Non-fulfillment of Russia's obligations. What does that mean?

The countdown began on April 4, when Russia tried to repay dollar debts in rubles. The payment was not made, and the Russians were given 30 days to settle their obligations to creditors in the currency determined by the debt. If the Russians fail to pay off the $ 650 million debt by May 4, then, in fact, there will be an official default, the inability to pay the obligations of the Russian Federation. By the way, the first since 1918 for external debt.

In essence, the delay is non-payment of the loan or violation of the terms of such payment. Government default is when the borrower is unable to repay government debt. Since most countries take loans regularly, they avoid government payments, because then it is difficult to find people who are willing to borrow money. So, every state non-payment is an extraordinary event, you remember the non-payment of Argentina, Venezuela or Greece, although we are not interested in their economies as Russian.

We do not accept Russian rubles

Russia's bankruptcy could have happened before, but for the first time, sanctions have allowed Russians to use blocked foreign exchange reserves to pay off debts. Fortunately, in early April, US sanctions were tightened, banning Russia from using dollar reserves in US banks, even for these purposes.

This does not mean that the Russians have run out of money, they still earn at least a billion dollars a day from the sale of gas and oil. So what are the problems with the payment of 650 million dollars? Sanctions simply do not allow the payment of this money, and if you do not find even half a billion dollars in foreign currency, what will happen to other debts?

Russia's total debt in dollars and euros is 40 billion dollars, of which more than half is owed to Western investors who do not want to pay in rubles. Although they really don't need rubles, every debt agreement simply fixes the currency, and violating this condition is tantamount to not paying the debt.

The absence of any productive and positive changes in Russian policy in response to sanctions makes the May default guaranteed at 99.9 percent. Bravo Russians, of course, not only collected reserves before the war, but also diversified them by accumulating gold and yuan to protect themselves from Western sanctions. They only hoped that those sanctions would be milder, like in 2014, so that they could look at their debt repayment plan and the sanctions would pass. As it turned out, in vain, the yuan, as well as the ruble, the debt in dollars has not been repaid..

What are the consequences of non-fulfillment of obligations?

There will be no disaster, no matter how much you want it. Since the reasons for this non-payment are not economic but political, its economic consequences will not be devastating.

First, the sovereign failure to fulfill obligations is in itself a great trouble. This is the worst signal to the financial universe that can exist. And the lack of foreign loans and investment in the Russian economy as such is good news for Ukraine. Because the countries of the "Russian world" will also think carefully

about whether they should take such risks. After all, sanctions simply block the repayment of these debts, even if there is money.

This is in our favor, because researchers from the University of Boston once estimated that 88 percent of the wars between 1823 and 2003 were financed by the state. And that is logical, it is difficult to explain to the citizens why they should be malnourished due to the military ambitions of their politicians, so it is better to go to war, so as not to upset the public again. So, the less credit there is in Russia, the less money they have for the army. The chances of the war's exhaustion scenario failing are higher.

Second, restrictions on external funding will force Russians to further reduce their spending as rising inflation, falling investment and rising unemployment ensue. It’s not a disaster, of course, but it’s very close. The worse the Russians live, the sooner they will realize that "getting up from one's knees" does not refer to foreign policy, but to domestic politics.

Third, non-compliance has short-term consequences: falling GDP growth, inflation, exchange rate fluctuations, etc. We may not know about them, because Russia is now in an "era of negative economic growth." But there are long-term ones, for example, the IMF once, analyzing the outstanding liabilities of a number of countries, estimated that the average decline in foreign trade of a country that has survived default, lasts 15 years. Such countries return to foreign capital markets at least eight years after default. Better yet, the political consequences for a failed government are always painful and irreversible. Even if the brain does not understand the essence of non-fulfillment of obligations, it realizes that it is something very bad for the state. It is clear that the Minister of Finance of the Russian Federation, Anton Siluanov, and the President of the Central Bank of Russia, Elvira Nabiulin, will be found guilty. But did we want to miss him?

What will happen after the default?

Too many lawsuits, in short. In fact, sanctions block all conscious options for restructuring these debts, because the problem is not that there is no money, but that the money cannot be spent. So, only the courts are before us.

First of all, Russia has already announced that, if the creditors declare a delay on foreign loans, it will go to court and prove that it did everything possible to repay the debts. Their main proof is, obviously, the same attempt to pay in rubles. Because we all understand that debt agreements can be read in the Russian Federation, and we knew in advance that such a payment would not be accepted, so it was a conscious preparation for a boring lawsuit.

Well, in response, creditors will first show contracts with clearly specified repayment currencies. Secondly, it will probably be noticed that the war in this case is not a force majeure, because it was initiated by the borrower. And third, it will bring to court one hundred and one official appeals from the United States, Great Britain and the European Union to Russia, in which it is officially stated from December 2021 that the response to the Russian invasion of Ukraine will be economic sanctions. That is, you have been warned in advance about economic and financial isolation, and you have ignored these warnings. Have you really done everything you can to satisfy creditors? Have you simply neglected the external obligations and interests of reputable borrowers because you feared an invasion of a neighboring state? This is roughly how the court will be, unpromising for Russia.

Creditors will, of course, seek the truth either in the courts or in arbitration - here they have options, because the terms of the securities do not set out any special requirements for resolving disputes. In any case, their goal is the same - to receive compensation and the right to confiscate the property of the Russian Federation, if there is still anything to take away. There will be no confiscation without a court decision, and what can be taken away in Russia is not worth estimating. Because this story will last for years, without exaggeration - the trials last for ten years after the Argentine default. There is currently only one clear detail - disputes will be considered in the UK, as most of Russia's foreign debt is registered there. But this is already bad news for the borrower, because the British justice system is principled and ruthless.

However, no one will close their eyes to non-payment or forgive debts. Especially since some Russian creditors will lose twice from this non-payment, because not only did they borrow money that will not be returned to them, but they also insured themselves against possible non-payment by Russia, buying so-called default swaps for six billion dollars. It seems that everything was done properly and they should have slept peacefully, but the American sanctions actually blocked the secondary market of Russian bonds. Now, on the one hand, their value is one big unknown, which means that it is simply impossible to determine the payouts for these default swaps. On the other hand - even if you decide on the amounts, do not pay them, again, because of the sanctions.

Well, next time, reputable investors will pay more attention to whom to lend.