The Global Crisis of the Late 2000s and Currency Substitution: A Study of Three Eastern European Economies Russia, Turkey and Ukraine

For the last two decades, most of Eastern European countries moved towards open economies, including Baltic Countries, Ukraine and Russia. Some of these countries adopted the euro such as the case of Montenegro in 2002, Slovakia in 2009, Estonia in 2011, and finally Latvia in 2014. Adoption of the new currency helped these countries further integrate into a larger market, the Eurozone, and stabilize their economies against heavily fluctuating exchange rates. The governments of Ukraine and Russia, on the other hand, did not show interest to join the Eurozone and followed more independent currency policies along with the limited economic liberalization during the period of the 90s and the early 2000s. Similarly, Turkey, not a former Eastern Bloc country, but located geographically very close to these two countries did not peg its currency to the euro or the US dollar. All of these three economies in Eastern Europe had multiple deep financial crises, inflation, devaluations, and weak governments in the last two decades of the 90s and the 2000s (Lissovolik, 2003). For instance, Turkish lira depreciated from 13 TL/$ in 1973 to 1.5 million TL/$ in 2004 (Bahmani-Oskooee, 1996). As a result, of these negative experiences, local people of these countries developed a tendency to keep at least a portion of their savings in a foreign currency (Civcir, 2003). In the case of Turkey, the ratio of reserves held in the foreign currency over the local currency, which is a de facto measure of US dollarization, showed a steady rise during the period from 1983 to 1993, remained steady high around 50% until 2001 and decreased afterwards (Metin-Özcan, 2009). In short, these countries are examples of highly US dollarized countries (Havrylyshyn & Beddies, 2003; Kaplan, 2008). This paper is to investigate the changes in the currency substitution during and after the global financial crisis between 2007 and 2010 in Russia, Turkey and Ukraine. These three countries with large economies, recent strong US dollarization experience in the last two decades, and relatively open markets, provide good cases for understanding the global trend in the currency substitution and the status of the US dollar as a reserve currency.