First payment only in rubles
Russia on the way to “artificial” national bankruptcy
04/06/2022, 18:06
Despite the war and Western sanctions, Russia has so far served its foreign creditors on time in US dollars – until today. For the first time, the Ministry of Finance is paying a tranche in rubles – which is considered a default. Russia sits on more than sufficient foreign exchange reserves.
For the first time, Russia has only settled foreign debts in rubles instead of US dollars. Altogether it concerns payments for Eurobonds over 649.2 million dollar (595.3 million euro). This time, the Russian Ministry of Finance transferred the amount, which was actually to be paid in dollars, in rubles after an American correspondent bank refused to execute the payment order in US currency. The background to this are the Western sanctions against Russia’s war in Ukraine.
Kremlin spokesman Dmitry Peskov stated that there was no reason for a national bankruptcy. “Russia has all the resources it needs to pay off its external debt,” he said. However, the Russian central bank does not have access to a large part of the reserves. Peskov complained that “significant sums of our reserves” were frozen and blocked abroad. If this situation persists, Russia will be forced to switch to ruble payments, Peskov said. An “artificial bankruptcy situation” could only be brought about if the ruble payments were also blocked.
On Wednesday, White House spokeswoman Jen Psaki said Moscow had a choice between slowly depleting the valuable foreign exchange reserves it still has access to or declaring national bankruptcy. Given the severely limited access to currency and gold reserves, experts and rating agencies have been warning for weeks of an imminent default on Russia’s foreign debt. This is often also referred to as state bankruptcy, but is not to be equated with domestic insolvency of the state.
Due to the exceptional situation caused by the sanctions, Russia is initially only dealing with a technical or partial payment default, not with a state insolvency in the strict sense. On the financial markets, the risk of a Russian default is firmly factored in, but due to the relatively low level of international ties, the risk for the overall market is manageable. Most analysts do not expect a financial market shock. The head of the International Monetary Fund IMF, Kristalina Georgieva, described the involvement of international banks in Russia in March as “definitely not systemically important”.
According to the most recent data from the Deutsche Bundesbank from November 2021, the claims of German banks on Russia amounted to around 6 billion euros. Including the claims of their foreign branches and subsidiaries, it was around 7.5 billion euros. According to the Bundesbank, this is just under 0.4 percent of the total foreign claims of German institutions. The securities of public households in Russia, which also include government bonds, at German banks amounted to 119 million euros.
Russia’s last default was in 1998 as a result of falling oil prices and the Asian crisis, but at that time it only affected internal debt in rubles. Should the country fail to pay its bills to international creditors, it would be the first time since the Russian Revolution in 1917 that its foreign debt would default. As a rule, however, a 30-day default period applies to government bonds before rating agencies formally determine a default.