THE WORLD BANK

The Russian crisis of 1998 is yet another instance of financial globalization contributing to an emerging market crisis in-stead of better resource allocation and faster growth. Exter-nal financial liberalization took place in the presence of weak country fundamentals, with financial globalization eventu-ally amplifying the vulnerability from the Russian Federa-tion’s combination of a fixed exchange rate and unsustain-able government debt dynamics. In particular, external portfolio investors—motivated by the expectation of a big official bailout—continued to finance the government’s debt build-up after mid-May 1998, even though it was obvious by then that a fundamentals-based crisis à la Krugman-Flood-Garber (Krugman 1979; Flood and Garber 1984) and Sargent-Wallace (1981) was unavoidable. As a result, Russia ended up with a much bigger external debt burden whe