Has Russia really gone into default?
The Bloomberg agency has announced that Russia has entered into default for the first time since 1918 (when the overthrow of the tsarist regime and the consequent refusal to cover the debts contracted by it took place), after it has not been able to meet 100 million dollars in debt interest.
According to Bloomberg agency, the 30-day grace period agreed by the creditors expired this Sunday, June 26, without the Russian treasury being able to meet its obligations. It is the “culmination of the increasingly severe Western sanctions” imposed on Russia in response to the invasion of a sovereign nation, such as Ukraine. From the economic information agency they add: “It is a grim sign of the rapid conversion of the country (Russia) into an economic, financial and political pariah”.
Sanctions, cuts in energy and raw material exports and the paralysis of the activity of practically all foreign companies on Russian soil have torpedoed the waterline of its financial system… which has led to this very undesirable situation for the Russian economy. But what does this really mean for the Russian economy?
The first and most immediate consequence of the default is that bondholders and foreign investors will be left without payment. Or rather, these creditors will be left without payment if they have not taken out bankruptcy insurance or CDS. In the event that they have, it will be these insurance companies who will assume the defaults of the defaulting state.
If a state defaults, no one repossesses it or forcibly demands what it owes… but it will have lost the confidence of investors, and therefore, no one will lend it money. A society that has allowed its economy to end up in such a situation will have to work hard – and for a long time – to regain the confidence of investors. And in the meantime, the hardships that society will have to suffer will be enormous. These problems will be particularly severe for the middle and working classes… who are the ones who – in the end – sustain the economic system of a country.
Has Russia really gone into “suspension of payments”?
“Stock exchanges are faced with a unique scenario where the debtor in default has the will and the resources to pay, but cannot,” explained Bloomberg. Therefore, the fact that Vladimir Putin’s government has incurred in a suspension of payments… is something “more symbolic than effective” because -really- Russia had already been marginalized by a large part of the international financial markets after the beginning of its offensive on Ukraine.
A few weeks ago, the Kremlin announced that it would pay its obligations by depositing rubles in a financial institution under sanctions. The U.S. Treasury Department made an exception during the first months of the conflict and allowed Moscow to pay its foreign debt. But this option was completely blocked in May. So Putin approved, last June 22, a decree that would allow unilateral payment of debts in rubles… instead of in dollars and euros (as initially agreed).
This suspension of payments is basically a technical bankruptcy. Russia argues that they want to pay, but cannot do so because of the sanctions, although they have the funds and promise to do so in the future.
Regardless of what the rating agencies say, it is up to the investors to accept or not this debt that for now they cannot collect and they have no choice but to wait to collect the outstanding debt, but it is difficult, if not impossible, for them to accept new Russian debt under these conditions.