The specter of default is approaching, three weeks from the new deadline

For several weeks, Russia managed to avoid the risk of default despite the sanctions imposed on it. This is because the US Treasury has allowed the use of foreign currencies held by Moscow abroad to settle foreign debts. Recently, this is no longer the case. The US department had already tightened the sanctions at the beginning of April, not accepting any more dollars held by Moscow in US banks.

A decision was made when Russia had to repay a debt of nearly $650 million, two bonds maturing in 2022 and 2042. So they were settled on April 4, but in rubles and not in US dollars, as announced by Russian Finance Minister Anton Siluanov. For Moody’s, this amount is in rubles “Modifies the terms of payment compared to the initial contracts and therefore could be considered a default” If by May 4 Moscow did not forgive this debt, this would mean the end of the grace period.

Bond contracts do not provide for any compensation in a currency other than the dollar. Moody’s continues. To specify: “Although Eurobonds issued after 2018 allow payment in rubles under certain conditions, those issued before 2018 (including 2022 and 2042 bonds) either do not have this alternative currency requirement, or only allow payment in other strong currencies (the dollar). Euro, Pound Sterling (or Swiss Franc)”.

Russia’s default will have a limited impact on the global economy; The threat is inflation (IMF).

Russia has already been placed in “selective default”, last before the overall default

After this ruble payment, the financial rating agency S&P Global Ratings announced on Saturday 9 April that it had lowered Russia’s rating on its foreign currency payments to the level of Selective default. With this selective default rating, Standard & Poor’s estimates that Russia has not been able to meet part of its obligations, but retains the ability to pay back to future maturities. However, this is the last note before the default.

Russia: “selective” shortening before a year’s default?

Déjà rétrogradée à plusieurs reprises par les différentes agences (S&P, Fitch et Moody’s) depuis le début de la guerre en Ukraine, La Russie se rapproche donc encore un peu plus du défaut de paiement généjental imméjental, Mars.

A country is considered in default when it is unable to meet its financial obligations to its creditors, which may be countries, financial institutions (IMF, World Bank, etc.) or investors in financial markets. Partial default is when the state does not pay part of its obligations.

The US wants to push Russia into default

The US Treasury’s decision to no longer allow Russia to use its currencies deposited abroad to settle foreign debts is aimed at driving Moscow into default. According to one of its spokesmen, Russia should “Choose between emptying their remaining dollar reserves or using new incoming revenue, or defaulting on payments.”

The United States is trying to get Russia to default

The idea is to further drain Russia’s resources to prevent it from spending them on financing its war in Ukraine. On March 24, the leaders of the G7 countries and the European Union have already taken new, unprecedented measures, perhaps not expected by Russia, aimed at preventing the Russian Central Bank from using its international reserves, including gold, to prop up the ruble or finance war.

“Of the more than 700 sanctions that we have imposed, one of the strongest was our sanctions against the Central Bank of Russia” The US Treasury indicated last week. Western sanctions had earlier frozen some $300 billion in Russian reserves held abroad.

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Russia will be prosecuted for default

Russia will initiate legal action if the West announces its non-payment, in any case the Finance Minister confirmed in an interview published on Monday, April 11th. “We are going to court because we have taken all necessary steps to ensure that investors get their payments.” Did he say.

We will present to the court our invoices confirming our efforts to pay in foreign currency and in rubles. It will not be an easy process. We will have to prove our position very actively, despite all the difficulties, ” He added, without specifying which legal body Russia would resort to.

The minister denounced the strategy implemented by the United States. Russia has tried in good faith to repay external creditors by transferring corresponding amounts in foreign currency to repay our debts. However, the deliberate policy of Western countries is to create an artificial default by all means.”

The minister noted that Russia’s external debt represents about 4,500-4,700 billion rubles (about 52 billion euros at the current rate), or 20% of the total public debt.

In the view of many analysts, a government default now appears imminent, even inevitable. As a reminder, defaulting on its foreign debt cuts off a country from the financial markets and complicates its return for years.

Three questions about Russia’s possible default

(with AFP)