Russia Defaults on Debt and Abandons Ruble Defense: Largest Sovereign Default in History Caps Decade of Economic Devastation

The Russian government under Premier Sergei Kiriyenko announced a sovereign debt default, devaluation of the ruble, and a 90-day moratorium on commercial external debt payments, marking the climax of Russia’s most serious economic crisis since the 1991 Soviet collapse. Three days after President Yeltsin stated unequivocally that the ruble would not be devalued, and just two weeks after the IMF approved an $11.2 billion emergency bailout (part of a $22.5 billion international package), Russia abandoned its defense of the currency. By September 21, the ruble had lost two-thirds of its value, reaching 21 rubles per U.S. dollar. The default was the largest sovereign default in history at the time and contributed to the collapse of the Long-Term Capital Management (LTCM) hedge fund in the United States, which required a $3.6 billion Federal Reserve-orchestrated bailout. Russia’s 1998 crisis represented the catastrophic culmination of seven years of ‘shock therapy’ economic reforms that had contracted GDP by 40-50% (worse than the U.S. Great Depression), caused hyperinflation that decimated savings, and triggered a mortality crisis killing an estimated 1.6 to 5 million Russians through collapsing life expectancy. Russian inflation in 1998 reached 84%, GDP contracted 5.3%, and unemployment hit 12% while average monthly wages were just $100. Between October 1997 and August 1998, the Central Bank had expended approximately $27 billion defending the currency. Many major banks including Inkombank, Oneximbank, and Tokobank collapsed. The crisis exposed the complete failure of the IMF’s structural adjustment programs and the neoliberal shock therapy model championed by Jeffrey Sachs, Harvard advisors, and the Washington Consensus. Within a year of the crisis, Vladimir Putin would become prime minister and then president, rising to power on promises to restore order after the chaos of the Yeltsin era and the economic devastation wrought by shock therapy reforms.