Russian financial crisis of 1998
Russia's August 1998 default on its ruble government paper, together with a 90-day moratorium on private payments abroad, the collapse of the ruble and the fall of the LTCM fund.
On August 17, 1998, the Kiriyenko government and the Central Bank of Russia issued a joint statement. The ruble band was widened to 9.5 rubles per dollar, against about 6.3 the day before. GKOs and OFZs, the ruble government bills and bonds maturing before the end of 1999, would be restructured, meaning they would not be paid. And for 90 days, Russian residents could no longer pay non-residents the principal on financial credits, margin calls on securities-backed loans or forward currency contracts. On September 2 the ruble floated; it ended the year beyond 20 to the dollar. Foreign investors had bought GKOs at yields of 50% and more, hedging the ruble with forward sales struck with Russian banks. The moratorium froze those hedges on the very day they had to pay, and several large Moscow banks, Inkombank and Menatep among them, later lost their licenses. The shock crossed the Atlantic. LTCM, a Greenwich fund running huge borrowed positions, watched its convergence trades blow out in the flight to quality, and the New York Fed brought the creditors together, and on September 23 fourteen banks and securities firms agreed to put in 3.6 billion dollars. The Federation itself kept servicing its eurobonds while it stopped paying debt inherited from the USSR: a default chosen series by series. For an underwriter, 1998 is still the textbook case of wrong-way risk. The currency hedge, the claim on the local bank and the sovereign risk were one risk, and it crystallized in one go. And a state moratorium on private payments abroad is a transfer event even when the debtor is solvent, provided the policy files it under political risks.
Textbook case: in July 1998, a fund holds 600 million rubles of GKOs and sells those 600 million forward to a Moscow bank, for October delivery at 6.30, to lock in 95.2 million dollars. In October the ruble trades at 16. Its rubles are worth only 37.5 million dollars, and the bank owes it the difference, 57.7 million. The bank invokes the August 17 moratorium and does not pay; by the following spring it has lost its license. The GKOs themselves are frozen in the restructuring. The hedge and the hedged risk defaulted together, for the same reason and in the same month.
Russian default 1998, GKO default, ruble crisis, 1998 Russian moratorium
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