises of 1997–1998, a strengthen- ing USD and the collapse of oil prices added to the market pressures. As a result, on August 17, 1998, Russia defaulted on its public debt obligations and abandoned the USD currency band, which led to ruble devaluation by three- quarters of its initial value. Soon market panics spread to other FSU countries, which were suffering from the same macroeconomic vulnerabilities as Russia. All but Azerbaijan and Armenia recorded substantial currency depreciation be- tween mid-1998 and mid-1999 (Fig. 1). Russia and Ukraine were forced to rene- gotiate their government debt obligations with creditors. Banking crises occurred in Russia, Ukraine, Kazakhstan, and Kyrgyzstan; these were additional examples of the rst-generation model of currency crisis. Abrupt devaluation led to a new wave of high in ation; fortunately, in most cases, these in ationary bouts were rather short-lived (Table 2). Moreover, these in ationary spells helped close balance-of-payments gaps and increased nominal budget revenue while expenditures were not fully indexed. 3.4. Fallout from the global nancial crisis (2008–2009) The 1998–1999 crisis was followed by almost a decade of high growth, much lower in ation (but nonetheless higher than in ation in other transition and emerging-market economies at that time), better scal performance (particularly in the oil and gas producing and exporting countries), growing international re- serves, higher demand for domestic money balances and relative exchange rate stability (Dabrowski, 2013). This period resulted from favorable global condi- tions, i.e., abundant liquidity, high oil and other commodity prices (Fig. 2), large- scale capital in ows, and reaping the initial rewards attributable to the decade- long structural and institutional transformation. However, the global macroeconomic shock triggered by the nancial crisis in the US and part of Europe spanning the 2007–2009 period set back most of those accomplishments. The global liquidity squeeze, particularly following the bank- ruptcy of the Lehmann Brothers in September 2008, led to massive capital out- ows from emerging markets. A bit earlier, in the summer of 2008, the previ- ous commodity bubble burst, with oil prices plummeting to one-third of their pre-crisis peak (Fig. 2). As result, Russia and other FSU economies experienced capital out ows, declines in foreign exchange reserves, depreciation of their cur- rencies (Fig. 3), deterioration in scal accounts, GDP declines or stagnation, and tensions in their banking systems. However, the scale of currency depreciation was smaller than a decade earlier and one country (Azerbaijan) even recorded currency appreciation during this period. As discussed above, the FSU economies (with the exception of Belarus and (partly) Ukraine) entered the period of the 2008–2009 global turmoil with more solid macroeconomic fundamentals than they brought to the 1998–1999 crisis. Therefore, a third-generation model of currency crises (microeconomic over- borrowing plus negative external spillovers and contagion) can be conceived of in place of the rst-generation model that effectively explained the causes of pre- vious crises (in late 1980s and 1990s). Although the global liquidity squeeze was overcome in the spring of 2009 by aggressive monetary policy easing of the major central banks, and global trade, GDP and commodity prices began to recover in the second half of 2009, Russia and other FSU countries did not return to their previously high growth rates. Other macroeconomic indicators also deteriorated compared to the pre–2008 period.