Vladimir Putin often invokes the spectre of the 1990s when justifying his rule over Russia, referring both to the economic calamity of the period and its political tumult. While he may obsess over the latter in his increasingly rabid broadcasts, it is the former that poses the greatest threat to his regime.
Russia is set to undergo a near-redux of one of the darkest episodes of that time, its August 1998 default, ie sovereign bankruptcy — an experience that scarred the word in the Russian language, дефолт (pronounced like the English, “default”).
Similar events are being played out today. Russia has defaulted on domestic debts owed to foreigners under Putin’s post-invasion diktat not to send currency to so-called “unfriendly nations” — making this a technical default. Russia appears to have paid its first key foreign debt since the war, albeit belatedly, but it is a question of when rather than if Russia will formally default. Putin appears to be as unwavering in driving his economy to collapse as he is in his desire to crush Ukraine.
The economic pain that Russians experienced in 1998 was vast and shocking. Over the previous four years, the Central Bank and the government of President Boris Yeltsin had managed to stabilise the rouble, a key condition for attracting foreign capital and one of the few successes on which Yeltsin could rest his hat. Then during the tumult the rouble lost two thirds of its value. Millions of Russians had their savings destroyed. Inequality exploded as elites had already long been stashing their assets in dollars or abroad.
Imports cratered and regional governments such as that of Tatarstan refused to send food or tax revenue to Moscow. Widespread food shortages were only alleviated by emergency US aid. Inflation rose to 28 per cent by the end of 1998; GDP fell by 5.3 per cent. Inflation shot up still further to 85 per cent in 1999 and though headline growth returned, for many such numbers lost all meaning as they feared another Soviet-style collapse. State employees were unpaid for months. The crash devastated Russia’s nascent small and medium businesses: between a third and a half are estimated to have closed or suspended trading.
Putin first tasted real power amid all this, having been appointed director of the FSB, Russia’s main security service, three weeks before the default.
The economic tumult put the final nail in the coffin of Yeltsin’s coterie of economic reformers, led by Anatoly Chubais and dubbed the “dream team” by the future US Treasury secretary Larry Summers just a year prior. Yeltsin too became a lame duck, beholden to the oligarchs around him such as Roman Abramovich and Boris Berezovsky. Putin would not forget these experiences. Later he crushed, cuckolded or co-opted these same oligarchs as he built his executive presidency.
Yeltsin’s team worked closely with international advisers often blamed for economic “shock therapy” but many had sought to put Russia on the path to a market economy even in the late Gorbachev era. By 1998 Moscow was closely entwined in the global financial system. In his memoir Martin Gilman, who was the International Monetary Fund (IMF) representative in Russia at the time, notes the extent of Western support for Moscow before the default: a single quarterly tranche of Russia’s 1996 IMF facility was equivalent to the total average annual disbursement to all African countries. In fact, Russia received new IMF and World Bank support just before the default, though it has since been alleged that much of this was stolen.
The 1998 default set a precedent because Russia defaulted on its domestic currency obligations while remaining current on its foreign currency debts. Scholars had long thought such a scenario fanciful — after all, a country can simply print more of its own currency. Yeltsin’s Kremlin was seen as prioritising foreign capital over its own people. International financial institutions lost any legitimacy they might have still had with the Russian people.
The ramifications of this are still felt today. Putin’s Kremlin does not see such international financial institutions as legitimate. Although they were not a particular target of Putin’s ire during his early years, he has spent over two decades claiming that Russia’s economic boom in the early 2000s was entirely due to his iron rule.
It would not have been possible without Western support, however. The last vestige of the 1998 crisis was the 2000 restructuring of Soviet-era debts by Western banks, who then went on to turn on the spigot of lending to companies such as Rosneft, Rusal and Gazprom. This enabled such large Russian firms to expand and reap the benefits of the oil boom during Putin’s early years, with small and medium businesses lagging behind.
Such support is impossible now. The sanctions introduced on Russia’s central bank in response to the invasion of Ukraine have left it without access to a large chunk of its reserves. International financial institutions and private banks cannot lend to Russia while the sanctions remain, as they are likely to do long after the war ends.
The Kremlin made this choice, willingly — the West had outlined the sanctions it would impose if Putin invaded Ukraine. But Putin has long made clear he sees such international financial institutions, and their market structures, as an enemy and he tried to undermine them through a convoluted loan structure for the regime of the pro-Russian Ukrainian president Viktor Yanukovych in its dying days. Dmitry Medvedev, Putin’s erstwhile presidential placeholder, declared Russia’s open hostility to the IMF in 2016.
Yet Russia has pursued a traditional market agenda in recent years, building up the reserves that have now been frozen at the expense of domestic investment. Russia’s economy has been stagnant since 2014, when Moscow annexed Crimea and invaded the Donbas region of Ukraine. This was thanks in part to a “fortress balance sheet” strategy. It has rapidly failed.
Putin’s choices will further impoverish the Russian people. The sanctions’ extent, Russia’s stock market closure and Putin’s own capital controls and threats spell the collapse of Russia’s market economy, a shake-up reminiscent of the 1990s. Putin will be hoping that the authoritarian power that he has built — something Yeltsin could only have dreamed of — will stop the economic crisis from morphing into a political one.
Yeltsin only barely survived, and turned to Putin as his successor. Less hardline alternatives such as the former prime minister Viktor Chernomyrdin were too discredited. Yet Chernomyrdin’s phrase, uttered in 1993 to describe another failed economic reform, rings true once again: “We wanted the best, but it turned out like always.”