Russia is likely to be unable to repay its foreign currency debt for the first time in decades, which is likely to begin a process of international conflicts.
International sanctions against the Central Bank of Russia over Ukraine’s irreversible attacks have blocked a large portion of the country’s foreign exchange reserves, which it used to pay off private debts.
Measures taken by Moscow to reduce the impact – such as financial control – have led to large rating agencies lowering the Russian government’s debt, concluding that debt default is now more likely to happen.
This will be the first sign of Russia’s failure since 1998, when it failed to repay its domestic debt, as well as the non-payment of its first foreign currency debt since the 1918 Bolshevik Revolution.
Here is a quick CNBC guide to what is happening:
When does it need to pay?
The Russian government is expected to pay $ 117 million in interest on two private eurobonds on Wednesday, the first of four payday loans to lenders only in March, but economists are still unsure how Moscow will meet its debt obligations.
Russian Finance Minister Anton Siluanov revealed on Monday that Russia will use its Chinese yuan reserves to make some of its payments, as euros and dollars are now inaccessible due to sanctions.
Otherwise, the government has warned that payments to debtors from “hostile” countries will be made in rubles, and the cost has dropped dramatically since the Ukrainian invasion.
William Jackson, chief economist at emerging market economics at Capital Economics, explained in a letter on Monday that although some Russian FX bonds – those issued since 2018 – allow payments in rubles if they cannot withdraw in other currencies, this does not apply on Wednesday. payments.
Jackson suggested that trying to pay in rubles would be as automatic, although it was less than a grace period of 30 days before it became official.
Western governments are concerned that Russia is losing some of its remaining foreign assets to repay lenders. This also undermines Russia’s free FX assets, according to Timothy Ash, a major emerging market strategist at BlueBay Asset Management.
“At the moment the message seems to be that the Treasury is willing and able to pay, but it is prohibited from doing so with CBR sanctions, so a message from Russia states that if the West wants to repay Western lenders sanctions on CBR need to be released,” Ash told email on Monday.
“It even issued an order that it would pay by FX through a credit service to foreign banks, but if these banks are unable to cooperate with CBR due to disciplinary action, the debts will be paid in rubles but kept in CBR. The National Security Depository (NSD) and payments will be made at a later date through accounts called ‘S’. “
What are the consequences?
This, Ash says, may be a failure, but Russia’s Treasury Department will again say it tried to pay but was barred from completing work due to sanctions.
“Although in some ways the MOF would prefer not to be able to repay foreign debtors as this a) saves rare FX savings; b) it hurts investors in rival countries, and then hopes to persuade their governments to lift sanctions, worse that default and potential failure could have serious and long-lasting consequences in Russia, ”Ash added.
Failure to pay will result in Russia’s rates being reduced by default by companies, which could be extended due to the difficulty of ensuring a rapid debt recovery. This will keep Russia’s borrowing costs high and limit financial options, even China’s popularity, Ash suggested.
“Even if the war ends soon, peace is resolved, markets and rating agencies will keep this problem in mind for some time and rates will be delayed, and Russia’s borrowing costs will be reduced. This will hamper Russia’s economic development in the coming years, ”he added.
On Wednesday, Ash estimated that more money would be paid, perhaps with some delay, but it was not clear whether foreign investors would be able to access it, and in what form.
Russia and the rating agencies will also have to negotiate whether this is a non-payment, a dispute they suggest could end up in the courts.
Will it lead to more default?
Capital Economics’ Jackson suggested that while automation is more expensive for foreign investors, and that Russia’s strong public finances imply that the government does not rely too much on foreign currency, Russia’s business debt may be at risk.
“Perhaps the biggest risk is that it could be a precursor to the failure of Russian companies, whose foreign debt is four times larger than that of the state,” he said.
“So far, Russian companies seem to have continued to pay off their debts since sanctions were tightened, but as trade is disrupted, sanctions are likely to be extended and the economy slipped into a major recession, the chances of corporate failure increase.”
BlackRock and Pimco have already been identified among many fund managers around the world who are exposed to Russian debt, although many of these positions have been marked and are already reflected in fund prices.
Economists have dispelled widespread fears of the effects of globalization if Russia makes a mistake. IMF Executive Director Kristalina Georgieva said in an interview on Sunday that the $ 120 billion global banking crackdown on Russia “does not work in a systematic way.”
Jackson also noted that overseas debtors have strongly noted the participants, while noting that the total size of Russia’s foreign currency debt held by non-citizens is “relatively small” by about 20 billion.