Introduction

Major stumbles in economic growth have had something to do with banking system problems. This was true of the Great Depression, true with the Asian financial crisis, and now again with the current global financial crisis. The illiquidity in the global financial market has affected the world, halting more than a decade of exuberant economic growth. It has particularly impinged on trade through reduced provision and high cost of trade finance. Problems in finance impact business operations, and usually especially affect the small- and medium-sized enterprises (SMEs) more. Thus, there is a need to focus research on SMEs and their performance during this time of crisis.

The chapter focuses on SMEs in Central Asia¹. SMEs in the former Soviet Republics were newly born following the breakup of the Union of Soviet Socialist Republics in 1991. While they quickly adapted to the new market economy, they struggled through the very challenging transition period characterized by, among other problems, an institutional vacuum. Then, when the economy had relatively normalized, the Russian financial crisis hit them towards the end of the 1990s. Now, after experiencing stable growth throughout the first half of this decade, the global financial crisis is again threatening to undo many of their past gains.

The chapter focuses on SMEs in Central Asia1. SMEs in the former Soviet Republics were newly born following the breakup of the Union of Soviet Socialist Republics in 1991. While they quickly adapted to the new market economy, they struggled through the very challenging transition period characterized by, among other problems, an institutional vacuum. Then, when the economy had relatively normalized, the Russian financial crisis hit them towards the end of the 1990s. Now, after experiencing stable growth throughout the first half of this decade, the global financial crisis is again threatening to undo many of their past gains.

The paper first provides a broad–brush discussion of how a financial crisis affects the real economy, the central role of banks in the lubrication of trade transactions, and why SMEs have difficulties accessing bank financing in general and trade finance in particular. Section 3 provides an overview of the Central Asian economy and discusses SMEs importance and discernible characteristics and features. Section 4 and Section 5 put forward a few pieces of evidence on the impact of the 1998 Russian and the current global financial crises on SMEs, drawing heavily from inferences based on firm surveys conducted in 1999 and 2005. The paper relies heavily on the Business Environment and Enterprise Performance Survey (BEEPS, or BEEP Survey) conducted by the European Bank for Reconstruction and Development (EBRD) to derive plausible conclusions on the likely effect on SMEs of the two crises, basing them on sector characteristics and features as well as revealed perceptions by the respondent firms. Section 6 discusses government support of SMEs, particularly their financing needs and problems. Section 7 summarizes and provides policy recommendations.

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