Moscow lacks the technical capacity to repay debts due to Western sanctions that have frozen most gold reserves and foreign exchange and foreign exchange transactions. Despite the fact that the default is technical, the consequences will be felt for many years.
Russia defaulted on foreign-currency sovereign debt for the first time since 1918, Bloomberg reported. On June 27, the thirty-day “grace period” for bond payments, due on May 27, expired. The end of this extension is a default event.
There is no official default announcement. This is usually done by international rating agencies, but they have all suspended their activities in Russia, Bloomberg pointed out. The Kremlin has denied that it has fulfilled its obligations, but the bondholders have not received payment. Athletistic telling details.
Default in Russia for the first time since 1998
On the night of June 27, Russia defaulted on its foreign debt for the first time since 1918, as the extended period for repayment of approximately $ 100 million in final payments on government bonds expired, reported Bloomberg on Monday.
Default is the default of the debtor to repay the debt. The state’s declaration of default reduces its credit ratings – it becomes difficult or impossible for the country to attract new loans, as a result, the limited infusion of external capital hinders economic growth.
There was no official default announcement, as international rating agencies that normally do so have suspended their activities in Russia, the newspaper notes.
At the same time, bond holders may make such an announcement, but they are busy assessing the chances of returning all or at least part of their money, the agency wrote. For lenders to default, a quarter of bond holders have to agree.
Investors are likely to prefer to follow the course of the battles in the hope that penalties will eventually ease, the Guardian wrote. Time is on their side: they have the right to demand compensation for another three years.
The last time Russia faced default was in 1998, when it experienced a ruble crisis during the turbulent end of Boris Yeltsin’s leadership. Then he did not repay the short -term government bonds – it was mainly debt in rubles.
The default of 2022 is different because today Russia is unable to fulfill its obligations to foreign investors in foreign currency debt. This, according to Bloomberg, last happened in 1918 – then the Bolsheviks did not pay the debts of tsarist Russia.
The 1998 default was a serious blow to the economy. By the time the default was announced, the phenomena of the crisis were already growing in Russia, but the default itself became an event that actually launched a clear phase of the crisis: the ruble began to fall rapidly, stores had to change price tags several times a day, and banks began to have problems.
Economists explained that the default greatly influenced the further economic policy of Russian officials: they tried to remove debts, did not increase budget spending, and generally pursued a very conservative policy. Some economists have criticized this policy for hindering economic growth.
Why did Russia default?
We are talking about the dollar bonds Russia-2026 and Russia-2036, according to which investors should receive 71.25 million dollars and 26.5 million euros, respectively, the balance of which for 552 million dollars will be paid on April 4.
However, at that time, the United States blocked Russia’s ability to repay its debts from fixed reserves, and the RF Ministry of Finance initiated the fulfillment of the obligation in rubles.
Western market participants have prepared to default on these bonds, citing an unrelated change in the payment currency, however, at the end of April, the Russian Federation managed to bring in dollar funds. to foreign investors. According to Bloomberg, the unrestricted dollar account of mortgage corporation Dom.RF was used for this.
On May 11, the former holders of these bonds, who received the principal payment on May 2, filed a notice of Russian default in the Euroclear clearing system, citing the fact that they did not receive the additional interest accrued. from April 4 to date. of the actual redemption of the bond.
Russia, when paying the principal at the end of April, does not include additional interest in its payment, they argue. “Following the request of the holders of the securities, Russia never paid this interest,” the lenders pointed out.
In April, the U.S. banned Russia from servicing foreign debt by not renewing a license that allows holders of Russian sovereign bonds to receive payments. This license expires on May 25th.
London Citibank subsequently refused to perform the duties of a payment agency for Russian dollar issues, and the Ministry of Finance of the Russian Federation transferred these duties to the National Settlement Depository. In early June, the NSD also came under EU sanctions.
The Kremlin called this decision an attempt by Brussels to push Russia into an “artificial default.” On June 22, Russian leader Vladimir Putin signed an order on the interim procedure for fulfilling Russia’s external debt obligations in foreign currency, indicating the making of such payments in rubles.
On June 27, commenting on a Bloomberg report, Putin’s spokesman Dmitry Peskov said the Kremlin did not agree with allegations that Russia was not paying foreign currency debt obligations.
According to him, “the allegations of a default are completely unreasonable,” because in May Russia made the necessary payments in foreign currency. “The fact that Euroclear withheld this money is no longer our problem,” a Kremlin spokesman said.
What will be the consequences of Russia’s default
Will the 2022 default have the same consequences as the 1998 default? I do not think so. Under normal conditions, a default could provoke an influx of investors, a collapse in the ruble and stock exchanges, weakening economic confidence and, as a result of all this, a reduction in its growth potential. But all this has already been done by Russia’s war against Ukraine.
“It’s a very, very rare situation where another government is forcing a country to default when it has funds to pay,” Hasan Malik, senior sovereign analyst at Loomis Sayles & Company LP, told Bloomberg.
Bloomberg called the “default event” rather symbolic for Russia’s economy and the Russians are “experiencing double-digit inflation and the worst economic collapse in recent years.”
“This is a stark marker of the country’s rapid transformation into an economic, financial and political pariah,” the agency said.
But the damage to reputation from the default, the Financial Times wrote, if penalties are raised will exacerbate the issuance of new bonds and the Russian government will have to offer a higher yield on them.
The default will not affect Russia in the short term, said Chris Weafer, chief executive of Macro Advisory, a Moscow -based consulting firm. This is due to the fact that Russia does not have to raise money around the world, because it receives revenue from expensive goods such as oil.
But he agrees that it will create an “inherited” problem. “These are actions that will spur the economy and greatly complicate the recovery once we get to this stage,” the expert said.
The default will lead to the need to repay large amounts of debt to Russia. About $ 40 billion of Russia’s debt is denominated in dollars or euros, and about half of it is abroad.
“Some parts of this debt will now be automatically redeemed, as all loan instruments have a prepayment clause, so if you don’t meet one, it will usually trigger an immediate call to pay off other debts. , so Russia will surely face immediate debt repayment. about $ 20 billion at this stage, ”he told BBC Today.
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Source: korrespondent
I am David Wyatt, a professional writer and journalist for Buna Times. I specialize in the world section of news coverage, where I bring to light stories and issues that affect us globally. As a graduate of Journalism, I have always had the passion to spread knowledge through writing.