August 16, 1998
About 400 kilometers northwest of Moscow, in the small town of Valdai with just under 10,000 residents, the Russian president's summer residence was located.
Nestled in a dense forest, the villa stayed cool during the summer and was surrounded by lakes of various sizes, making it a favorite fishing spot of President Ivanov.
Night had fallen, heavy and dark.
President Ivanov, enjoying his summer vacation, sat on the sofa in the reception room alongside Prime Minister Yevgeny Popov, who had rushed down from Moscow, and Andrey Sinichin, governor of the Russian Central Bank.
Ivanov, whose face was flushed and carrying the faint scent of vodka, looked incredulously at Governor Sinichin, seated to his left, and asked,
"What did you just say?"
Caught off guard, Sinichin forced himself to speak, his expression tense and his lips trembling.
"We have only one billion dollars in foreign reserves remaining. If no immediate action is taken, the country will face default within two or three days."
"What…? Just a few days ago, we still had close to five billion dollars, didn't we?"
Pressed, Sinichin, now noticeably gaunt over the past few months, answered in a weak voice.
"Through Wall Street, we issued additional high-interest government bonds, and an IMF loan of seven hundred million dollars came in… but the measures failed, and capital outflows have actually increased."
"Even so, you're telling me that several billion dollars vanished in just a few days!"
"As the Asian financial crisis resurged and the yen plummeted, investors rapidly withdrew funds from emerging markets, and the effects have now reached us as well."
The unstable political situation, deepening economic recession, and falling international oil prices—all domestic factors in Russia—were amplifying foreign investor flight.
Yet Governor Sinichin couldn't bring himself to be fully honest and spoke in vague terms.
Before he could finish, President Ivanov slammed the armrest of his sofa with the palm of his hand and roared,
"You're treating Russia like any other developing country!"
Seeing that foreign reserves were about to run dry and yet Sinichin still seemed oblivious, as if Russia were still in its Soviet days, Ivanov couldn't help but sigh in frustration.
At that moment, Prime Minister Popov, seated on the sofa to Ivanov's right, interjected.
"It's all an excuse about the yen's decline. This is just the sly scheme of Western speculators trying to shake us up."
At that moment, Governor Sinichin immediately furrowed his brow.
The source of the worsening situation was sitting there, still oblivious, spouting nonsense—it was impossible not to feel irritated.
He wanted to snap, saying that if proper oversight had been maintained from the start, things wouldn't have gotten this bad.
But there wasn't a second to waste; every moment was critical. Sinichin swallowed his frustration and spoke in a firm, steady tone.
"When the foreign exchange market opens tomorrow, another massive outflow of currency will occur, pushing us into a situation that may become irreversible."
President Ivanov raised his glass and downed a strong shot of vodka in one gulp.
"What's the solution?"
Sinichin leaned forward as if he had been waiting for the question and answered immediately.
"There's only one remaining option."
"So what is it?"
"Declare a moratorium."
"…!"
Startled, Ivanov raised his eyebrows and stared at him, while Sinichin continued, his expression set and serious.
"We suspend all debt repayments for ninety days to stop further outflows of foreign currency and sharply devalue the ruble."
"…"
Prime Minister Popov, apparently already briefed on the matter, remained tense but showed little surprise.
Faced with such a drastic prescription, Ivanov stayed silent for a moment before speaking.
"Is there no other way?"
Sinichin shook his head gravely.
"To avoid the worst-case scenario, this is the only option."
"Ugh…"
President Ivanov grimaced and groaned in frustration.
He sat for a while, clutching his head, before finally turning to look at Prime Minister Popov, seemingly unable to let go of the thought.
"What if we request support from the United States or the IMF?"
Popov cast his eyes down briefly before answering.
"We've already requested assistance, but both sides expressed reluctance, saying further support isn't possible."
"Damn it!"
In truth, the U.S. and the IMF had plenty to say themselves.
When Russia, facing a crisis, humbled itself and hurriedly sent a delegation to Washington, its apology was accepted, and support was offered again.
This time, the aid was far more than the originally promised 5.6 billion dollars—it totaled 22.6 billion dollars, to be disbursed over eighteen months into the following year.
The package included not only the IMF but also World Bank loans and Japanese government credit.
The urgency stemmed from the fear that if Russia faltered, the economic crisis could spread into Europe and potentially trigger a global depression.
Even so, unlike other Asian countries such as Korea, which had faced prior financial crises, the support was unusually swift and generous.
Yet despite these measures, Russia found itself requesting aid again within just a few months, making the country feel like a bottomless pit.
With his flushed face deep in thought, Ivanov once again addressed Governor Sinichin.
"If we declare a moratorium and devalue the ruble, will that resolve the problem?"
Sinichin, tense and unsure of the president's decision, quickly responded.
"It should at least prevent us from collapsing into bankruptcy and give us time to stabilize the situation."
Though it felt like swallowing poison, Ivanov had no viable alternatives and reluctantly approved the course of action.
"If this is the only option… so be it. Let's proceed that way."
Governor Sinichin, who had been anxiously awaiting a response, finally exhaled in relief.
"You've made a difficult decision."
He bowed slightly to President Ivanov, who grimaced as he swallowed the bitter taste of the situation, and spoke formally.
"I'll need to prepare to minimize the shock, so I'll head to Moscow immediately."
Although night had fallen and darkness enveloped the surroundings, there was no time to worry about that—the fate of Russia depended on swift action.
Declaring a moratorium would inevitably send shockwaves both domestically and internationally, so it was essential to be in Moscow to respond quickly.
Given the severity of the situation, President Ivanov himself also needed to return to his post. In fact, as the head of state, he should have returned to the Kremlin even before Sinichin.
Yet Ivanov seemed unconcerned, pouring vodka into an empty glass and speaking as if it were someone else's problem.
"Do as you must."
He then lifted the filled glass and drank it in one gulp.
Watching the captain behave this way while the Russian ship was about to be wrecked in a violent storm was enough to make anyone sigh in despair.
'The road ahead looks hopeless.'
But Sinichin could not afford to remain idle. He quickly stood and made his way outside.
The only relief was that Prime Minister Popov, unlike Ivanov, did not shirk responsibility. He boarded the helicopter with Sinichin, heading toward Moscow to take action.
***
The next morning.
As usual, Seok-won was sitting in the backseat of a Mercedes sedan on his way to work when his pager vibrated. He pulled his phone from his inner pocket.
"Hello?"
[Boss. The event you predicted has occurred!]
Hearing Landon's excited voice, Seok-won immediately realized that the situation he had been anticipating had finally come to pass.
"Russia declared a moratorium?"
[Yes. Just now, Prime Minister Popov announced the suspension of all debt repayments for 90 days and a sharp devaluation of the rubble, from 6.3 rubles per dollar to 9.5 rubles.]
"That's a 34 percent devaluation in one move."
[Exactly.]
Although the market shock would be enormous, the decisive action reflected the urgency of the crisis.
"What's the market reaction?"
[Investors are panicking. No one expected Russia to actually declare a moratorium. As soon as the news broke, Russian government bond yields shot up from 150% to 200%.]
A 200% yield—this was essentially a junk bond on the verge of default.
'Considering Russia declared a moratorium, making it uncertain whether they could pay interest or even principal, calling it a junk bond isn't wrong.'
Seok-won quickly pushed aside the fleeting thought as Landon continued.
[Even if we ignore the temporarily closed Russian stock market, the shock will hit as soon as the Asian markets open.]
"Investors spooked by this will flock to safe assets, so it's not just equities—yen will likely fall further too."
[Most likely, yes.]
Landon's tone was unusually serious.
[It might even break 150 yen per dollar.]
"The Japanese government will do everything it can to stop it, so it probably won't go that far."
If his pre-regression memory was correct, the peak had been 147 yen per dollar.
'Then it's about time to start liquidating positions.'
Seok-won tightened his grip on the phone and gave instructions.
"Tell Branch Manager Porter to liquidate all positions when it hits 147 yen."
[There's been a major shock, so the yen will likely remain weak for a while. Couldn't we hold a bit longer?]
"We've made enough. It's better to take profits now. You know the saying—buy the rumor, sell the news."
He felt a twinge of regret, but as Seok-won said, the profits were already substantial, so there was no real attachment.
Besides, the real bet was on Russian government bonds, so Landon didn't press the point and simply nodded.
[Understood. I'll inform Branch Manager Porter to close out the positions.]
After replying, Landon asked another question.
[What should we do about the short position on the Nikkei?]
Seok-won paused for a moment before replying.
"Let's leave that for a bit longer."
[Understood.]
"Keep monitoring the market and the Russian situation closely. If there's any major movement, notify me immediately."
[Yes, I'll get back to you then.]
After ending the call and putting the phone away, Seok-won leaned back into the plush leather seat, took a deep breath, and exhaled slowly.
Then, a thought crossed his mind, and he muttered quietly to himself.
"Last month, I didn't realize LTCM was aggressively buying up Russian government bonds like crazy."
He didn't know the exact amount, but they must have held hundreds of millions of dollars' worth of Russian bonds, heavily leveraged.
With Russia's moratorium announcement causing bond prices to plummet, LTCM would have instantly lost hundreds of millions of dollars overnight.
The problem was, this loss was only the beginning.
If panicked investors started dumping Russian bonds en masse, prices would tumble even further, and LTCM's losses would snowball.
"At this point, LTCM must feel like a nuclear bomb just hit them."
TL/n –
In 1998, Russia faced a severe financial crisis, defaulting on its domestic debt and devaluing the ruble by about 34%. The crisis was caused by falling oil prices, large fiscal deficits, overreliance on short-term government debt, and investor panic. The default led to bank failures, a stock market collapse, and economic contraction, though Russia eventually recovered in the early 2000s as oil prices rose.
The 1998 Russian default caused massive losses for LTCM, a highly leveraged hedge fund with large positions in Russian bonds and related derivatives. The fund lost over $4 billion in months, forcing a Federal Reserve-coordinated bailout to prevent a broader financial crisis.