This weekend marks an important deadline for Russia’s economy. The sanctioned country had a total of thirty days to make outstanding interest payments. What happens if the Russians don’t comply? An overview.
If a state has debts, interest is due on them – and if a state cannot pay them, it is considered insolvent, with often dramatic consequences. Such a case is now threatening Russia, at least on paper. A 30-day period expires at the weekend during which Russia can still make late interest payments without triggering a default.
In reality, however, the situation is far more complicated. The most important questions and answers at a glance:
Basically, a state is considered insolvent if it can no longer service its debts, i.e. has problems with interest payments or debt repayments. Typically, such problems arise when governments have spent beyond their means and are over-indebted or have otherwise lost creditworthiness and have a liquidity problem. Typical examples are Argentina’s earlier national bankruptcies or Greece’s financial problems during the euro crisis from 2010. However, the situation in Russia is very different.
Due to its financial situation, Russia is actually not a case for a state bankruptcy. The country has significant financial resources at home and abroad. The main source of income is the large amounts of raw materials that Russia has sold abroad over the years. In return, the country received foreign exchange, i.e. foreign currency. In addition, Russia is not highly indebted by international standards: at around 20 percent of economic output, the debt ratio is significantly lower than in many western industrialized countries.
The most important reason is the severe financial sanctions that predominantly Western countries have imposed on Ukraine because of the Russian war. The sanctions effectively exclude Russia and its banks from the financial system, which is dominated by Western states. A significant part of Russia’s financial reserves stored abroad is also blocked by sanctions. And US banks are now banned from forwarding payments from the Russian state to their customers. These restrictions make it almost impossible for Russia to pay its creditors abroad – even though the financial means are actually there.
Russia continues to pay interest due on government bonds – not in dollars or euros, but in rubles. The country has set up a new procedure for this via its NSD payment office. The problem, however, is that the payments from there can hardly be forwarded to western payment offices and thus to western creditors because of the sanctions. The payment in rubles is also controversial: actually, interest payments on foreign debts are usually provided in US dollars or euros. Therefore, experts consider payment in the Russian national currency to be inadmissible.
Normally this is a case for the rating agencies. The three major credit rating agencies Standard
The sums are comparatively small. For example, a few weeks ago Russia failed to pay $1.9 million in late-arrears interest as part of a arrears interest payment. Strictly speaking, this was already a default by the Russian state. The current interest payments involve significantly higher sums, often in the hundreds of millions. Measured against Russia’s financial strength, however, this is still little. The Russian central bank currently puts the entire – partly blocked – foreign exchange reserves at almost 600 billion dollars.
No, the situation is completely different from that of Russia’s previous national bankruptcy in 1998. At that time, oil prices were at a low point and Russia’s foreign exchange earnings from raw material exports were not sufficient to pay off the debt. This time, Moscow has enough money and is also willing to pay off its debts.
Since the payment default has nothing to do with an acute lack of money on the part of the Russian government, the direct consequences are initially minor. A drastic devaluation of the ruble or the collapse of the banking system is not to be expected. If the default is determined, creditors could demand that Russia repay all debts – even those that are not actually due.
They could well be problematic for Russia. Russia cannot issue new bonds. Moscow’s isolation from the global financial market, initiated by the sanctions, is being reinforced. The property of Russian state-owned companies abroad, such as Gazprom, may also be threatened. Plaintiffs could sue in court for that possession in exchange for lost interest payments.
