"Trampoline works": How non-fulfillment of foreign debt affects the future of the Russian Federation
Despite the "fortress" the Kremlin has built for itself, international sanctions are working: Russia has not paid $ 100 million in interest on Eurobonds.
After nearly four months of balancing on the brink, Russia has failed to pay $ 100 million in interest on its Eurobonds. The Kremlin had a month after the Russian Ministry of Finance missed the payment on May 27, 2022, and on June 26, 2022, this grace period expired.
According to the Russian side, they sent the money, but it got stuck in the Euroclear system (a Belgian financial services company specializing in settling securities transactions) due to Western sanctions, which blocked the method of payment to foreign creditors. But in the end the creditors did not get the money.
That is, according to the conditions of the bond issue in Russia, there is an "event of non-fulfillment of obligations" - non-fulfillment of obligations.
Not the first time?
Russia has already experienced at least two non-fulfillments of obligations in its recent history. Thus, in 1991, Russia tried to refuse to pay the international debts it inherited after the collapse of the Soviet Union.
It was about 100+ billion dollars. Then, Russia formally stated that such a state as the USSR does not exist, so the Kremlin will not fulfill its credit obligations on this debt. The Paris Club of Creditors then forced Russia to recognize part of the debts of the former USSR, and in 1996 they restructured the debt.
Against the backdrop of falling world oil prices in 1998, Russian authorities were unable to service their domestic debt. The Russian government then collected very little tax (depending on oil revenues) and was financed by short domestic treasury bills, on which yields rose sharply.
On August 17, 1998, Russia suspended the payment of domestic debt for 40 billion dollars and devalued the ruble. At that time, the head of their government was Sergei Kiriyenko, now - the first deputy head of the administration of the President of the Russian Federation, who oversees the occupied territories of Ukraine. So, he already has experience with non-payment of debts.
But Russia used to fulfill its external financial obligations. This is now the first non-payment of Russia's foreign debt since February 1918, when the Bolshevik leader Ulyanov-Lenin refused to pay the debts of the tsarist government after the October Revolution.
According to the prices from 2020, the then debt of Russia can be estimated at 500 billion dollars, and now it is stuck at 100 million dollars.
Why it matters
First, Russia's announcement of the impossibility of repaying the foreign debt shows that, despite the "fortress" that the Kremlin built there, international sanctions work (or, as Elon Musk would say, "the trampoline works").
In fact, Russia is separated from foreign capital markets, major banking systems (correspondent banks, clearing systems, depositories) and rating agencies. This made it impossible for Russia to pay its foreign debts, and Russia went bankrupt.
The Ministry of Finance of the Russian Federation complains that all this is the aspiration of the West and that they want to pay, but they cannot. They tried to pay in rubles, forcing creditors to open accounts in Russian banks. They said it was a farce or force majeure, but it failed.
By analogy, it is like seeing a house or a bank with all your money in front of your eyes, and at the same time telling your creditors: "I could give it back to you, but I can't get to my house or the bank." "So in Russia, their financial system is collapsing and all the international creditors are seeing it now.
Second, default is a severe blow to Russia's image in financial markets, which usually closes the country's access to foreign markets for many years.
Some will say that the Russian Federation does not have it after the start of the war. That is true, but non-fulfillment of obligations will make it very difficult for them to return to the civilized financial market even after the war, especially considering that the world investment banks, rating agencies and auditing companies of the Big Four have also left the Russian market and will not return soon.
When, after the regime change in Russia and the payment of post-war reparations to Ukraine, the infrastructure of the stock exchange begins to recover, years will pass, and the Russian Federation will start its journey with the status of garbage due to its debt.
There is another important point
It will be interesting to see how Western investors (they now have about $ 20 billion in Russian Eurobonds) will demand that Russia pay off its outstanding debts. There is a chance that he will do nothing and wait for further development of the situation with the war, sanctions or the health condition of Russian President Vladimir Putin. But there is also the possibility that lenders may want to hire lawyers and understand how to use the funds of the Russian Central Bank for payment, which are now frozen in the United States and Europe.
As they once said: amicus meus, inimicus inimici mei, that is, it will be very good for Ukraine when another enemy of Russia becomes an influential international financial business.
Let's wait and see how Russia will continue to slide into a state of economic, financial and political exile for most countries. Russia will continue to pay for everything.
The next step is to recognize Russia as a sponsor of terrorism. After the rocket attacks on Ukrainian cities from June 25 to 26, 2022, it is a matter of a short time ... and then a complete embargo on the export of Russian energy or at least the establishment of a limit on oil export prices, which will limit earnings from Russian exports.
The G7 countries are also expected to ban the import of Russian gold, the second most important export commodity for Russia. goods.
So for Russia - the country of the aggressor, the financial life after non-payment will be interesting, but not long.
Putin wanted to be like Peter I, but he will be like Vladimir Ulyanov-Lenin… He chose this fate himself.