Russia’s first foreign debt default in more than a century is not expected to have a major impact on global financial markets.
The grace period for bond interest payments, due on May 27, ended on June 26. Due to the inability to pay by this time, Russia has technically fallen into default. However, according to the AP, it can take time to confirm a default.
Last month, the US Treasury Department ended Moscow’s ability to repay billions of dollars in debt to international investors through Washington banks. In response, the Russian Finance Ministry said it would pay its debts in rubles.
Russia has criticized the West for pushing it into “artificial default” because it has the money to pay it off, but sanctions have frozen its foreign currency reserves abroad.
Tim Ash, senior analyst at BlueBay Asset Management (UK), said the default was “clearly not out of Russia’s control” and that sanctions were preventing the country from paying its debts.
How much does Russia owe?
Russia owes about $40 billion in related foreign bonds. Before the start of the “military campaign”, Russia had about $640 billion in foreign currency and gold reserves, most of which were kept abroad and now frozen.
Russia has not defaulted on a foreign debt since the Bolshevik revolution in 1917. Russia defaulted on its domestic debt in the late 1990s, but was able to recover later with the help of international aid.
Investors had been anticipating Russia’s default for months. Russian debt insurance policies have assessed the probability of default for several weeks.
What can investors do?
The official way to declare default is if 25% or more bondholders say they didn’t get their money. Once that happens, all other Russian foreign bonds are said to be in default as well, and bondholders can then ask a court to enforce the payment.
Under normal circumstances, investors and defaulting governments negotiate, in which bondholders are awarded new, lower-valued bonds. However, that at least helps them get some compensation.
However, sanctions have prevented dealings with Russia’s Finance Ministry, and no one knows when the conflict in Ukraine will end or how much the defaulted bonds might be worth.
In this case, declaring default and suing “may not be the wisest option,” said Jay S. Auslander, a leading attorney at the Wilk Auslander firm in New York. It is impossible to negotiate with Russia and there are too many unknowns, so creditors may decide to wait.
When a country defaults, that country can be cut off from borrowing in the bond market until the default is resolved, and investors regain confidence in their ability and willingness to pay. government payment. However, Russia has been cut off from Western capital markets, so getting loans back is a long way off anyway.
The Kremlin can still borrow in the domestic ruble, which relies heavily on Russian banks to buy bonds.
What is the impact of Russia’s default?
Western sanctions over the “military operation” in Ukraine have prompted the withdrawal of foreign companies from Russia, as well as disrupted the country’s commercial and financial ties with the rest of the world. gender. Default would be a sign of that disruption.
Investment analysts are cautiously calculating that Russia’s default will not have the same impact on financial markets and global institutions as the previous one in 1998.
Back then, Russia’s default on its bonds in domestic rubles prompted Washington to step in and encourage banks to underwrite a large US hedge fund. According to them, the failure of the fund could possibly shake the broader banking and financial system.
Bond holders, such as those investing in emerging bond markets, can suffer severe losses. However, Russia only plays a small role in the emerging market bond index, thereby limiting the damage to investors.
International Monetary Fund chief executive Kristalina Georgieva said that while the conflict in Ukraine is driving food and energy prices up worldwide, a default on government bonds would be “certainly irrelevant in terms of system side”.