The Russian Bailout: A Messy Policy gets Messier

CAMBRIDGE: Foreign policy in today’s world increasingly falls under the jurisdiction of investment bankers. Read about the future of Russian reforms, or the prospects of Chinese democracy, and as likely as not the commentators will be investment bankers. Obviously, these international money managers must constantly follow the news to make their portfolio decisions. But it’s equally true that these portfolio decisions are now determining the news, not merely following it. When money managers panic about economic prospects in one economy or another, they can create economic havoc and political chaos.

The dialectic of money and international politics was revealed again this week in Russia. The international money managers had decided that Russia was at the brink of the economic cliff. These investors were therefore stampeding out of Russia just one year after they had poured large sums into Russia. The huge and sudden outflow of money from Russia in turn threatened to force the Russians to devalue the Russian Rouble.

The investment bankers told us that such a devaluation would be a disaster for Russia, by provoking inflation, a loss of confidence in the government, and perhaps political crisis. Western governments believed this argument, and responded by offering Russia another $17 billion in loans from the International Monetary Fund, the World Bank, and some other sources. This money will now be used in part to repay foreign investors that are taking their money from Russia. Thus, the investors will get their money out, and Russia will avoid a devaluation . . . at least in the short run.

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