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Russia is currently suffering a historic default: Here’s what happens next


Russian President Vladimir Putin attends the Summit of the Collective Security Treaty Organization (CSTO) at the Kremlin in Moscow, Russia May 16, 2022.

Sergei Guneev | Sputnik | via Reuters

The US has announced that it will not renew an exemption that allows Moscow to repay foreign debt to US investors in US dollars, potentially forcing Russia into default.

Until Wednesday, the US Treasury Department had granted a major waiver of sanctions against Russia’s central bank. allowing it to process payments to bondholders in dollars through U.S. and international banks, as the case may be.

This was allowing Russia to meet previous debt payment deadlinesthough forcing it to tap its accumulated wartime foreign currency reserves for payments.

However, the Treasury Department’s Office of Foreign Assets Control allowed the waiver to expire at 12:01 a.m. ET on Wednesday, which is announced in a news release on Tuesday.

Russia has amassed substantial foreign currency reserves in recent years and has enough money to pay it off, so it would likely oppose any default on the grounds that it tried to pay it off but failed to pay it off. blocked by the tight sanctions regime.

Moscow has a series of repayment deadlines coming this year, the first being on Friday, when 100 million euros in interest is due on two bonds, one of which requires payment in dollars, euros, pounds or Swiss francs while the remaining bond can be paid in rubles.

Reuters and the Wall Street Journal reported on Friday that Russia’s Finance Ministry had transferred funds to make these payments, but that another $400 million in profit would be due at the end of June.

In the event of a missed payment, Russia will face a 30-day grace period before potentially being declared insolvent.

Russia has not defaulted on foreign currency since the Bolshevik revolution of 1917.

‘Unknown territory’

Central to the fallout from OFAC’s decision not to renew the waiver is the question of whether Russia considers itself a defaulter.

Adam Solowsky, partner on the Financial Industry Group at global law firm Reed Smith, told CNBC on Friday that Moscow will likely argue it is not defaulting on insolvency, even though it has money available.

“We have seen this argument before OFAC sanctions prevented payments from being made, the sovereign issuer declared,” said Solowsky, who specializes in representing trustees. claimed they weren’t defaulting because they tried to make the payment and were blocked,” said Solowsky, who specializes in representing trusts on sovereign bond defaults and restructurings.

“They are likely to consider a litigation scenario that lingers long after the situation has resolved as they try to determine if there is indeed a default.”

Solowsky stressed that Russia’s situation is not like the usual process for sovereign defaults, in which a country is near default, it restructures its bonds with investors. international.

“That wouldn’t be possible for Russia at this point in time because basically under sanctions nobody can do business with them, so the normal scenario we’re going to see play out isn’t going to happen,” Solowsky said. must be what we would expect in this case,” Solowsky said.

He added that this would affect Russia’s access to global markets and potentially increase foreclosures both domestically and abroad.

“We’re moving into some unknown territory,” Solowsky said. “This is a big economy for the world. I think we’re going to see a fallout effect from the next few days to many years.” .

Default ‘for years to come’

Timothy Ash, senior strategist for emerging market sovereignty at BlueBay Asset Management, said in an email Tuesday that it is now only a matter of time before Moscow defaults.

“The right move by OFAC as this move will plunge Russia into default for many years to come, as long as Putin remains president and/or leaves Ukraine. Russia will only be able to get out of default when OFAC allows it. Therefore, OFAC remains leveraged,” said Ash.

“This would be an insult to Putin, who has done so much with [Former Chancellor of Germany] Schroeder at a time when Russia was finally on the verge of a Paris club insolvent that great powers like Russia had to repay. Russia can no longer repay its debt because of its invasion of Ukraine. “

Ash predicts that Russia will lose most of its market access, including to China, due to default, as Moscow’s sole financing will carry exorbitant interest rates.

“It means no capital, no investment and no growth. Lower living standards, capital and brain drain. Russians will be poorer for a long time to come because of Putin.”

Ash suggests that this would further isolate Russia from the global economy and reduce its superpower status to a level similar to “North Korea”.

‘Burning Bridges’

Agathe Demarais, global forecasting director at The Economist Intelligence Unit, told CNBC on Friday that because Russia’s government debt was low and declining prior to the invasion, it was unlikely that the EIU would consider it a default. Avoidance may not pose a major problem for Russia.

“For me, it’s really a signal of whether Russia thinks all the bridges have been burned with the West and financial investors. Usually, if you’re a country sovereign, you will do your best to avoid default,” Demarais said.

“All the moves that we’re seeing at the moment – at least for me – show that Russia isn’t really concerned about a default, and I think that’s because Russia is really hoping. that there won’t be any forward improvement in relations with Western countries any time soon.”

She added that punitive sanctions against Russia from the US and its Western allies would likely be in place “indefinitely”, given the Kremlin’s misrepresentation of the invasion as an attempt to “destroy”. destroy” means it cannot easily turn around.

The EIU predicts a hot war throughout the year and protracted conflict afterward, as Russia and the West attempt to reconfigure supply chains to accommodate the new sanctions regime rather than seek to end it.

Russia is still drawing a significant amount of cash from energy exports and is trying to force European importers to pay for oil and gas in the country. ruble to change sanctions.

“What this really shows is that this bridge-burning strategy by Putin feels he has nothing more to lose,” Demarais added.



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