Russia Avoids Defaulting on its Debt

Russia Avoids Defaulting on its Debt


The sanctions the U.S. has imposed on Russia are designed to give the country the choice between spending foreign currency reserves and defaulting, said White House spokeswoman Jen Psaki.

According to her, the ultimate goal of the U.S. administration is to deplete the resources that Russian President Vladimir Putin has to continue his activities against Ukraine.

As a reminder, after the start of the special military operation that Russia has been conducting in Ukraine since February 24, the West announced large-scale sanctions against our country, among which almost half ($300 billion) of the Central Bank's gold and foreign currency reserves were frozen. Nevertheless, even after that, the Russian Ministry of Finance announced several times that it continued to make payments on foreign debt.

As for the settlement of the Eurobonds, Russia for the first time performed them for $650 million in rubles. There is another important detail. The Ministry of Finance transferred the funds to the National Settlement Depository only after the foreign correspondent bank had refused to execute its orders. A little earlier, the international rating agencies announced that they would consider ruble payments on Eurobonds, provided for payment in foreign currency, as a default.

“Our Western 'partners' clearly know that Russia has enough money to pay them back,” economist, publicist, and radio host Mikhail Khazin said in an interview with “Moreover, we can open a ruble account for them and pay them in rubles at the exchange rate. Before imposing new sanctions against our country, the U.S. should pay attention to the unprecedented inflation in their country, equal to more than 20% per year. The U.S. faces a very real threat of collapse of GDP, up to 30%, and, accordingly, a severe decline in living standards of ordinary citizens.”

Meanwhile, the Russian Financial Ministry continues to respect the interests of the security holders and the fulfillment of the obligations of the Russian Federation. Thus, the Ministry of Finance acquired a Russian financial institution to make payments, and on April 4 everything was paid in rubles at the official exchange rate of the Bank of Russia. So, it can be said quite definitely that the obligations under the Russia-2022 and Russia-2042 bonds have already been fulfilled.

Notably, payments to foreign holders of bonds of the so-called unfriendly countries will be credited to type “C” accounts, but conversion into currency from these accounts will be possible only after Russia's access to foreign currency accounts is restored.

It is clear that such difficulties arose after the West imposed sanctions against us in response to the special military operation in Ukraine. It should be said that by an order dated March 6, the Central Bank of Russia allowed to pay in rubles for currency liabilities from unfriendly countries.

Some experts point out that this could lead to a technical default, because under the agreements, it is supposed to pay in the currency in which the money was borrowed. However, the thing is that our Ministry of Finance does not refuse to fulfill its obligations. It is simply deprived of the possibility to fulfill them. So, this situation will not have any impact on the ruble exchange rate. Moreover, as many citizens of our country have probably already noticed, the domestic currency has recently even strengthened – just look at the exchange rate in the exchange offices.

Apparently, Ms. Psaki was instructed to voice a slightly different viewpoint. “Russia does not have unlimited resources — especially now, given the crippling sanctions we’ve put in place — and they are going to be forced to choose between draining remaining valuable dollar reserves or new revenue coming in or default,” she said.

Of course, the situation remains tense. For example, Russia will now not be able to borrow dollars and euros on foreign markets, although this would not have happened anyway, because foreigners were not buying new issues of Russian bonds because of the sanctions. If the payment fails, then after 30 days Russia will have to declare a technical default on sovereign bonds and, accordingly, a cross-default on all Russian corporate liabilities, and these are quite different amounts. If there is a cross-default, everything will be demanded from us.

“In my opinion, a certain part of our elite has finally come to an understanding that the continuation of the liberal course poses a real threat to the whole country,” said Khazin. “The situation in the country may deteriorate so badly that it will be impossible to fix anything. It is clear that the neoliberal course that Russia has followed for almost 30 years has failed not only at home, but all over the world.”

He reminded that energy prices have risen sharply, so “Russian income will begin to increase” in spite of the fact that the volume of Russian exports to the West “will decrease.” Khazin believes that export to the East will grow. Therefore, the surplus of the Russian trade balance will increase in comparison with 2021. It turns out that the effectiveness of the sanctions announced to our country is not too high, Khazin said in conclusion.

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