Chapter Eleven

Chapter Eleven
Globalization Interrupted: George Soros Returns, the Asian Financial Crisis, Russia Defaults.

Teach a parrot the terms supply and demand and you have an economist.
Thomas Carlyle (1795-1887).
Philosopher, mathematician and polemicist.

Chapter Highlights

In the late 1990s, the general advice given to those managers conducting business in Thailand had two standout elements over and above the typical corporate travel recommendations:

      1. Do not insult the King or Royal Family in any way, shape or form. This is a serious consideration in the conduct of international trade at the corporate level, especially where the foreign country is proudly republican (e.g. France, Germany) or frequently critical of the monarchies they do have (e.g. UK, Netherlands). Cultural sensitivity is a fundamental requirement for success as an international manager. Cultural arrogance, sadly, remains too common in the conduct of international business by multinationals, both by employees and the companies they work for. Be warned. Lese-majesty in Thailand will land you in jail: that experience won’t be pleasant, and you might be there for an indeterminate time, but you will deserve it. Forewarned is forearmed: don’t do it.
      1. Also, do not mention George Soros, preferably not at all, and definitely not with any hint of respect for the man.

The first point above is deadly serious. I have the travel advisory to prove it, provided by a major multinational company I was consulting for in Thailand during this period. The second point is not a joke. Soros became a hate figure amongst large swathes of Thailand’s population, a focal point of blame for the devastation to the country’s economy caused by the collapse of the Thai baht in 1997. He frequently figured in mass-market news channels and public news postings, always in a highly negative fashion.

Whether the vitriol was justified will not be debated here, nor will the culpability of the Thai politicians and civil servants responsible for Thailand’s failed monetary policy be assessed in any depth.

The Asian Financial Crisis

Whether your opinion of Soros is that he is a financial genius or a sordid speculator preying on the vulnerable is a discussion for a different forum. What happened is what matters when we come to explore the impact on the global economy of this ‘little local difficulty’ and the implications of this for the steady expansion of international trade and Foreign Direct Investment (FDI) into emerging and ‘frontier’ markets.

What Soros did was a de facto déjà vu of what he had previously done to the UK government in 1992. He correctly judged that the Thai baht was unsustainably over-priced and shorted it on a massive scale. Simply put, he thought the baht would devalue, backed his judgement and reaped the rewards.

Although the UK and Thailand scenarios had the same outcome (currency devaluation), the economic and political contexts of the two were markedly different. In both cases, Soros and his team carefully analysed the political motivations behind the two countries’ macroeconomic policies of setting a currency peg, always a perilous financial markets strategy when undertaken by overly ambitious or hubristic governments.

The critical point of departure between the UK and Thailand was that, although they ‘lost’ the skirmish, the UK could afford to take the battle to Soros. Although initially defiant, the Thais had to concede, lacking the foreign reserves to stay in the fight. They were forced to float the baht on July 2nd 1997, allowing its value to be determined by global currency markets. This, in turn, caused a chain reaction, eventually culminating in a region-wide economic drama, subsequently labelled the Asian financial crisis.

Like dominoes, in a process that economists call contagion, the currencies of other high growth countries in Southeast Asia collapsed (followed later by South Korea and Japan), wreaking havoc in the process and disturbing global financial markets. In tandem, stock market valuations slumped across the region, as did other asset prices (e.g. property), while corporate and private debt soared. After Thailand, the countries most affected were Indonesia, South Korea and Malaysia, while Hong Kong, Laos, the Philippines and even China were hurt. The little local difficulty had globalized.

It should be noted that a full economic recovery was achieved relatively quickly in the region, reflecting a defining characteristic of emerging and frontier markets: turbulence and tranquillity, aka volatility.


Russia Defaults

Undoubtedly the most significant single event at this time in terms of its global impact was that Russia, shortly after the onset of the Asian financial crisis and now under the stewardship of Boris Yeltsin, devalued the rouble on August 17th 1998, defaulted on its domestic debt and declared a moratorium on the repayment of its foreign debt.

Although not directly linked to the Asian crisis via trade or financial transfers, the ‘Russian flu’ had many similar economic problems, albeit tinged with a soviet hue of corruption, oligarchy and anti-capitalist political sentiment.

It is important to note that the debt default was the effect, not the cause, of the Russian crisis. At the time, the country’s Central Bank employed a ‘floating peg’ policy toward the ruble, which meant it managed the ruble-to-dollar exchange rate within a relatively narrow band (range). In practice, the Bank would intervene in currency markets by selling or buying rubles using its foreign reserves. As was the case with Thailand, this worked well as long as those reserves were plentiful and the economic conditions were benign.

For multiple reasons and long before the debt default, the Russian economy was in desperate need of reform, as was its fragile political system. The inability of the government to implement a series of coherent reforms dramatically eroded investor confidence which, in turn, instigated a vicious cycle of currency (ruble) and asset sales, the latter including property, stocks and bonds. This then put further downward pressure on the ruble, which forced the Central Bank to deplete foreign reserves through their interventions which again sapped investor confidence.

All of this happened just seven years after the collapse of Comecon and the dissolution of the Soviet Union. It sent shock waves throughout the capitalist community eager to invest in the new country, either to exploit its natural resources (e.g. in a joint venture with a Russian oil & gas company) or to tap into its fast-growing attractive demographic profile: young and relatively affluent consumers.

More generally, the Asian financial crisis commencing 1997 and the simultaneous Russian default in its wake sent shivers throughout the corporate world, shook investors to their core and forced recalibrations of the numerous FDI risk indices which multinational companies rely so heavily upon.

Except for the two World Wars of the twentieth century and the Great Depression that separated them, the combined impact of the Asian financial crisis and the Russian debt default delivered the most significant single systemic jolt to global financial markets in the history of the world economy.

Like an economic tsunami, the shockwaves it produced jumped continents and landed in Greenwich, Connecticut, USA, threatening Wall St., New York City, in its turbulent wash.


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All content © Colin Edward Egan, 2022