Russia may not be able to repay on Wednesday the $117 million it owes to international creditors. He would then default on his foreign debt for the first time since the 1917 revolution, a strong symbol because of the sanctions imposed after the start of the Russian invasion of Ukraine, but the consequences of which would be limited.
Two Vladimirs, one flaw. Vladimir Putin’s Russia runs a big risk on Wednesday, March 16, of failing to repay its international creditors. The last time the country defaulted on its foreign debt in this way was at the start of the Bolshevik Revolution, in 1918, when Vladimir Ilyich Ulyanov, known as Lenin, was in power.
Moscow’s default on payments “is no longer improbable,” warned Kristalina Georgieva, director of the International Monetary Fund (IMF), on Sunday, March 13. The major rating agencies – Fitch, Standard & Poor’s and Moody’s – downgraded Russian debt to toxic investment status, signaling their weak faith in the Russian state’s ability to repay the debt.
The threat of payment in rubles
That widespread pessimism is about the $117 million payment Russia is due on Wednesday. This is nothing, and even a month ago the idea that Moscow would not be able to repay this debt would have made any investor smile. “Russia was in a very comfortable financial position thanks to significant gas and oil revenues and more than $630 billion in foreign currency held by the Russian Central Bank,” recalls the Wall Street Journal.
But since then, Vladimir Putin has launched an invasion of Ukraine, inciting Western powers to multiply economic sanctions in order to deprive the Kremlin of the famous “nerve of war”: access to money.
“What took the Russian authorities by surprise was the American decision to freeze the dollar assets of Russia’s Central Bank,” said Sergei Popov, an economist at Cardiff University who was contacted by France 24 to not repay the debts taken on by the Tsarist regime. Today, even if Russia were willing to pay, it simply would not have access to the funds (in dollars) needed to complete its list, no matter how small.
Russian Finance Minister Anton Siluanov also warned that debts to investors from “countries that have shown hostility towards Russia will be paid in rubles.” What gives these international creditors a cold sweat, because the Russian currency is now in free fall. They may be paid in rubles the equivalent of what they owed in dollars one day, but the next day the amount paid is likely to be worth much less.
But this trick will not allow Moscow to avoid default. The receivables, the interest on which is due on Wednesday, are repayable in dollars, so “technically, payment in rubles is a violation of the contract, tantamount to a delay in payment,” summarizes Sergey Popov.
Very different from the 1998 default.
A late payment that won’t happen immediately because there’s always a thirty-day grace period to allow debt negotiation. Unless in this case the mood is not too much for an amicable settlement. “The grace period can be shortened by rating agencies. [qui ont l’autorité de déclarer qu’un débiteur ne peut pas payer] if they believe that Russia does not have the will to find a compromise,” emphasizes the American channel CNN.
This likely default brings to mind the ghost of 1998, the last time Russia defaulted on some of its debt. At that time, the near bankruptcy of the state led to a deep economic crisis in the country. Unemployment skyrocketed from 8% to nearly 12% in one year, and prices rose over 80% in 1999.
If history were to repeat itself, perhaps the population of Russia would rise up against the ruler of the Kremlin for his decision to drag the country into a costly war? This is far from accurate. Not to mention the uncertainty associated with the popular uprising in Russia, the default of 2022 has nothing to do with the default of 1998.
“At that time it was a default on the domestic debt of Russian banks and companies. In other words, they could no longer function normally, since they were counting on the state to reimburse their debts. This time, only foreign investors are concerned, which does not have a direct impact on the life of Russians,” Sergey Popov sums up.
The only concrete consequence if Moscow fails to repay the debt will be that the country will no longer have access to international capital markets to raise funds. “Now this does not bother Vladimir Putin too much,” Sergei Popov said. Moreover, the Russian state finances itself more from the domestic market than from borrowing from international creditors.
Limit Putin’s military ambitions
What could have a stronger impact on the Russian president’s militant determination is that all foreign companies are pulling out of the Russian market. This great departure means that “everything that was produced abroad and that the Russian economy needs will soon cease to be available,” explains Sergey Popov. Some aircraft parts are made by foreign companies, as are spare parts for tractors used in grain fields or machine tools used in oil-to-diesel refineries.
The whole question is when Russian stocks will run out. It may not be fast enough to affect an offensive in Ukraine, but “the idea is to prevent Vladimir Putin from further promoting his ambitions, whether in Poland or Estonia, for example,” Sergei Popov says. Without spare parts to repair aircraft or the ability to quickly produce fuel for tanks, it becomes much more difficult to fight a war.
But before we get there, a default on the horizon could hit Western banks or businesses hard. In 1998, one of the largest US investment funds almost went bankrupt, and the Russian default (on payments) was primarily an internal affair, reminds the Financial Times. This time, Moscow directly threatens not to pay off international creditors. Some large groups are taking big risks, like the US investment fund Pimco, which could lose more than $1 billion, Bloomberg emphasizes.
Since 2014, however, Moscow has been careful not to borrow too much money from international lenders. In total, the Russian state owes banks or foreign investment funds about $70 billion. Not enough to destabilize the international financial system if Russia does not reimburse anything. “GameStop case [des petits investisseurs ayant misé sur des groupes en perte de vitesse en Bourse, faisant perdre des milliards à des grands fonds qui pariaient sur la chute de ces valeurs] had a greater impact than a Russian default could have had,” Sergei Popov said. And when Argentina went bankrupt in 2001, it owed a little more money to international creditors, and despite this, there was no global financial shock.
But the game of historical comparisons has its limits, warns Capital Economics, a North American financial think tank that published a policy note in early March on the impact of a Russian default. The main danger comes from a bank or investment fund that has invested too much in Russia and is on the verge of bankruptcy because Moscow can no longer repay the debt. And the existence of such a black sheep will be known only if Russia is really not enough.
