Russia cannot pay foreign creditors and is sliding into insolvency. But the financial markets react calmly. The Russian government is also relaxed.
It is unclear whether Russia is already technically broke or only tonight. But one thing is certain: initially nothing will change.
For the first time in more than a century, Russia has defaulted on paying off its foreign debt. But that’s not because the government ran out of money. The country cannot make interest payments due because it is largely isolated from the global financial system. As a result, the Russian government cannot transfer the money to foreign creditors even though it is available.
Presidential spokesman Dmitry Peskov said Russia had made the bond payments due. The fact that they were not passed on to the banks by the clearing house Euroclear because of Western sanctions is “not our problem”.
The background: At the end of May, Russia had to pay interest on two government bonds in foreign currency – 29 million euros and 71 million dollars. However, due to the sanctions imposed for the attack on Ukraine, Russia was unable to do so. Now the usual grace period of 30 days has expired. Lawyers disagree as to whether that was the case on Sunday evening or only occurs on Monday evening.
In principle, Russia is technically insolvent because creditors have not received their money. But this has no immediate consequences. At the moment it even looks as if there will be further failures. Because President Vladimir Putin has signed a decree according to which the country can make payments due in rubles and not in euros or dollars. However, this contradicts the contractual terms of many bonds and would mean a default every time. But the Kremlin shouldn’t care.
This is because Russia is already largely excluded from the global financial market. Technical defaults do not complicate the situation for the Kremlin. In the medium term, it is likely to become more expensive for Russia’s to return to the capital market and borrow. But a return is currently not foreseeable anyway – regardless of whether Russia is servicing its debts or not.
In addition, Russia has little debt by international standards. The ratio of total debt to economic output is currently around twenty percent. The foreign exchange reserves held by the Russian central bank, some of which have been blocked, are currently likely to be close to 600 billion dollars. In addition, only a small part of the national debt is in the hands of foreign creditors. They hold about half of Russia’s government bonds issued in foreign currency, totaling $40 billion. This is small for the size of Russia’s economic output.
Against this background, the financial market reacted with complete composure to the first default on foreign debt since the Russian Revolution. It had been clear for weeks that this would happen at some point. Bankruptcy is therefore classified as a formality.
Russia’s western creditors must now decide how to proceed. One possibility is that at least 25 percent of the affected investors band together and declare a formal default and demand to get their money immediately. This could result in all of Russia’s external debt being considered non-performing. But even then the creditors would not get their money because of the sanctions.
Investors could also try to foreclose on Russian state property abroad – like hedge funds did with the Argentine Navy’s training ship that was seized in Ghana. But even if investors succeeded, they would have achieved little. Because the Western sanctions are likely to make it very difficult for them to sell Russian assets.
