The process of building a market-based financial system in the countries of the Former Soviet Union (FSU) and other transition economies has been doubly complex. In the first place the transition countries have needed to contend with the problems faced in the 1990s by all developing economies that opened themselves up to the world's financial markets. Access to the international capital markets can bring important benefits, especially financing for much-needed infrastructural and capital projects, given the pressing need for many transition economies to upgrade and replace the capital stock they inherited from the centrally planned system. However, it also can carry significant risks. The potential for such capital flows to induce serious disruptions in the process of development has been widely documented and analysed, and was graphically illustrated by the worldwide financial crisis that began with the Asian currency crises in 1997 and was compounded by the Russian Treasury Bills (GKO) default in 1998. Unless domestic financial systems are especially robust, they will be unable properly to intermediate the flows of international capital, and their failure to do so may result in serious banking or currency crises.
The problem of a weak domestic financial sector intermediating international capital flows is common to both the transition and developing economies. But while institutional development has been an issue for other developing economies as well, in the transition economies this problem has assumed qualitatively different dimensions. They have needed to build a market-based financial system from a starting-point in which financial institutions had played little more than a passive record-keeping role, and in which market prices and property rights were almost completely absent under the socialist system. This book is concerned with the process of building viable, market-based financial