What happens if Russia defaults? economists weigh in

There is now a real risk that Russia could default on its national debt as the US tightens economic sanctions on President Vladimir Putin’s government amid the ongoing war in Ukraine.

On Monday, the US Treasury Department barred Russia from paying more than $600 million from the country’s reserves in US-based banks to its bondholders, which would allow Russia to dip into dollar assets held at home or depreciate in rubles. may be compelled to service the debt. ,

The Treasury had blocked the Central Bank of Russia’s access to about $300 billion of the country’s total reserves of about $640 billion, but forced the US government to make coupon payments on dollar-denominated loans on a case-by-case basis. -Was allowing access to held repository. Case basis.

Russian President Vladimir Putin speaks during his address to the nation in the Kremlin in Moscow on February 21, 2022. Russia faces the risk of default as the US freezes loan repayments from US-held reserves.
Alexey Nikolsky / Sputnik / AFP / Getty Images

However, the Treasury barred Russia from doing so on Monday as a principal payment of $552.4 million on a maturing bond became payable on a 2042 sovereign dollar bond with a separate $84 million coupon payment.

Russia has a grace period of 30 days to make payments on Monday, but a default will occur if the country fails to make payments within that time frame or if Russia pays in rubles where other currencies such as dollars and euros are exchanged. was specified.

Russia has 15 outstanding international bonds with a combined face value of about $40 billion.

Kremlin spokesman Dmitry Peskov said on Wednesday That Russia can pay its debt but it may have to pay it in roubles.

“Significant amounts of our reserves are blocked abroad, so if this blockage continues and these transfers are blocked with blocked amounts, they will be serviced in rubles,” Peskov said at a news conference.

“If this is not possible, then, in principle, of course, a default position could be organized,” he said.

the experts we spoke to newsweek suggested that there was a real risk of default but the possibility of Russia opting to repay its debts.

Russia’s Choice

Tatiana Orlova is an Emerging Markets (EM) economist at Oxford Economics. He said newsweek that Russia is likely to pay off its debts using the foreign currency (FX) funds available to it.

“Russia will have a choice between defaulting and using FX funds that are still available—for example, export proceeds—to repay bondholders,” Orlova said.

“So far, Russia has shown a willingness to honor its sovereign debt obligations. I have a high probability that the government will decide to continue to do so despite the new US sanctions,” she said.

“As Russia’s oil and gas exports are not restricted, it continues to receive a steady stream of FX export earnings, and in addition to gas and oil exports, there are wheat, metals, fertilizer exports, etc.,” Orlova he said. ,

President Joe Biden has banned US imports of Russian energy but most European countries have yet to do so. Russia provides about 40 percent of the EU’s gas needs and 27 percent of its oil.

Orlova said that “it was difficult to find a way to ensure that US dollar-denominated funds reach bondholders.”

“The total sovereign foreign debt amounts to about $40 billion,” Orlova said. “It is not front-loaded, meaning this year’s payout is not a huge burden, even if Russia does not have access to a large portion of its FX reserves.”

“In my opinion, Russia still has sufficient funds for its sovereign debt repayments – the only problem is that it may be prevented from doing so by the technical constraints imposed by US sanctions,” she said.

sanctions and sovereign debt

Orlova warned that there is still a risk that Russia could default and that this will potentially have a huge impact on sovereign borrowings in US dollars.

“The default risk is very high because the US is doing its best to prevent Russia’s sovereign debt repayments,” Orlova said.

“If Russia defaults, it would be a unique case of a sovereign borrower being able to do so and unable to pay due to sanctions imposed by the country in whose currency the loan is issued,” she said.

Orlova said a Russian default “could potentially reduce the popularity of sovereign debt issuance in US dollars with other emerging markets, particularly those that have their own views on the direction of their foreign policy—China.” , Saudi Arabia, Turkey.”

“The share in circulation of US dollar-denominated government debt will gradually decline,” it said.

bondholders sit tight

Anna Galpern is a non-resident Senior Fellow at the Peter G. Peterson Institute for International Economics and Professor of Law at the Georgetown University Law Center. She also co-directs the Sovereign Debt Forum, which focuses on research about sovereign debt management.

Galpern told newsweek That if Russia defaults, the consequences may not be felt in the short term.

“In the near term, if they fail to pay before the grace period, it is entirely plausible – though not certain – that nothing will happen immediately,” Gelper said.

“If you are a bondholder, enforcement will be very messy, with all the uncertainties regarding legal, regulatory, institutional, political and reputational factors,” she said.

“Unless you’ve got some assets against which you can enforce without sharing it with a lot of fellow travelers, you can just sit tight,” Gelper said.

“When some of the dust settles, but before the sanctions are lifted – no matter how long – I suspect that creditors may try to find and set their claims for the benefit of Russian government entities or against the flow of money.” ,” He said.

Gelpern said she would “expect to see some interesting battles, not between Russia and its creditors, but between creditors and creditors outside Russia and those who can give money to Russia.”

debt relief

In the short and medium term, Galpern said it will “remain ledger-focused on payment systems.”

“Holding the payment flow, not finding treasure chests, is the name of the game for creditors and other claimants,” she said. “This will have the effect of increasing the impact of financial sanctions, as Russia will need to find its way around sanctions and private creditor claims.”

Gelpern said it was possible that the Russian government “managed to buy a lot of debt directly or by proxy when the price fell” and that “whoever holds the debt to the government will keep it” until an opportune time. Country.

“If that’s the case, I don’t think they’ll just cancel the loan,” she said, adding that whoever held the loan would keep it.

“For now, they don’t really need debt relief — they don’t have a lot of debt relative to past crises or relative to other countries in crisis. The concern is payment disruptions,” Gelper said.

long term

Galpern and Orlova suggested newsweek That Russia will not face serious problems in the short term as a result of the default, but the country will find it difficult to borrow on international markets in the long term.

“For Russia, it probably won’t matter much in the short term – it is currently unable to raise funds in international capital markets anyway,” Orlova said.

“Furthermore, there is no acute need for the government to raise external financing while commodity prices are high,” she said.

“When Russia finally gets into international lending markets, which is not going to happen very soon, it will have borrowing costs like Argentina or other emerging markets that have recently defaulted. Russia will probably wait for many years before it can Try to put in place a sovereign bond again,” Orlova said.

Galpern suggested that the issue of claims on Russia’s debt could be subject to an international process after the conflict ended.

“A long time from now, I would not be surprised to see a process—a special international tribunal or similar—to resolve and satisfy various competing claims,” she said.

“But not before a political settlement, which can take ages,” Gelper said.

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