Washington, 2 September 1998 (RFE/RL) --Russia's economic difficulties are affecting Western markets because they are affecting the Russian political system, a logic that is sometimes ignored but helps to explain what may happen next.
As numerous observers have pointed out, Russia's economy is simply too small and its integration with the international economy too limited to have the kind of direct impact on most Western economies that problems on the Pacific rim already have.
But despite that, the Russian economic crisis may end by having an even larger if indirect impact on the stock markets of the world through its impact on the Russian government.
That is because the Russian state looms very large on the world stage even if its economy is relatively small. And this indirect impact of the Russian economic crisis will thus have a profound impact on what Western investors are likely to do and on how Western governments are likely to respond.
Buffeted by the Asian economic downturn, difficulties in Latin America and in the so-called emerging markets, and political uncertainties in the West itself, many investors are adopting an ever more cautious approach.
And the very public political crisis in Russia, a crisis triggered by the effective devaluation of the ruble, the rescheduling of Russian debt, and the collapse of the Moscow stock markets has led investors to conclude that Russia is now one of the riskiest places to have their money.
But even if they sold off all their Russian equities, that alone would not be sufficient to explain the declines in Western markets that many analysts have linked to Russian developments.
Instead, these Western investors now appear to view the political problems in Russia as casting a shadow on their own earlier optimistic expectations that the post-Cold War world would be one in which economics rather than politics defines their actions.
Calculations of this kind have the effect of dramatically multiplying the impact of the Russian economic crisis on the world's financial markets.
But such an analysis not only helps to explain why many Western stock markets have declined on the basis of news from Russia. It also helps to predict how Western governments are likely to respond.
For them as for the investors, the Russian problem has never been a purely economic one. And consequently, the responses of Western governments to Russian economic difficulties are likely to be driven less by economic calculations than political considerations.
If Western governments conclude that a change in direction in Moscow would have the most negative of consequences for themselves, they may be willing to provide some additional support for the Russian economy, even if the economic conditions and related political institutions in Russia do not appear to justify such steps.
And even those Western investors who are now reacting to the Russian crisis and seeking to pull their money out of investments there are likely to support such moves less out of a conviction that they will solve the Russian economic problem than out of a fear that failure to do something may exacerbate the Russian political problem.