30 October 2003 09:05
Lex: Russia
When Russia produced a market shock in 1998, a global financial crisis nearly followed. Moscow's default on its
sovereign debt sparked a chain reaction that culminated in the near-collapse of Long-Term Capital Management, the US
hedge fund.
Could history now repeat itself? Certainly, the drama evokes deja vu. And if Russian assets prices slump, this will
probably hurt some hedge funds. However, a sovereign default and devaluation, amid an emerging market crisis, is very
different from the Yukos drama. Russia is far stronger than five years ago, not least because reserves are bloated by
oil revenues. Moreover, the global investing community is in a happier state. This drama has hit when global leverage is
relatively low, liquidity high and international financial sentiment improving. The last Russian shock, by contrast,
followed an Asian currency crisis, Japanese banking drama and a dramatic swing in the yen-dollar rate.
None of this means that regulators can relax: the one predictable feature of Russia is its ability to produce
unpredictable shocks. But the risk of serious contagion remains relatively low. And that, at least, is welcome news when
the rest of the Yukos tale seems distinctly grim.
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