It was a typically Russian choice between the very bad and the catastrophic. And in a fraught meeting last weekend, top government ministers concluded they had no alternative but to choose the very bad. With the central bank haemorrhaging up to $1 billion (£700 million) of reserves a week and no additional financial support likely to be forthcoming from abroad, the government concluded it could no longer defend the rouble. It widened the bands within which the currency is free to float, imposed a 90-day moratorium on some foreign debt repayments and said it would restructure the domestic debt market. The rouble promptly sank.
This was very bad because by last spring Russians had started to believe in the once-incredible notion that their currency might be a store of value. Thousands, if not millions, of Russians started opening rouble bank accounts and buying rouble-denominated financial assets. Russia was beginning to build its own financial system.
Those hard-won gains have now been jeopardised, if not wrecked, by the government's decision on Monday to cut the rouble free from its narrow trading band. Overnight, the government severely damaged confidence in the currency - one of the main achievements of reform. Shops immediately marked up the price of goods by up to 20 per cent; currency exchange points were only prepared to sell dollars at a rate of 9:1 as opposed to the official rate of 6.43:1.
But the government deemed that all this, bad as it was, was preferable to the catastrophic alternative: propping up the rouble until the dollars ran out, when the rouble would have come crashing down. It is better, ministers argue, to use precious foreign reserves to help manage a controlled devaluation than to blow them all in a futile defence of the indefensible.
The fear was that if this had happened inflation would have risen uncontrollably, the inexperienced government would have fallen, ebbing support for Mr Yeltsin would have vanished and Russia would have been plunged into a familiar turmoil.
In other words, the justification for this abrupt change of course is that it was the lesser of two evils. But that raises several questions: if it was inevitable, how did Russia come to face such a choice? And if the government has chosen the lesser of two evils, does this mean Russia has done enough to end its crisis?
Mr Sergei Kiriyenko, Russia's youthful Prime Minister, explained on Monday how Russia got into this mess. The government's first line of defence, he said, had been breached as a result of the further slide in the oil price and the downturn of global financial markets. It was now necessary to fall back on a second line of defence. Already the recriminations have begun as to why that first line of defence proved so flimsy. Just a month ago, the International Monetary Fund approved the first tranche of an additional $11.2 billion loan designed to preserve the rouble's stability.
But Mr Pavel Teplukhin, economist at Troika Dialog Asset Management, a Moscow-based fund management group, argues the IMF package was misconceived because it attempted to treat the symptom of Russia's financial problems rather than their cause. The government's principal difficulty was that it faced a critical short-term funding crisis that was only obliquely addressed by the IMF package.
Understandably the IMF was reluctant to use western taxpayers' money to buy off reckless foreign speculators in the Russian government debt market who were selling out of their positions and putting pressure on the rouble. So the IMF bolstered the central bank reserves to inject more confidence in Russia's financial stability and hoped the debt markets would work the problem out. Initially, the strategy appeared to be working. The trouble was the IMF deal depended on several crucial items of legislation passing through parliament - and the Duma emasculated much of the anti-crisis package designed to shift the tax burden from the corporate to the personal sector. That raised concerns about Russia's ability to meet the tough budget targets and the IMF decided to withhold $800 million of its first $5.6 billion tranche, undermining the credibility of its own programme. The government's poor handling of a series of debt auctions further unnerved investors while a blazing public row between the central bank and finance ministry over policy differences tarnished the image of Russia's monetary authorities.
A further downward lurch in the international oil price and Asian financial markets dealt the final blow to market confidence.
The government's decisions on Monday to allow the rouble to float, to freeze and forcibly restructure the domestic debt market, and to impose a 90-day moratorium on the repayments of some foreign commercial debts were intended to buy the government time to grapple with its economic problems. There is no doubt that in the short-term these measures will help - albeit at a high long-term cost.
The change of policy will certainly have several benefits. Before it froze its domestic debt market this week, the government was spending about one-third of its monthly budget revenues on interest payments.
Much of this money will now be available to pay off back wages to striking coalminers and teachers and ease the alarmingly high social tensions.
The slide in the rouble will also give Russia's export industries a short-term kick. Russia's oil and gas companies have warmly welcomed the decision to let the rouble float and - it is hoped - will find it easier to pay their outstanding taxes to the government. The IMF programme, which remains in place, will help slow the fall in the rouble.
However, the government's actions are also fraught with new dangers. The most immediate is that Russian depositors may panic when they see the rouble slide, withdrawing their bank deposits and forcing an uncontrollable devaluation anyway.
The further concern is that for the foreseeable future the government has cut itself off from both external sources of funding and internal ones (because Russians will not want to hold government paper of any kind). That will leave the government with no option but to run a budget surplus.
While the government may argue it is not technically in default on its domestic debt, few international investors are likely to see it that way. At the very least, global capital markets will demand a far higher risk premium before lending to Russian borrowers.
Moreover, the government's attempts to raise money by privatising more assets have been stymied by the breathtakingly low valuations that now attach to Russian assets.
And as if these financial pressures were not enough, the government faces an even more feverish political climate, which will make it all the harder to overhaul the tax regime and make other structural reforms.
Russia's Communist party is incensed that the government's latest measures will hit the poor far more than the wealthy and is demanding Mr Yeltsin's resignation. Moreover, Mr Gennady Zyuganov, the Communist party leader, warned foreign investors they faced a nationalist backlash if they kept supporting Mr Yeltsin's discredited regime.
