Billions of dollars on fire
Russia will soon be bankrupt
By Jan Ganger
3/15/2022 5:52 p.m
The economy is suffering, the ruble is plummeting, creditworthiness is not worth mentioning, foreign companies are leaving Russia. Now the Kremlin will probably not pay off its debts abroad and is therefore approaching bankruptcy. This has not happened under the Bolsheviks since 1917. ntv.de answers the most important questions.
What is it about?
On Wednesday, Russia will have to service $117 million in debt from two government bonds. Most of the creditors are abroad. In all likelihood, Russia will not want to pay off its debts in dollars, but in rubles.
Is Russia out of dollars?
But. The sum would not be a problem at all without the war in Ukraine. Until the attack, Russia was considered to be extremely creditworthy and has high foreign exchange reserves in the equivalent of more than 600 billion dollars. However, half of these supplies are abroad and have been frozen by the West. Some commercial banks have also been sanctioned. Finance Minister Anton Siluanov therefore announced that debts to “unfriendly countries” may be paid in rubles until the sanctions are lifted. That means: either Russia does not pay at all or in rubles.
What does that mean?
According to the original agreement, the payments due from the government bonds must be settled in dollars. However, most creditors will probably not want to be paid out in the Russian currency, which is under massive pressure. The rating agencies, which have lowered Russia’s credit rating deep into junk territory, could then in all likelihood declare Russia insolvent for defaulting on its obligations.
Does this happen immediately?
If a country does not meet its payment obligations, a grace period automatically comes into force. It lasts 30 days. Meanwhile, creditors and debtors can come to an agreement. In this case, that means that you have until April 15th. Only when there is no agreement do rating agencies usually declare countries bankrupt. However, you can prefer that. Courts can also determine the insolvency of a country.
How likely is a quick agreement?
It’s going to be a long road. Normally, an agreement looks like this: The creditors waive part of their claims. They swap the old bonds for new ones that are either directly worth less, pay less interest, or have a longer maturity—or a combination of these. But the sanctions imposed by the West prevent such a deal.
What are the consequences for Russia?
If a country cannot or does not want to pay its debts, it will become more difficult and expensive to borrow money in the future. Since the West has imposed financial sanctions on Russia anyway, the country is already largely isolated. Russia can no longer borrow money from the big financial centers like New York or London. The sanctions are already reducing the government’s room for maneuver and are likely to force the government to either cut spending or increase taxes.
How big is Russia’s debt?
According to the investment bank JP Morgan, Russia has around 40 billion foreign currency debts. Around half is held by foreign creditors. Before the war, Russia’s debt was around 20 percent of gross domestic product. This is low in international comparison. But Russian corporations also have debts abroad. Steel company Severstal is due on Wednesday, mining company Evraz is due on Thursday and Bank Tinkoff is due on Sunday. Energy giant Gazprom is next week’s turn, followed by refiner Silur and gold miner Polyus.
What does this mean for Russian companies?
The same applies to them as to the state: if they do not pay their due payments, it will become even more difficult to obtain outside capital. Here, too, it remains to be seen to what extent payment defaults will further complicate their situation. As a result of the sanctions alone, it is becoming increasingly difficult for most of them to meet their financial obligations over time. Because their income is falling sharply.
What does this mean for believers?
It will be expensive for them. To put this in context: the Russian state and companies owe around 120 billion dollars to international banks. European banks have more than $84 billion on fire, with banks from France, Italy and Austria accounting for the largest share.
Is a new financial crisis looming?
The International Monetary Fund considers this almost impossible. The overall exposure of the banks to Russia is not insignificant, but at the same time “not systematically relevant,” says IMF boss Kristalina Georgieva. Should Moscow stop all payments on government bonds, it would have the same volume as Argentina’s state bankruptcy last year. That was a “non-event” for the financial markets.