Russia’s 1998 government default helped trigger the collapse of Long-Term Capital Management, commonly called LTCM. In August 1998, Russia devalued the ruble and declared a moratorium on some domestic debt payments, shocking investors who had treated Russian obligations as relatively manageable.
LTCM was a highly leveraged hedge fund founded in 1994. Its partners included prominent traders and economists, including future Nobel laureates Robert Merton and Myron Scholes. The fund used complex models and borrowed heavily to profit from small pricing differences between securities.
The Russian default intensified a global flight from risky assets. Positions that had appeared diversified became correlated as investors rushed toward liquid, safer instruments. LTCM suffered enormous losses and faced the possibility that a disorderly failure could destabilize markets.
The Federal Reserve Bank of New York helped arrange a private-sector rescue in September 1998. The central bank did not directly bail out LTCM, but coordinated negotiations among major financial institutions to prevent a wider panic.