The Russian government this week issued a default – preventing default of international creditors. Reuters and Bloomberg reported this on Friday. As of Wednesday, the country seemed unable to make interest payments to investors, worth more than $117 million (about 107 million euros). This brought Russia close to defaulting status on the international bond markets.
According to anonymous sources on which the two news agencies rely, the payments were made on Thursday and Friday, although it is not clear whether all creditors have received the money. On Wednesday, the deadline for Russia to pay interest on two government bonds, which were denominated in dollars, expired. Russia used a 30-day grace period.
The interest had to be paid in dollars. Payments in dollars are now problematic due to Western financial sanctions against Russia. The United States and European countries have restricted Russian transactions in Western currencies. It now appears that interest payments in dollars can in principle continue.
According to a US Treasury Department spokesman, quoted by Bloomberg, US sanctions do not prevent Russian interest payments, although it is not clear whether this applies in all cases.
The transactions went through two US banks, JP Morgan and Citigroup. They must comply with US sanctions and have received permission from the US government to make the transactions.
It is not clear whether there are legal or political reasons for the American position. Analysts had previously assumed the US would likely not approve the payments. Partly for this reason, credit rating agencies downgraded the status of Russian debt to ‘junk’.
The total foreign currency debt of the Russian state and (state) companies is about 150 billion dollars, according to Bloomberg. Later this month, the Russian state still has to pay $615 million in hard currency interest, according to the AP news agency. On April 4, the first government bond worth 2 billion dollars expires.
Last default in 1917
In principle, the US government can block any dollar payment, said Damien Sassower, a Bloomberg commentator. “The US Treasury Department can turn Russia into a default force if it chooses not to approve wire transfers.”
A default can have a major impact. Borrowing on the international capital markets then becomes extremely expensive. Russia last defaulted on international creditors in 1917. The Bolsheviks then refused to take over the debts of the tsarist government. Creditors lost their money.
In 2022, the Russian state seems to have enough cash in hand to make interest payments and to pay off debts, because of the high income from energy supplies to Europe, which continues despite the sanctions.
The sanctions, including those against the Russian central bank and some commercial banks, nevertheless hit the Russian economy hard. The exchange rate of the ruble in US dollars bounced on Thursday and Friday, but is still 25 percent lower than a month ago. The central bank kept interest rates at the high level of 20 percent on Friday, to support the ruble exchange rate and to combat high inflation (12.5 percent). The Moscow stock exchange has been closed since February 25.
A version of this article also appeared in NRC Handelsblad on 19 March 2022
A version of this article also appeared in NRC in the morning of March 19, 2022