Financial Crisis, Economic Recovery, and Banking Development in Russia, and other FSU Countries

This paper provides a unified analysis for the onset of the 1998
financial crisis and the strong economic recovery afterward in
Russia and other former Soviet Union countries. Before the crisis a
banking failure arose owing to the coexistence of a lemons credit
market and high government borrowing. In a lemons credit market low
credit risk firms switched from bank to nonbank finance, including
trade credits and barter trade, generating an externality on banks’
interest rates. The collapse of the treasury bills market in the
financial crisis triggered a change in banks’ lending behavior,
providing initial conditions for banking development.