I don’t think–please notice the “think”–you need to worry that the collapse of the Russia economy and chaos in the Russian financial system will prove another global financial crisis as it did in the “Ruble Crisis” of 1998.
Oh, not because the Russia economy won’t collapse or the Russian banking system won’t descend into chaos.
Because they will.
But because of the mountain of sanctions piled on Russian banks, oil producers, and assorted oligarchs, Russia is much less connected to global financial systems than it was in 1998.
A big stone will still hit the financial pond, but the splash will be much smaller this time. Which may or may not be a good thing where a return to peace in Ukraine is concerned.
Just in case you don’t remember the Ruble Crisis of 1998, here’s a quick recap.
After the collapse of the Soviet Union, Russia pursued rapid market reforms and financed chronic budget deficits with short‑term ruble‑denominated securities, creating a rollover risk and dependence on international investor confidence. Falling commodity prices, particularly oil, in 1997–98 depressed export revenues and worsened the current account, further undermining the ability to sustain the exchange rate and service the country’s debt.
By mid‑1998, bond yields had surged, stock prices had fallen, and reserves were strained despite an IMF‑led support package approved in July 1998. On 17 August 1998, the Russian government announced a devaluation of the ruble, a default on ruble‑denominated domestic debt, and a 90‑day moratorium on certain private foreign debt payments and forward contracts.
Following the announcement, the ruble rapidly depreciated, losing more than half its value within weeks, as Russia abandoned its defense of the previous currency band and moved toward a floating regime. Domestic bond markets effectively collapsed: yields had already spiked above 100–200% from pre‑crisis levels, and the default wiped out a large share of local fixed‑income holdings. The banking sector, heavily exposed to government securities and FX mismatches, suffered cascading failures as asset values plunged and dollar liabilities became unpayable. Real GDP fell by around 5% in 1998, and inflation spiked as the pass‑through from the currency collapse hit domestic prices.
Russia’s domestic default had global implications because emerging market debt positions were widely leveraged in international portfolios. The shock contributed to a broader “flight to quality” and was one factor in the chain of events that led to the near‑collapse of Long‑Term Capital Management (LTCM), a highly leveraged U.S. hedge fund, necessitating a coordinated private‑sector rescue arranged by the New York Fed.
The 1998 Russian financial crisis is a textbook case of how weak fiscal institutions, short‑term local‑currency debt, exchange‑rate defense under commodity price pressure, and fragile banks holding sovereign paper can create a crisis. It also shows how sovereign default in a large emerging market economy can affect global risk premia and leveraged intermediaries, making it a core case in discussions of capital flight. (Think India right now if you want to worry.)
Despite the severity of the 1998 crisis, Russia’s recovery was relatively rapid.The sharp ruble depreciation made domestic products more competitive, and the subsequent upswing in oil prices from 1999 onward dramatically improved the trade balance and fiscal revenues. Debt restructuring, banking clean‑up, and IMF support underpinned macro stabilization, and Russia entered the 2000s with strong real growth, setting the stage for the commodity‑driven boom of the next decade.
Flash forward to 2026 and many of these same elements are in place.
The combination of the chaos in Crimea, record drone strikes on Moscow, and fuel rationing spreading across Russia appears to be taking a political and economic toll. According to data from the Public Opinion Foundation, a polling organization with Kremlin ties, trust in Putin has fallen to 69%–its lowest point since the war began.
The Kremlin is scrambling to respond to an intensifying campaign of Ukrainian drone attacks reaching ever deeper into Russia, hitting key arms production facilities, destroying an ever-greater share of oil-refining capacity, and causing fuel shortages across the country. This week alone, swarms of Ukrainian drones hit oil facilities across Russia as well as the VZPP-S semiconductor devices plant, a major producer of components for Russian ballistic missiles in Voronezh, the Dubna Satellite Communications Center near Moscow, and a chemical plant that is key for producing Russian ammunition in Tula.
In Russia-occupied Crimea, rolling power outages were triggered across the peninsula by Ukrainian strikes, and fuel sales have been suspended, causing Russian-installed authorities there to declare a state of emergency Friday.
President Vladimir Putin’s government held an emergency meeting earlier this week on the escalating fuel crisis after gasoline production plummeted 25% across Russia during the week of June 15-21 and pushed dozens of regions to impose rations. Publicly, Russian officials have tried to play down the impact of the Ukrainian strikes. At a meeting with Putin to discuss the fuel crisis earlier this week, Russia’s deputy prime minister, Alexander Novak, told the president that the situation on the domestic fuel market was “not easy, but controllable.” Russian Finance Minister Anton Siluanov, meanwhile, denied the crisis had caused a huge spike in gasoline prices. “If they have risen at all, they have done so insignificantly,” Siluanov told reporters.
Yeah, right. In a letter to Putin, leaked to Russian newspaper Kommersant, the head of Rosneft, Russia’s biggest oil company, Igor Sechin, called the amount of damage to Russian oil refineries “unprecedented.” The government has been weighing a total ban on diesel exports to compensate for the shortages, tacit acknowledgment that it is not possible to increase production anywhere.
A sharp drop in price for Russian oil to levels last seen before the United States and Israel’s war against Iran are adding to the jitters at a time when Russian officials are urgently seeking additional sources of funding to increase military spending. Even before prices for Russian oil–Russia’s main source of revenue–plummeted to $50 per barrel following Iran’s ceasefire agreement with the United States, Russia’s federal budget deficit had been snowballing beyond the 3.8 trillion rubles ($48 billion) intended for all of 2026. The deficit reached 6 trillion rubles ($83 billion) by the end of May, more than double the level last year. “The budget is shaking,” one Russian official told the Washington Posts. “The deficit is enormous, and the sovereign wealth fund is almost exhausted.”
The deteriorating financial situation is adding to the anxiety in Moscow, as finance ministry officials rush to find ways to fund ever-increasing military spending. Last week, the government pushed through amendments to the budget code to allow the finance ministry to spend and borrow more without seeking formal parliamentary approval. A former senior finance official said a decision clearly had been taken to increase borrowing, including by issuing greater volumes of state bonds–a measure he said would further stoke inflation even as the central bank has sought to control rising prices with high interest rates, now at 14.25%.
Fears are growing among Russians with savings that the government could seek to access the population’s savings to prop up Russia’s military machine “The government could try to take money by any means,” a Moscow business executive sold the Washington Post. “Everyone is thinking about how to get their money out and leave.”
The concerns were exacerbated this week when Gennady Zyuganov, the long-standing leader of the Communist Party, openly called in parliament for some 130 trillion rubles held by businesses and individuals in bank accounts to be “mobilized” to solve Russia’s economic and budget problems. “That money isn’t being invested in production or anything else–not even in victory,” Zyuganov said. “This problem can be solved quickly. If I were the president, I’d do it with a single decree. In wartime, he has the right to do so–he is the supreme commander in chief.”
In addition, the finance ministry is preparing legislation that would potentially allow it to access some $40 billion in pension savings held in privately managed funds.
Meanwhile, since Russia isn’t really a part of the global financial markets anymore, the impact of the crisis has been very modest. The ruble has weakened against the dollar over the past month and three months, but is roughly flat over six months, and it actually appreciated versus the dollar over calendar year 2025. Over the last three months, USD/RUB has moved from the high‑60s/low‑70s to the high‑70s, a weakening of 10–15% versus the dollar.
So far, it’s a crisis in Russian that global markets aren’t exactly in a dither about.
Photo by Marek Studzinski on Unsplash
