Russia's government has bowed to market pressure by freeing the rouble, freezing its domestic debt market and imposing currency controls and a 90-day moratorium on foreign commercial debts.
The startling change of economic policy, announced early yesterday, comes just three days after President Yeltsin vowed there would be no devaluation and government ministers insisted they would honour all their debt obligations.
The government has now widened its currency corridor and will allow the rouble to trade in a band of between 6 and 9.5 roubles to the US dollar until the end of the year.
Economists suggested that if the rouble fell to the bottom of this band, it would in effect have been devalued by 34 per cent.
Mr Sergei Kiriyenko, the prime minister, said the "demise" of Russia's financial markets last week had forced the government to take these "rapid and resolute" actions to pre-empt a worsening of the situation and further losses of central bank reserves.
He said the promised $23 billion support package led by the International Monetary Fund (IMF) had not been sufficient to turn round Russia's financial crisis. Additional international support was unlikely to be forthcoming.
Mr Michel Camdessus, IMF managing director, said it would now be "especially important for the Russian authorities to take all necessary steps to strengthen the fiscal position". The IMF sent more staff to Moscow yesterday to analyse the measures.
Confusion and concern reigned on Moscow's streets as Russians puzzled over what the abrupt policy change meant. Although the official exchange rate slipped only from 6.31 to 6.43 to the US dollar yesterday, there was a wide array of different rates being offered by the few banks and exchange points which remained open.
Some shops immediately put up the prices of imported goods to take advantage of the situation, prompting fears of an upsurge in inflation.
Mr Boris Fyodorov, the head of Russia's tax service who was yesterday promoted to become the deputy prime minister in charge of macro-economic policy, said the government would clamp down on any banks or businesses which tried to gouge customers.
Russian bankers and businessmen welcomed the government's moves but opposition politicians demanded that heads should roll. It was widely rumoured that Mr Sergei Dubinin, the central bank governor, would be forced to step down and replaced by Mr Dmitry Tulin, a well-respected commercial banker.
The government also announced steps to restructure forcibly the domestic debt (GKO) market, where yields have risen to astronomic levels. Yesterday's moves knocked stock markets across Europe. They started trading about 2 per cent lower but recovered more than half their losses by the close of trading. In Dublin, the ISEQ index of Irish shares closed down about 0.5 per cent in quiet trading. Russia's benchmark RTS-IF equity index fell 4.9 per cent. However, international markets will be cheered by a late recovery on Wall Street last night, where the Dow Jonex index closed up 149.85 at 8,574.85. Investors took a sanguine view of events in Russia and of the start of President Clinton's grand jury testimony, with share prices of the major stocks recovering after heavy falls last week. Meanwhile, international financier, Mr George Soros, who last week urged a rouble devaluation, welcomed the decisions.
The Russian government has acted in a timely and brave manner to stop the collapse of the financial system, Mr Soros told Ekho Moskvy radio in an interview, adding a warning that further measures might be needed.
