The Russian financial crisis and eventual default is often cited as a counterargument to one of the principle MR ideas that a sovereign currency issuer should not be able to go bankrupt. It’s a complex subject that is worth spending some time on.

Russia was a rather unique situation. Most people who study the Russian default are fixated on the fact that Russia defaulted on their debt. They focus almost entirely on the ultimate cause of death without actually studying what led to the default. This is similar to studying a man who dies of a heart attack and concluding that his bad heart was what was wrong with him. And while that might be true, a more thorough examination is likely to show you that a series of things (diet, smoking, lack of exercise, etc) actually led to broad problems that ultimately culminated in a heart attack. This lack of analysis leads many observers to conclude that Russia had too much debt, defaulted, end of story. This sort of simple analysis leads to simple conclusions which leads to misconceptions. The truth, as is generally the case, is more complex.

When one looks at the history of Russia you actually find many similarities with my conclusions in “Hyperinflation – It’s More Than Just a Monetary Phenomenon“. In the case of Russia, we actually have many of the same elements leading to hyperinflation and then default. In this particular case, we have loss of a war, regime change, collapse of the tax system, political corruption, foreign denominated debts and collapse of productivity. In other words, from an MR perspective, this country was ripe for self destruction as they met almost all of the criteria that precede a hyperinflation and/or crisis resulting from ceding of monetary sovereignty.

I don’t have nearly the time or the space to cover the sequence of events in its entirety, but it’s important to understand that Russia’s eventual hyperinflation and 1998 default is actually rooted in the break-up of the USSR which occurred in 1991. The dissolution of the USSR was the largest dissolution of any socialist state and resulted in 15 sovereign states. Russia was the surviving state formerly known as the USSR and the burden that accompanied this was extraordinary. As you can imagine, the collapse of one of the worlds super powers was highly traumatic as the government and its people attempted to transition. Here we have the first two common elements in hyperinflations – loss of a war & regime change. The third crucial element was foreign denominated debts from their Soviet predecessors. How problematic was this? Pravda explains how Russia only just managed to pay off this heavy burden a few years ago:

“The Soviet Union left a huge debt after its collapse. Russia became the only country to inherit not only the foreign property of the former USSR, but all of its foreign debts as well. It was extremely hard for Russia to serve the debt because the economy was declining steadily in the beginning of the 1990s. The Soviet debt had been restructured four times before the default of 1998. By 1999 Russia managed to either write off or delay the payments to private creditors (the London Club, for instance). However, such a compromise proved to be impossible with the Paris Club of Creditors.”

From an MR perspective, the story essentially concludes itself right there. This country was never truly sovereign because it was essentially a currency user when the new regime was established and Russia was saddled with the foreign denominated debts of the old USSR. In other words, ceding your monetary sovereignty proved disastrous as we’re now seeing in Europe. But there’s actually more to it than just that. Their errors multiplied as the years went on.

Many analysts and critics of the Russian default like to imply that Russia was simply spending uncontrollably and that their default is an excess of spending and government largess. But that’s not exactly accurate. Turmoil in the regime change and political disunity made tax collections increasingly difficult as the new regime took control. The St Louis Fed cites corruption and the drop in tax collections as the primary cause of the ballooning deficit:

“Another weakness in the Russian economy was low tax collection, which caused the public sector deficit to remain high. The majority of tax revenues came from taxes that were shared between the regional and federal governments, which fostered competition among the different levels of government over the distribution. According to Shleifer and Treisman (2000), this kind of tax sharing can result in conflicting incentives for regional governments and lead them to help firms conceal part of their taxable profit from the federal government in order to reduce the firms’ total tax payments. In return, the firm would then make transfers to the accommodating regional government.”

The country would eventually go to the IMF in 1996 seeking aid. This further relinquished their sovereignty. All the while, inflation was ravaging the country leading to unrest and increased economic turmoil. Their rolling hyperinflation leftover from the trauma of the collapse of the USSR never really ended. Even into the late 90’s the country suffered from high double digit inflation:

The lack of economic diversity (their economy was highly dependent on oil exports) and foreign denominated debts made it vital that they grow via their trade surplus. In attempting to achieve this the country further ceded sovereignty by implementing a peg to the US Dollar. Further, in 1998 the Russian government cited the tax issue as a serious risk to the regime. They attempted a complete overhaul of the tax system, but the damage had already been done. As the Asian Crisis erupted in the late 90’s the fragility of the Russian economy was exposed. The government attempted to protect the Ruble during the crisis leading to massive hemorrhaging of FX reserves. In a 1998 paper Warren Mosler explained the impact of this policy:

“The marginal holder of ANY ruble bank deposit, at any Russian bank, had a choice of three options before the close of business each day.

(I will assume all rubles are in the banking system. Actual cash is unnecessary for the point I am making in this example.)

The three choices are:

Hold rubles in a clearing account at the Central Bank

Exchange ruble clearing balances for something else at the CB.

Buy a Russian GKO (tsy sec), which is an interest bearing account at the CB

b. Exchange rubles for $ at the official rate at the CB

For all practical purposes, 2a and 2b competed with each other. Russia had to offer high enough rates on its GKOs to compete with option 2b. In that sense interest rates were endogenous. Any attempt by the Russian Central Bank to lower rates, such as open market operations, would result in an outflow of $US reserves. The conditions for a stable ruble could not coexist. The net desire to save rubles was probably negative, the failure to enforce tax liabilities resulted in deficit spending even as the government tried to reduce spending, and the higher interest rate on GKO’s increased government spending even more.

At the time GKO rates were around 150% annually, and the interest payments themselves constituted at least the entire ruble budget deficit. It seemed to me that higher rates of interest were the driving factor behind the excess ruble spending which led to the loss of $US reserves.

With the $ in high demand due to a variety of factors, such as domestic taxed advantaged $US savings plans, insurance reserves, pension funds, and the like, and, exacerbating the situation, what could be called overly tight US fiscal policy, there was, for all practical purposes, no GKO interest rate that could stem the outflow of $US reserves.

The main source of $ reserves was, of course, $ loans from both the international private sector and international agencies such as the IMF. The ruble was overvalued as evidenced by the fact that $ reserves went out nearly as fast as they became available. The Russian Treasury responded by offering higher and higher rates on its GKO securities to compete with option 2b, without success. This inability to compete with option 2b is what finally leads to devaluation under a fixed exchange rate regime.”

But that wasn’t all. The global economy began to decline sharply as the Asian Financial Crisis unfolded in 1998. Russia was particularly hard hit as the oil and non-ferrous metals markets collapsed. The shock was enough to drive investors to believe that the Ruble would be massively devalued or debts would be defaulted on. In other words, Russia was built on a poor foundation and then driven into the ground as a series of events battered their economy and government.

In sum, you had a nearly perfect environment for a major economic calamity. And like my study of past hyperinflations, we find that the Russian default was actually much more than just a monetary phenomenon. In fact, it was rooted in much more devastating and complex issues than merely running high sovereign debts. The primary causes include regime change, loss of a war, foreign denominated debt and loss of monetary sovereignty via a pegged currency.

N.B. - It should go without saying that this situation is not even remotely analogous to the current situation in the USA.

Addendum – A brief note on willingness to pay via Warren Mosler:

“An extreme example is Russia in August 1998. The ruble was convertible into $US at the Russian Central Bank at the rate of 6.45 rubles per $US. The Russian government, desirous of maintaining this fixed exchange rate policy, was limited in its WILLINGNESS to pay by its holdings of $US reserves, since even at very high interest rates holders of rubles desired to exchange them for $US at the Russian Central Bank. Facing declining $US reserves, and unable to obtain additional reserves in international markets, convertibility was suspended around mid August, and the Russian Central Bank has no choice but to allow the ruble to float.

All throughout this process, the Russian Government had the ABILITY to pay in rubles. However, due to its choice of fixing the exchange rate at level above ‘market levels’ it was not, in mid August, WILLING to make payments in rubles. In fact, even after floating the ruble, when payment could have been made without losing reserves, the Russian Government, which included the Treasury and Central Bank, continued to be UNWILLING to make payments in rubles when due, both domestically and internationally. It defaulted on ruble payment BY CHOICE, as it always possessed the ABILITY to pay simply by crediting the appropriate accounts with rubles at the Central Bank.

Why Russia made this choice is the subject of much debate. However, there is no debate over the fact that Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default. “


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • CFS


    Great post, thanks – it definitely answers my questions about Russia’s default.

  • Wasabi

    Cullen, thank you very much for this helpful article. It cleared up a lot of things for me. Another aspect worth remembering is that Russia in no way equals the old USSR. The land area of Russia is 23.8% smaller than that of the former USSR, and the population of Russia in 2010 was only 48.8% of the population of the USSR in 1991: for the USSR, the population was about 293 million, and the population of Russia is about 142.9 million. That’s an incredible drop. How would the US economy perform if the US population were suddenly more than halved?

    If you know, could you tell us sometime about the status of MMT in Russia now?

    A small point: “This further relinquished them…” –> “This caused them to relinquish…even further…”

  • Barbra

    Oy. I’ll get back to this. You’re going too fast.

  • Neil Wilson

    What this shows is that understanding the currency system doesn’t automatically eliminate bad managements.

    It is perfectly possible to send the economy down the drain even with a perfect understanding of the monetary system.

    It’s just easier to send the economy down the drain if you don’t understand what you’re doing.

  • Sherman McCoy

    Interesting and informative. What about the UK in 1973. Why did they need an IMF bailout? Weren’t they able to issue all the pounds they needed?

  • Barbra

    Don’t EVEN start. I’m already stressed.

  • suckmybishop

    didn’t help having a corrupt idiot like Yeltsin at the helm. makes even Putin look like jesus.

  • Brian Konash

    The bulk of Russia’s 90’s era tax receipts were oil and natural gas price-based. They still are. This article would have done better to focus on those as the primary reason for the default. Remember 0.85cent/gallon gasoline? So does Russia.

  • Bond Vigilante/Willy2

    Thre were more disastrous economic policies:
    1. The price for natural gas and gasoline was (heavily) subsidized.
    2. The US has plundered/looted/pillaged Russia from 1990 up to 1997. (Remember the words from one Vladimir Putin: “”The US is a parasite”” ??).
    Michael Hudson
    F. William Engdahl

  • Andrew

    Didn’t the UK call in the IMF because they were operating a currency peg as a precursor to the Euro?

    The clown princes couldn’t see the disaster of the Euro then….. still can’t see it today.

    Just how dumb can they be?

  • Detroit Dan

    Yes. My understanding is that the UK got into trouble by trying to prop up the value of the pound. So the currency was not allowed to float, and that was the root cause…

  • Adam1

    I believe it was 1976. Anyhow according to the data I could find UK recieved a $5B loan from the US to support a falling pound. While they can print all the pounds in the world, they can’t print dollars. They had to call on the IMF to pay back the US loan which had an end date of December 1976.

  • jt26

    Thinking outside the Matryoshka doll …

    If a big quantity of these can lead to hyperinflation …

    “loss of a war, regime change, collapse of the tax system, political corruption, foreign denominated debts and collapse of productivity”

    then a small quantity can lead to regular inflaton …

    loss of a war = Iraq, Afganistan, War on Terror (Homeland security), War on Drugs … has anyone actually looked at the cost of all these + CIA/NSA/ etc.?
    regime change = debt ceiling debacle
    collapse of the tax system = does anyone pay taxes esp. with the procyclical tax deduction of mortgage interest? private wealth & corporate tax leakage to Cayman islands, Ireland
    political corruption = congressional insider trading (good one TPC!), Wall Street lobby
    collapse of productivity = continuing decline of manufacturing of tradable goods (i.e. ex. autos etc.) … one can’t run a nation on leadership in social media companies

  • Robert Bruette

    This is interesting in the fact that we (UMKC Advanced Macroeconomic Theory) were just looking at this from Warren Mosler who lost a good chunk of money due to default of Russia on debt obligations. Also like you said it is extremely important to note that it was under a pegged currency, which lends itself to being a “user” of the currency that it is pegged too. They therefore gave up the sovereign right to print money to pay their debt obligations. Inflation was not the issue.

  • Mark Baker

    Excellent piece on Russia. Would the same things: loss of a war, oil shock, loss of confidence in politicians, explain the inflation the United States experienced in the 1970s or is there some other reason?

  • El Viejo

    Great Post CR. I have always had a nagging interest in what went on there. Comparative analysis among various countries and their problems is extremely informative.

  • Cullen Roche

    I am actually working on a piece on the 70’s. Stagflation is very different from hyperinflation so no, the causes are different. I’ll elaborate in the published piece.

  • VII

    Thanks Cullen!

  • Scott Fullwiler

    Warren discussed Russia a bit here, too, FYI . .

  • rhp

    none of which Cullen disputes in his periodic rants against wasteful gov’t spending. but, we STILL do not carry foreign denominated debt we have to service, which is a game changer…….

  • prescient11

    This antiquated notion of printing bonds IS KILLING OUR BALANCE SHEET.

    It would have been much much less inflationary to just print this money and move on.

    Can someone please start a movement to print the debt and thus get rid of this huge overhang on our economy.

    Now that’s a protest I can get behind.

  • El Viejo
  • Pierce Inverarity

    There are unintended consequences to what you suggest, but the U.S. government could, tomorrow, exchange all outstanding Treasuries for USD and retire the debt. That’s an operational reality. But really, what’s the point? You would then be taking an interest bearing savings instrument away from the private sector, sending many to riskier assets in search of yield.

    From a political perspective, I can get onboard with this idea though. It would knock the legs out of the fearmongers who prey on the notion that the U.S. government is overburdened with “debt”, which is a complete misrepresentation of fact.

  • anon

    The main differentiator would be automatic cost of living adjustments built into many employment contracts in the 70s – those created a self-propelling wage/price inflationary spiral without any increase in efficiency.

    When your pay is specified in essence as a percentage of GDP, and if most of the pay in the country is negotiated that way then the government increasing GDP via spending money into existence won’t increase production.

    So basically this should be added to the MMT list of “don’t do it” policy measures: don’t kill your currency by automatically coupling wages to price levels. This comes right next to the “don’t get indebted in another country’s currency” rule.

  • Trading_Pymph

    Well, I actually worked in a financial services company in 1997, at the peak of the bubble, so to speak, and can attest that one of the biggest problems was tax collection. Manufacturing companies couldn’t get money for sold goods and barter schemes were everywhere. Our firm helped to link different manufacturers into complex chains of barter dealings. Since these companies received little liquid funds, they had difficulty in meeting tax obligations. Only export-oriented industries (oil, gas, and metals) had hard cash.

    As an example, we worked with a regional electric utility and my task was to settle their Federal tax obligations against electricity sales to Government agencies (military, municipal, etc). Government didn’t pay money to those “budgetary organizations” who in turn couldn’t pay their electricity bills. However the utility still had to pay taxes on these sales. So, even in the absence of “live money” it was possible to help the utility out and get our cut from it, but all the other industries had huge tax debts.

  • Bond Vigilante/Willy2

    Th main reason – IMO – why around the world, (not only in the US) we had high inflation in the 1970s was that we had a wage-price spiral. In the 1970s when CPI was say, 5% then there would be a wage increase of 5% as well. in combination with loose monetary policies caused high inflation. Especially after 1971 when Nixon broke the gold exchange standard (a.k.a. Bretton Woods). That wage-price spiral was lacking after 1981 in – at least – both Europe and the US.

  • anon

    I should add that the 70s had pretty much full employment as well – the unemployment rate was 4-6% and only went to 9% during the 73-74 oil shock which made the U.S. severely uncompetitive and came down quickly afterwards.

    The 79 oil shock then pushed unemployment above 10%.

    Inflation spiked during these shocks too. When your economy is so dependent on oil then you have in essence borrowed in another country’s currency: oil. You are forced to ‘pay back’ that currency (consume it) going forward, regardless of the true capacity of your country.

    In that sense oil was an externally imposed gold standard – but there was no debt crisis associated with it in the U.S. So as the U.S. printed money to restore capacity utilization and employment, it necessarily inflated – made worse by cost of living adjustments.

    I think economically speaking the 70s weren’t all that bad: GDP grew and the U.S. weathered a pretty significant external crisis that devastated many other countries. The 70s were perceived as “bad” mostly due to the unprecedented spike in unemployment (which was still half of that of the Great Depression’s) and the loss of trust in politicians – the adoration of U.S. Presidents of the 50s and early 60s has turned into cynical distrust by the late 70s.

  • Bond Vigilante/Willy2

    The UK was in deep debt with the US after WW 1 and WW 2. The US demanded after WW 2:
    1. repayment of all/a significant part of that debt. They had to pay about 1% of GDP every year.
    2. No devaluation of the GBP.
    And that was a very effective way of killing the already teetering British Empire. Otherwise they would have been a strong competitor for the US. But Washington D.C. didn’t want a strong competitor.

    Michael Hudson
    F. William Engdahl

  • ES

    I think Russian central bank had no clue what they were doing at the time. Why the money was so tight with a runaway inflation? I think they were trying to control inflation and misculculated and tightened the screws too much.
    I remember working in a research institute around 1994. The customers wouldn’t pay it for its “research” because they didn’t have the case, but also the government agencies wouldn’t pay. Why the govenment didn’t pay? It was normal for to be behind on the salary by 3-4-6 months. I had no money to buy food on several occasions because of it. And my salary was 40USDs per month. That is not even peanuts, it is less than peanuts.
    Around the same time all the russian enterprises where sold to the private hands at silly prices because nobody had cash those with access to any cash could buy factories for a few thousand dollars. That was just outright theft.
    The things were so out of control it is really hard to pinpoint the actual causes. I think it was a combinatin of corruption, theft, inadequate monetary policies and too cheap oil that in the end lead to the complete blow out.

  • ES

    > didn’t have the case
    didn’t have cash.

  • Joe

    Excellent analysis. Thanks Cullen.


  • Anton

    Appologies previous message got cut off. So Russia did reschedule it’s Soviet era debt several times before 1998 – that was most mostly the Paris club (official foreign government borrowings) and London club (foreign commercial banks) but I think no foreign government at that time was in any rush or desire to provide a massive write-off to a former super power. Also don’t forget that Russia assumed responsibility for ALL Soviet debt but in 1998 it’s GDP was still only 1/4 of the Soviet Union’s former GDP in 1989! Ok to cut a long story short: 1. most of the debt Russia defaulted on in 1998 was Soviet era debt under Russian law. (73%); 2. 27% of Soviet era debt on which Russia defaulted was under English law denominated in USD. 3. The only non Soviet but proper Russian debt Russia defaulted on was on the local RUB denominated debt under Russian law. Again, it is not necessarily logical and it is difficult to give any conclusive economic reason for this but for anyone who knows anything about Russia or the time of the cold war there are clear political reasons for that. In addition, Russia at that time still considered itself a super power – superpowers do not default in the eyes of the external world ( no default on external debt). And finally, another proof that the Russia example does not disprove MMT is that Russia maintained a currency per to the USD prior to the 1998 default – the RUB weakened from 6 to 25 in 6 months after the default.

  • jt26

    I guess I disagree with TPC that foreign debt is the only game changer (i.e. the only pertinent element) (although he does not say this in his article, but I’ll use your interpretation). My comment was just a devil’s advocate food for thought. The US will never be in exactly the same place as Zimbabwe, because it has to screw up so badly (which is why my comment was just on “regular” inflation) …
    – the least dependent country in the G20 on international trade
    – the one and only superpower
    – technological and scientific brain power that is unequalled
    – freedom and flexible (idealogically and economically); open economy
    – no shortage of people lining up to become citizens
    – citizens have high faith in the government (compared to Russia!), and a healthy fear of it (can you say IRS audit?)

  • jt26

    BTW some examples of possible screw ups that could give increasing inflation in the future:
    – pandering to special interest groups: (i) unions/labour, (ii) corporates (increasing monopolistic and opaque market power). Both leading to increasing economic friction.
    – ideological wars (internal and external)
    – increasing dependence on Middle East oil

  • Junkie

    Cullen, the fact that Russia was “able” but not “willing” to print rubles to pay off its debts is essentially meaningless – all it means that the default risk in respect of a sovereign currency issuer does not lie in the monetary system but rather in the political system.

    ie, the default risk might be a form of political risk but it is still a default risk.

    Also, there is Argentina and other Latin American countries, which would also need to be somehow explained away.

  • Cullen Roche

    Sure, bad politicians can lead to bad outcomes. We could decide to default tomorrow if we wanted to. The Latin American countries all had fixed exchange rates and highly corrupt governments. There’s no need to explain them away. These were some of the most corrupt and incompetent govts in the history of economics. Again, comparing them to the USA or using them as a reasonable comparison makes no sense. Maybe Ill cover them in more detail at a future date….

  • Junkie

    I know that the chances of the political situation in the US getting so bad that the US does not pay its debts are pretty darn low, and can basically be dismissed for all practical purposes – but they’re not absolutely zero as the recent debt ceiling debacle illustrates.

    In any case, it’s not the US that is most interesting in respect of this, it’s Japan … I know some smart people who are starting to consider how much longer to wait before taking a bet on Japanese sovereign default risk rising.

  • Cullen Roche

    I’ve known people who have been making that bet for years. Their bond market investors have been making that bet for 20 years…..

  • green investments

    Great post. Lived in that part of the world for several years. Russia and whole former CIS suffered an economic and cultural trauma that was just unprecedented. I can tell you, the human suffering was tragic and immense, I think economies in CIS contracted anywhere from 20-50%. It was a true, horrific modern despression. I always felt that whatever the geo-political benefits from the Soviet collapse, people really underestimated the tragic affect on individuals. Anyway, Cullen is quite right that this is not an example that negates MMT I believe..

  • Andrew P

    The British Empire was already dead when they lost India and their other Asian properties. It was the war that killed the Empire. Everything else is merely rearranging deck chairs.

  • Ben Wolf

    I think the evidence is pretty conclusive that there is no such thing as sovereign default. The key is that the country must be truly sovereign and therefore operate in a currency it controls. If it controls its currency, it controls its debts.

  • Andrew P

    The USA could lose a Nuclear War. Even winning a nuclear war with a lesser power like Iran could be almost as bad as losing a nuke war with Russia. 80% of the country’s productive capacity could be lost in 1 day. A biological war with Iran could be even worse, since the loss of US life could be almost total. What good are factories if there is no one left alive to work in them? There is credible evidence that Iran has thousands of Revbolutionary Guard agents in the US with genetically engineered viruses and bacteria, ready to carry out their suicide mission the moment war is declared. This is the REAL reason the USA won’t launch a preemptive attack on Iran.

  • Andrew P

    We do not have a foreign denominated debt, but we do have to import immense amounts of oil, in whatever currency the oil exporters sell it. Currently oil exporters are happy to take US Dollars, and they merely increase the price whenever the value of the US Dollar goes down. Their willingness to take dollars is supported by US military power. Iran’s bid to become a nuclear weapons power would, if successful, neutralize any power the US has over the Islamic world, and we would no longer be able to persuade them to take dollars. If OPEC then decided as a political matter that they would take only physical gold or some foreign currency, we would have a BIG problem.

  • Cullen Roche

    Don’t bet the farm on Iran…..

  • Joe Firestone (LetsGetitDone)

    First class Cullen. We’ll all reference you and Warren when we get the Russia objection!

  • Bond Vigilante/Willy2

    No. the british still had one prize that kept them from a complete collapse and they managed to hang on to that prize. Keyword: Kuwaiyt. India wasn’t that important for the UK. The US simply wanted to take over the british empire.

    I’ll tell you something else. After WW 2 Germany had to pay down its debts to the US as well. That meant the german economy was struggling, couldn’t recover. This was precisely the intention of the US. But the Cold War came to rescue of Germany (FRG, not GDR). The US needed to contain the expanding Soviet Empire. And that’s why the US forgave Germany (FRG) all its debts. The resut was a debt free West Germany and the “”Wirtschaftwunder”” (german for “”Economic Miracle””). Any one who knows about this detail knows that this economic recovery wasn’t a “”Miracle”” at all.

    And that gives us a clue what needs to be happening now. “”Restructering””/Writing down of A LOT OF debt. Including that of the US. And NOT the issueance of more currency or “”the printing of more money””. It only will enable to “”kick the can down the road”” one or two more times. “”kicking the can down the road”” will only make things (much) more worse.

    Do you read this, TPC ???

  • Hugo Heden

    Very good stuff, this series! Looking forward to the stagflation-piece. John T. Harvey has a good piece here: