ABSTRACT
Chapter 5 traces the roots of dollarization, back to the first years of independence and focuses on the hyperinflation of 1993–94, the birth of the Georgian national currency, the lari, in 1995 and the Russian economic crisis of 1998. These three developments are crucial for understanding the history of dollarization in Georgia. The hyperinflation of 1993–94 turned out to have a long-lasting traumatizing influence on the attitudes of the Georgian public towards a national currency. Moreover, this chapter deals with the geopolitical developments and debates on currencies in the post-Soviet space, explaining why it was the dollar and not the ruble that gained more power in Georgia after its independence.
The hyperinflation shook the trust of the Georgian public towards national money and government institutions, as well as the central bank. Even though the Georgian lari was successfully issued in 1995, it was predestined for weakness and challenges. The lari had to overcome the trauma of hyperinflation and compete against the existing dollar hegemony. The 1998 Russian crisis caused the first important test for the lari and led to its depreciation. The role of the dollar was further strengthened in the aftermath of the crisis and this trend proved to be hardly reversible.
