Around talk about the default of Russia. What does it mean

Russia’s external default looks almost inevitable, Western economists say. What will be the consequences?

Within three weeks, Russia is highly likely to be in a state of sovereign default. It will be caused by Eurobonds Russia 2022 issued in 2012 for a period of ten years.

On April 4, the repayment of the principal amount of the debt in the amount of two billion dollars, as well as the repayment of the accumulated coupon income, was to take place. However, the US Treasury has banned the use of American currency blocked in the accounts of the Bank of Russia for this purpose.

Some rating agencies write that Russia is already in default, others that it is inevitable. At the same time, Russia itself claims that it is not threatened by any default. Korrespondent.net tells whether there will be a default and what consequences it will turn into.

Russia’s default is almost inevitable

The international rating agency Moody’s issued a warning that Russia risks a default if it does not make payments in foreign currency on government bonds by May 4, Reuters reported.

Moody’s has not yet downgraded Russia’s credit rating, but has warned that if no payment is made in the currency of the loan before May 4, when the grace period expires on Eurobonds redeemed by Russia on April 4 in rubles, “this could be considered a default by definition. Moody’s.

Thus, the positions of the entire “big three” in relation to the Russian public debt practically coincided. Standard & Poor’s already rated Russia’s foreign-currency bonds as “selective default” last week, as investors are unlikely to be able to convert rubles into “dollars equivalent to the amounts originally owed.”

According to S&P, a selective default is declared when a specific obligation is not met, but not on all of its debt.

Moscow has a 30-day grace period from April 4 to pay the funds and interest, but S&P does not expect Russia to honor its obligations given Western sanctions that undermine its “willingness and technical ability to comply.”

Fitch also warned that non-payment of foreign currency debt would mean default.

Russia’s first external default in a century looks almost inevitable – it will happen with 90 percent certainty, writes Bloomberg.

The Treasury of the Russian Federation has stopped paying dollar debts on Russian accounts in US banks. When the attempt to pay in foreign currency was blocked, Russia violated the terms of two bonds by paying investors rubles instead of dollars, the agency explains the reasons.

“This brought default one step closer. The risks of default in the Russian Federation appeared after Russia’s invasion of Ukraine in February and sanctions against the aggressor – Russian banks, companies and oligarchs. The freezing of the central bank’s foreign exchange reserves removed Russia from the global financial system, making it the country with the largest sanctions in a matter of days,” the newspaper adds.

Russia denies default and is going to sue

However, the Russian government still does not link the country’s default, the mechanism of which was launched on April 4, with the sanctions imposed on it as against the aggressor country. On April 12, the Russian Ministry of Finance announced that the default was artificially created, and in general, the information about it is not true.

“The Russian Federation has not declared a default on its obligations under Eurobonds, the information is not true. It is obvious that the obstacles to making payments, repaying and servicing the public debt of the Russian Federation in foreign currency have been artificially created,” the occupier’s Ministry of Finance said.

Dmitry Medvedev, Deputy Chairman of the Security Council of the Russian Federation, considers a default in the country to be unlikely in the near future. “You can’t step into the same water twice,” he said.

Putin’s spokesman Peskov said that Russia has all the necessary potential to fulfill its debt obligations, but “the unconstructive position of opponents can complicate the situation.”

In addition, Russia is ready to go to court if foreign states declare the Russian Federation bankrupt. “We will sue, … we will present in court our bills confirming our efforts to pay both in foreign currency and in rubles,” Anton Siluanov, head of the occupier’s finance ministry, said.

What are the implications for the Russian economy?

The last time Russia defaulted on short-term bonds was in 1998. After that, a crisis broke out in the country: the currency depreciated more than three times by the end of the year, the standard of living of the population fell sharply, the banking system was paralyzed for several months.

In the 1990s, Russia’s budget revenues were low, as the price of oil was at a record low of $16 per barrel. At the same time, in addition to the already considerable external debt, more and more new credit loans had to be taken in anticipation of rising oil prices.

However, with new debts, interest rates only rose, new loans almost ceased to be issued, and the price of oil continued to remain at a low level. Then Russia had no other choice but to recognize the impossibility of paying off its previously assumed debt obligations and declare a default.

The last default on foreign debt was more than 100 years ago when, in 1918, the Bolshevik revolutionaries under the leadership of Vladimir Lenin abandoned the tsarist debt, shocking the world debt markets, since Russia then had one of the largest foreign debts in the world.

This time, modern Russia has the means to pay off debts. In this case, the Central Bank of the Russian Federation has accumulated more than 600 billion dollars, but after the sanctions of Western countries, which froze most of the gold and foreign exchange reserves and foreign exchange transactions, Russia does not have the technical ability to pay off official obligations.

Since the default is technical, it will not cause such a global crisis as in the late 1990s, and as long as the EU pays Russia for oil and gas, there will be money in the Russian budget.

Russia still receives payments from the European Union for energy resources in the region of a billion dollars daily – since the beginning of the full-scale invasion of the Russian Federation into Ukraine, Europe has paid the aggressor the annual Ukrainian budget. The total external debt is $450 billion, and the state debt is $56 billion.

The main consequence of the default will be the inability to lend in foreign markets. This possibility has already been de facto closed with the start of a full-scale invasion of Ukraine.

However, under the conditions of continuing and intensifying sanctions, the standard of living of Russians will rapidly fall every month – prices are rising, and wages are actually declining due to the depreciating ruble.

The departure of Western companies, a ban on the import of components and other trade restrictions paralyze most areas of Russia’s life – from the purchase of diapers to the production of “unparalleled” hypersonic missiles.

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