In 1998, Russia defaulted on its outstanding domestic debt because it temporarily ran out of rubles due to the currency peg it was running with the US dollar.
Answer: False
The answer is False.
The question was a relatively straight-forward test of whether you understood what actually happened in Russia in 1997-98, given that more and more mainstream economists are (erroneously) using it as an example of sovereign default that is applicable to other nations at present - especially those that are sovereign in their own currency.
The question had correct details embedded with on major falsehood.
First, in late 1997 Russia did face a major collapse of oil and non-ferrous metal prices, upon which they heavily depended on to earn them foreign exchange.
Second, they did strongly rely on the export earnings from this sector to get foreign currency to repay the foreign currency-denominated loans that they had taken out in during the liberalism frenzy that followed the breakdown of the Soviet system. There was considerable optimism in Russia at the time and all sorts of opportunists were set loose and their foreign currency exposure rose dramatically.
Third, the defaults, in part were driven by the fact that they had chosen to peg the ruble within tight range to US dollar (a fairly hard peg) and thereby surrendered their currency sovereignty. Once the government pegged the currency and allowed wide-scale financialisation of its economy to occur with foreign-currency loans and foreign banks dominating, they were at risk of insolvency on any foreign currency debts they took out.
Under these circumstances, the economy - both government and non-government sectors - were are risk of any major decline in their export earnings and/or some other exogenous international event that would provoke speculative attacks on the ruble.
The latter came in November 1997 with the Asian crisis which led to speculative attacks on the Russian currency. The speculators knew that the Russian government would try to maintain the peg and was heavily indebted in foreign currencies. So by selling the Russian currency short the speculators knew they could profit.
The problem was that the Russian government played right into their hands and instructed the central bank (CBR) to defend the rouble (that is, maintain the peg) and they lost around $US6 billion in reserves in doing so.
Then in late 1997 oil and non-ferrous metal prices collapsed which reduced their capacity to replenish the lost foreign currency reserves.
The demise was fast and by April 1998 more attacks on its currency led to further foreign exchange reserves being lost in the futile attempt by the CBR to defend the hard peg. Further, oil prices kept dropping.
During this time, the CBR was hiking interest rates in a vein attempt to attract enough foreign investment to help defend the currency. The major impact of this policy was to scorch the domestic economy. The CBR however did not stop bleeding US dollars in its currency defence.
By August 1998 with the collapse of prices on Russian share and bond markets as investors sold off in the face of major fears of devaluation, the Russian government devalued the ruble, defaulted on domestic debt, and pronounced a moratorium on payments to foreign creditors (effectively a default). On September 2, 1998, the government floated the rouble.
So the crisis was the direct result of the currency peg and the massive exposure to foreign-denominated debt.
So why is the answer false?
Quite simply because the government not only suspended payments on all foreign-currency loans but also defaulted on its public debt denominated in rubles.
Even with the peg and the loss of foreign currency reserves, the government could have still always made the payments owing and the repurchases due on its domestic debt.
The fact they defaulted on their own debt was an act of sheer stupidity and the poor advice they were getting. There was never a solvency risk in their own currency. The IMF among others (including a bevy of mainstream economists) were telling the Russian government that they had to implement an austerity plan and convincing them that they needed to "raise money" to fund the deficit - both erroneous propositions.
They could have simply floated and become sovereign and then there was no solvency risk in all debts denominated in that currency.