Russia’s 1998 government default and ruble devaluation intensified the crisis known as the Russian financial crisis.
Russia struggled with weak tax collection, declining commodity prices, large budget deficits, and heavy short-term borrowing. Much of the government’s domestic debt was issued through instruments known as GKOs. Investors became increasingly doubtful that the state could maintain the ruble’s exchange-rate policy and service its obligations.
On August 17, 1998, the government announced a de facto default on domestic debt, a restructuring, and a widening of the ruble’s trading band. The ruble subsequently lost much of its value. Russian banks and businesses faced severe financial stress, and confidence in emerging markets deteriorated.
The shock also affected international financial institutions. The hedge fund Long-Term Capital Management suffered major losses on positions linked to Russia and other markets. The U.S. Federal Reserve helped coordinate a private-sector rescue, highlighting the danger that a market shock could spread through leveraged global finance.