Doubts Russia Will Not Be Capable to Pay Its Debts
Russia may pay off its debts after Western sanctions were imposed after it invaded Ukraine. Today, it will pay investors $117 million in interest on two-dollar-denominated bonds. Credit rating agencies warned that debt default is inevitable. The Russian finance minister said the claim has been paid and is awaiting an installment in the US banking system. It is unclear whether the current deadline for interest payments is met.
The Russian government and firms such as Lukoil, Gazprom, and Sberbank owe about $150 billion to foreign investors. Most of this is in dollars or euros. Accordingly, interest and payment must be in that currency. However, sanctions imposed after the invasion of Ukraine mean that Russia lost access to much of its $630 billion in foreign exchange reserves. However, it still receives dollars for the oil, gas, and other items it sells abroad, and foreign currency is available. If Russia completes the default, it will be its first debt since 1998.
In addition, it will also be the country’s first default in foreign currency since the 1917 revolution, When the new Bolshevik government refused to recognize the debts of the last tsar. However, if Russia pays using the existing dollar in the country, then the default concern will now disappear.
Another possibility is that Russia will not pay today; While $117 million has been paid; technically, there is a 30-day grace period to settle the tax by April 15th. So Russia will not be officially considered a default until then. The third option is where Russia pays rubles. His foreign ministry said it would pay international investors in rubles if they did not pay in dollars or euros.
Russia and The Global Economy
However, none of the dollar-denominated bonds you have to pay today allow you to use any other currency, so it is likely to cause a default. Some other Russian debt agreements will enable the use of different currencies; In this case, payment in rubles may be acceptable. This will depend on whether the ruble payment is the same value as the actual dollar or euro payment that investors expected.
Investors in Russia have seen the value of their investments decline in recent days. The problem will be falling rapidly from Russia’s financial grace for many. According to Moody, from a 21-point rating scale that indicates how credible the country is as a place to invest, Russia’s rating is now the second-lowest and may fall even further. According to Moody, this rating also means that it is waiting for a Russian default. Accordingly, he warns investors in Russia that they could lose up to 35% -65% of their money.
Finally, when Russia defaulted – in 1998 – it shocked the financial markets. According to the chief economist at Capital Economics, now the default will be very symbolic; However, significant results are likely to follow. The International Monetary Fund has said it will cut its forecast for global economic growth by 4.4% in 2022 due to the war. However, the head of the International Monetary Fund rejected the idea of a broader shock to the global financial system due to Russia’s default.
However, he warned that sanctions against Russia would lead to a deep recession. Consequently, the war will increase global food and energy prices. A still unknown factor is what could be the non-payment of debt by Russian firms and what impact they may have on foreign investors who have made significant investments in Russia.
Any debt default is likely to exacerbate financial and economic problems, Which Russia is now facing. Before invading Ukraine, Russia was one of the most creditworthy countries with low debt levels. However, now everything has changed dramatically.
Many foreign firms have left, and Moscow imposed strict credit controls to restrict the outflow of money to protect the economy and the ruble. Nevertheless, the Russian economy will shrink by 7% this year due to sanctions. Inflation was already 9.15% in February before the invasion of Ukraine. It is now suggested that it increase considerably, Although the Central Bank of Russia will raise interest rates to 20%, from 9.5%.