The Russian Default and the Contagion to Brazil

Abstract

In the aftermath of the Russian crisis in August 1998, a series of events led to the Brazilian crisis that culminated in the floating of the real in January 1999. The timing of the events led academics and policy makers to suspect that there was contagion from the Russian crisis to Brazil. If true, the transmission of pressure from Russia to Brazil would be a special case among the financial crises episodes seen in the 1990s. In contrast to the Mexican (1994) and Thai (1997) crises, the Russian contagion to Brazil appears to have crossed regional borders, thus leading to a number of interesting questions. Given the lack of substantial trade and direct financial linkages, why did the Russian devaluation prompt capital flight from Brazil? Why did some countries with similar fundamentals and stronger economic links not have a crisis (as for example Hungary)? In this paper, we attempt to verify the contagion presumption, and to analyze related issues that can aid our understanding of financial crises and contagion.

The authors thank the conference participants during the Bank-Fund Joint Conference on Contagion, especially Maria Sole Peria and Roberto Rigobon, for helpful comments. Additionally, we thank Julian Berengaut and Oleh Havrylyshyn for helpful inputs, Monica Cardoso, Leandro Rothmuller, and especially Diane Fisher for excellent research assistance, as well as Daniel Gleizer for the short-term exposure data on Brazil.