Russia’s 1998 debt default intensified the global market crisis and helped expose Long-Term Capital Management’s vulnerability.
On August 17, 1998, the Russian government devalued the ruble, declared a moratorium on some foreign debt payments, and restructured domestic ruble debt. The announcement shocked investors because Russian government securities had been treated by many market participants as relatively dependable instruments.
The resulting flight from risk widened spreads and disrupted markets well beyond Russia. Long-Term Capital Management, a highly leveraged hedge fund whose positions included complex fixed-income trades, suffered heavy losses as relationships that normally moved together diverged dramatically. The Federal Reserve Bank of New York helped coordinate a private-sector recapitalization of LTCM; the U.S. government did not directly bail it out.
The Russian event is sometimes reduced to simply a ruble devaluation, but the debt moratorium was equally important. The combination of devaluation and default made the shock especially damaging to investors holding Russian obligations and to institutions connected through global markets.