May 17, 2022

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Russia risks default

With the onset of the Russian invasion of Ukraine, the possibility of Russia defaulting, that is, it would not be able to repay its debts, became increasingly tangible. It will be an extraordinary event, the consequences of which are difficult to predict: to get an idea of ​​its effects – on the Russian economy and on Western creditors – we will have to wait to understand what this potential default will be. It is managed, especially if it will be limited to government bonds or will also be extended to corporate bonds, that is, debts incurred by Russian companies with international creditors.

Ratings firms and analysts now agree that Russia may default at least part of its government debt.

Determined by rating company FitchCheckAnd it lowered the Russian state debt rating, as it had previously done by other major international rating firms such as Moody’s and Standard & Poor’s. The reduction was so significant that Russia’s public debt is now considered “junk”, as they say in jargon: this means that those who buy Russian government bonds today face a very high risk of not being repaid. Carmen Reinhart, also an economist at the World Bank He said That Russia (along with Belarus) “clearly falls into the hypothetical zone”.

A “default” is defined as a state of insolvency in which a country’s government is unable (or rarely refuses) to pay all or part of its debt.

Technically, Russia is not yet in default because it hasn’t had to pay due dates or interest on its debt since the start of the war, but that could change in a matter of weeks. On March 16, the deadline for paying $107 million in interest to foreign investors expires, although a 30-day “grace period” has been granted for such payments, during which the debtor is not yet considered insolvent. However, if the payment does not arrive by April 15, at the end of the “grace period”, Russia will be officially in default.

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Secondly Reutersother payments are expected at a later time: one of $359 million on March 31 and one of $2 billion on April 4 (also in this case there is a 30-day “grace period”).

For Russia, this would be the first default of international creditors since the post-1917 years, when the newly established Bolshevik government refused to repay the Tsar’s debts. Russia had also defaulted in 1998, but out of $40 billion in debt owed internally: precisely as a result of that crisis, Russian President Vladimir Putin was elected, promising to revive the economy.

Until a few weeks ago, buying Russian government bonds was considered a good investment. The country has low debt (in 2020 it was about $280 billion; Italy, for comparison, has a public debt of about 2,500 billion euros, which is about $2,900 billion), an excellent debt ratio and – and before the war – more than 640 billion GDP dollars from gold and foreign exchange reserves held by the central bank, making debt payments virtually guaranteed.

Things changed drastically with the invasion and after the imposition harsh western sanctions.

Within days, the Russian government turned from a theoretically large cash availability to a shortage: sanctions have reduced Russia’s economic resources by reducing various sources of income and by blocking more than half of the reserves held by the Russian Central Bank. Foreign currency: Of the more than 640 billion available, according to experts, less than half remained in Russia, and the rest was frozen by Western governments. All this without taking into account that Russia now has a very expensive and probably a very long war to finance. Therefore, it is likely that at the moment Russia still has the resources it needs to repay its debts, but they are quickly running out.

There are also technical problems: the decoupling of the Russian financial system from the global system due to sanctions, along with the controls on capital movements imposed by the Russian authorities, has made the issuance of payments a problem: how he wrote The Washington PostRussia lacks the “logistical means” to repay the debt.

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Then there is another unprecedented element that makes default likely: Russia, at the moment, is paying off its debts with international creditors. A little might be useful.

Usually, when a country defaults, the worst consequence it can suffer is the loss of access to international markets. If a country does not pay its debts, it will struggle to find investors willing to lend it more money, and if in the long run it can no longer finance itself, it risks a complete collapse of its economy. For this reason, usually, when a country defaults, its government rushes to enter into negotiations with creditors and postpone payments to restore confidence in the markets and maintain open access to new investments.

But Russia has already lost access to international markets. As a result of Western sanctions, it cannot borrow from eight of the world’s ten largest economies, and even without sanctions, the war and economic crisis have greatly intimidated creditors.

Russia has already suffered the most serious consequences that usually accompany defaults and now, how He said Financier Jay Newman A BloombergPaying his debts is “optional… at this point it doesn’t make sense for them to pay.” This, of course, is true only in the short term: if Russia hopes to reintegrate itself into the global economy, it will have to restore market confidence and find ways to pay off its debt.

However, this is not a good sign for the Russian economy: in cash crunch, sanctions, unable to refinance itself in the markets, and as an expensive war drags on, Russia risks one of its worst economic meltdowns in decades.

Meanwhile, the problem of Russian default concerns mainly international creditors, who own the equivalent of $40 billion in Russian debt in dollars and euros and $28 billion in rubles. It is an important amount that, among other things, the various Italian banks are exposed to some exposure: in particular Unicreditwhich is by far one of the European banks with the most exposure to the Russian economy, but also Intesa Sanpaolo.

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However, it is not an amount capable of causing serious consequences for the global economy, both because the worst defaults did not (in 2001 Argentina defaulted on $82 billion in debt) and because the Russian government is unlikely to announce a default true. . It is likely, for example, that it will try to pay off its debt denominated in international currency in rubles, which at the moment have been exceptionally devalued. Government bonds issued in one currency are usually repaid in the same currency, but Russian President Vladimir Putin this week signed a decree requiring creditors from “enemy” countries to pay in rubles.

For creditors it will be a huge loss, and there are likely to be legal disputes on this issue. Among other things, there has been a proposal to use Russian reserves frozen due to sanctions to repay creditors: however, it is a very remote possibility, which could lead to years of contention.

Things could get even worse if companies, and not just the Russian state, refused to pay their debts. The exposure of international creditors to Russian companies is more than $200 billion, which if not paid (or if paid in reduced rubles, as required by the decree signed by Putin) will create significant problems. This hypothesis, remote, has not yet been fulfilled: on the contrary, on March 7, Russia’s state-owned Gazprom paid $1.3 billion in expired bonds as expected in the contracts, although it is not clear whether it did. The commitments made or because he did not have time to adapt to the new Russian regulations.