Russia debt of $117M in interest on two dollar-denominated bonds has the nation on the verge of defaulting over $150B in debt amid the current war in Ukraine.
Russian Economy Near Collapse With $150B Debt Default Looming
The Russian economy is at risk of a collapse and defaulting on over $150 billion in debt as a result of financial sanctions from the United States and European allies. The sanctions have put immense pressure on the Russian economy, which is already struggling due to low oil prices and the ongoing conflict in Ukraine. If Russia defaults on its debt, it could have a significant impact on the global economy.
The invasion of Ukraine by Moscow nearly one month ago was the biggest attack on a European state in decades. This elicited economic penalties from Western nations, including preventing the Central Bank of Russia from selling dollars, euros and other foreign currencies in its reserve stockpile. This is a key part of its $630 billion reserve.
The downgrade in Russia’s credit rating by international agencies has been attributed to the financial fallout of sanctions. These sanctions have caused a “huge shock to Russia’s credit fundamentals,” according to Fitch. It is possible that additional sanctions will be imposed in the future.
After Russia was removed from the Swift financial system and its currency reserves were frozen by the West, its central bank increased its key interest rate to 20%.
The Kremlin is now due to pay $117 million in interest on two dollar-denominated bonds on Wednesday. If it fails to make those payments, it will be Russia’s first default on foreign debt since the 1917 Bolshevik Revolution. This would be a major embarrassment for Putin’s government.
Current Russian Debt
The Bank of Canada and Bank of England estimate that the total value of government debt in default around the world was about $443.2 billion in 2020, or roughly 0.5% of world public debt. This is an increase from previous years, likely due to the Covid-19 pandemic.
Russian Finance Minister Anton Siluanov said Monday that Moscow will repay creditors in rubles and possibly the Chinese yuan until the sanctions are lifted, with the sanctions preventing the nation from accessing its reserve of dollars and euros. The ruble has depreciated sharply since Russia attacked Ukraine. As of Wednesday morning, 107 rubles were worth $1.
Siluanov said that Russia has to pay coupons on its eurobonds and has already asked Western banks to proceed with the transactions.
“Is that a default?” Siluanov asked during an interview with Russian state news. “From Russia’s point of view, we are fulfilling our obligations.
Some people argue that paying dollar-denominated bonds in rubles constitutes a default. It is unclear whether Russia will be viewed as defaulting on its debt if it pays in rubles. Siluanov accused Western nations of orchestrating the sanctions with the intention of creating a default that “has no real economic grounds.” This could have serious consequences for the Russian economy.
During an interview on Sunday with CBS News, head of the Washington-based International Monetary Fund Kristalina Georgieva stated that a Russian default is no longer “improbable” adding, “Russia has the money to service its debt, but cannot access it.”
If Russia fails to make its debt payment, it has a 30-day grace period. However, if Moscow indicates that it does not intend to pay its debt, credit rating agencies may declare Russia to be in default before the final deadline. The Russian central bank is meeting again on Friday in an attempt to prevent a complete financial crisis.