The burning question for many emerging markets investors is: "What will happen next in Russia?" Looking at past emerging markets crises for answers provides both good news and bad. The good news is that following what is usually a painful adjustment process, countries that have experienced financial dislocation typically emerge to regain economic competitiveness. Ultimately investor confidence is restored and the countries regain rating agencies' approval. Unfortunately the good news pretty much ends there.
The history of past emerging markets crises provides grim detail of what usually happens during the downturn:
risk premia typically reach extremely high levels and the yield curve becomes steeply inverse, market volatility increases and the currency comes under pressure. Judging from past experience (as shown in the table), these phenomena can persist for years. Russia's interest rate risk premia are presently huge;
the large numbers of foreign direct and portfolio investors that pour money into...
