uncertainty caused by the president’s ill health was compounded by
mounting economic problems. The government’s efforts to tighten
monetary policy produced in the short term an impressive reduction
in inflation and a significant improvement in confidence in the rouble.
In 1996 inflation was lowered to less than 50 percent and to under
15 percent by the onset of the Asian financial crisis in the autumn
spring and summer of 1997 expectations about Russia’s prospects
reached a high point. Market sentiment surged, boosted in part by
President Yeltsin’s election victory the previous year, and with the
news that, after a long and painful decline in output and living
standards, the Russian economy had finally begun to grow and
inflation was being brought under control.
During this period of
increased confidence in monetary policy, Russia took full advantage
of the surge in liquidity in international capital markets by
allowing foreigners to acquire government-issued paper. By 1996
operations with state securities, such as short-term government
bonds (GKOs), had emerged as one of the most lucrative financial
activities. The GKOs yields in some months exceeded an annual 300
and even 500 percent.
“financial stabilization,” however, was fragile and short-lived, as
proved extremely vulnerable to negative trends in the global
brief period of economic stability and growth, investors overreacted
and policymakers misjudged the degree to which they could take
advantage of the situation. The GKO short-term treasury bills turned
out to be a pyramid-type financial scheme, set up by the state that
was unable to
come to grips with the fundamental problem of fiscal viability.
reducing the budgetary deficit by improving tax collection and by
cutting back on federal spending, it preferred to finance that
deficit with the help of foreign loans and state securities, such as