Russia a hair width from the default

(Moscow) Russia is a hair’s breadth away from default because it says it wants to respect its financial obligations. The United States has decided to end today an exemption that allows it to pay its debts in dollars, Moscow will pay its debt in rubles, the Russian Ministry of Finance said on Wednesday.

Updated yesterday at 12:53 pm

“Since the refusal to extend this license makes it impossible to continue respecting the foreign debt in dollars, payments will be made in Russian currency with the possibility of converting them afterwards into the original currency through the National Settlement. Depository (NSD) to serve as ‘paying agent,’ the ministry said in a statement.

The NSD is a centralized Russian body responsible for depositing financial securities traded in the country.

“Russia’s Ministry of Finance, as a responsible borrower, ensures the readiness to continue to honor and repay all financial obligations,” the statement said.

“The current situation is unlike the situation in 1998, when Russia did not have enough funds to repay its debts,” Finance Minister Anton Silouanov said, quoted in the statement. “Now we have money, and the will to pay is also there”.

“This situation created artificially by an unfriendly country has no impact on the lives of Russians,” he said.

On Tuesday, the U.S. Treasury announced it had decided to end, from 12:01 am Wednesday, Washington time, an exemption that allows Moscow to pay off its debts in dollars.

In the area since the beginning of Western sanctions against Russia, in retaliation for the war in Ukraine, this exemption has allowed Moscow to escape default.

Washington has decided to “allow a smooth transition and investors to sell their securities,” U.S. Treasury Secretary Janet Yellen explained last week.

Yellen then indicated that this exemption would “probably” end.

Moscow faces “payment difficulties”

Washington’s proposal will take effect two days before Moscow’s next payment deadline, which is just for more than $ 100 million in interest on the two bonds.

According to wall street journal cited Russia’s official news agency Tass, however authorities have already paid the interest.

Aside from the May 27 deadline, the Russian government still has to honor 12 payments by the end of the year.

Russia can no longer repay its debt using dollars held in American banks, under strengthened sanctions imposed by the United States on April 5th.

Russian central bank governor Elvira Nabioullina admitted on April 29 that Moscow was facing “payment difficulties”, but she declined to speak about a potential default.

Russia’s external debt represents, according to its Ministry of Finance, approximately 4.5 trillion to 4.7 trillion rubles (about $ 78 to $ 81 billion at the current rate), or 20% of total public debt.

What does state default mean?

A country is considered a default of payment when it does not fulfill its financial promises to its creditors, which may be States, financial institutions (International Monetary Fund, World Bank, etc.) or investors in financial markets. Default qualifies as partial when the State fails to pay part of its obligations.

The announcement could also come from a rating agency after the 30 -day grace period, but as for Russia, three major agencies have downgraded the country’s state and corporate debt rating to comply with European sanctions.

The default can still be formalized by a private creditor who has publicly announced that a country has stopped paying it, or through the American agency ISDA (International Swaps and Derivatives Association), which manages CDS, a type of insurance against default of payment.

The only way is that “the European Union or the United Kingdom allows payments to Russia in euros or in pounds sterling”, an unlikely hypothesis according to teacher-researchers.

In addition to the first 71 million dollars, a second payment of 26.5 million euros is expected by investors on Friday, this time the possibility to pay in rubles according to Slim Souissi.

Three other interest payments, just under $ 400 million, should also be honored by the end of June, according to data compiled by the Bloomberg agency, some of which must be paid only in American currency.

How is the situation not typical?

Russia is a hair’s breadth away from default even as it says it wants to respect its financial obligations.

These are sanctions aimed at hampering Russia’s economy and financial system that prevent Russia from paying its creditors, first, according to Mr. Souissi.

“There are no examples of countries defaulting because of sanctions. In 2014, Argentina refused to pay” vulture funds by having financial means, “but it was in resistance to a decision of court ”, describes Tim Samples, professor of law at the University of Georgia in the States -United.

Sanso IS portfolio manager Cyriaque Dailland believes the United States is “pushing the Russians into default”.

Russia’s Finance Minister has promised to go to court if the country is declared non -paying, to show evidence of its efforts to repatriate investors.

If Russia is overly concerned, it is that a default will significantly reduce its ability to borrow in the future, even if in fact it will no longer be able to accumulate funds due to Western sanctions.

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