Russia suffered a currency and stock market crisis in 1998 that drove the dollar value of Russian stocks down to 10 percent of their pre-crash value. The crash caught investors by surprise, including hedge fund managers specializing in emerging markets. One hedge fund manager was quoted in the Financial Times (‘‘Funds Suffer ‘Confiscated' Russian Assets,'' by Eaglesham and Martinson, August 28, 1998, p. 22) as saying:
‘‘If Russia had taken over a plant belonging to General Motors, the government would have done something about it . . . . Essentially, the Russian government has confiscated Western capital, and nobody is doing anything about it.''
Is the risk of a market crash in an emerging economy a political risk or a financial risk? Explain.