PublishedAugust 23, 2022, 5:25 PM
War in UkraineFault or no fault? Understanding the Russian Debt Puzzle
After invading Ukraine, Russia suffered a shower of financial sanctions. However, the situation is complex. Because according to experts, Moscow “had enough foreign currency to repay its debts”.
Russia’s default is inevitable, but the consequences for investors and the country are still unclear.
AFP
After six months of Western financial sanctions in the wake of Ukraine’s invasion, Russia’s default is inevitable, but the consequences for investors and the country are still unclear. The point on this thorny file.
It has the color of the flaw, the taste of the flaw… but no legitimate authority has really made it official. Default is generally pronounced when a State has not repaid a loan or interest on this loan by a specific date, or when it declares itself publicly insolvent, like Sri Lanka in April.
Default can then be pronounced by one or more of the three major financial rating agencies, S&P Global, Fitch and Moody’s. S&P placed Russia in “selective default”, one notch from default, and Moody’s referred to a “default” following the non-receipt of one hundred million dollars by creditors, at the end of June, without touching the note.
Default can also be confirmed by triggering insurance to which investors subscribe to protect themselves, namely Credit Default Swaps (CDS), at the initiative of a creditors’ committee made up of major financial institutions. This committee has so far stuck to declaring a “credit event” in June, following Moscow failed to pay $1.9 million in penalty interest on an April installment.
Because at the heart of the problem are the sanctions imposed by the West. Rating agencies are no longer allowed to rate Russia, and the committee responsible for triggering CDS is groping to meet new procedures. “This is not a typical case of default, to say the least,” image Levon Kameryan, analyst specializing in Russia for the European rating agency Scope Ratings.
“This is not a typical case of default, to say the least…”
Sanctions are also at the origin of Russian payment incidents: the United States first made it impossible for Moscow to pay its debts with dollars held in American banks, then to pay them in dollars. The country can no longer raise money on international markets.
But Moscow “had enough foreign currency to repay its debts”, underlines Levon Kameryan, recalling “the enormous quantities of foreign currency” in the coffers of the State coming from the sales of hydrocarbons. This is why the Kremlin protests once morest an “illegitimate” default.
Eyes are on the creditors’ committee, which announced on Friday that an auction procedure might be held in the first half of September, an operation aimed at setting a compensation price for investors who have the famous insurance CDS. From the credit event to the triggering of the CDS, it usually takes thirty days, recalls George Cahill, CDS specialist and partner at the international law firm Alston&Bird. But it’s already been almost three months.
Is it serious for Russia?
Moscow has for the moment not much to worry regarding in view of the orders of magnitude. “In terms of fiscal position and financial needs, Russia is simply not dependent on international capital markets,” said Liam Peach, emerging markets economist for Capital Economics. Two figures sum up the situation, according to Levon Kameryan, of Scope Ratings: bonds denominated in foreign currencies weigh for regarding 40 billion dollars, when the surplus of the Russian current account amounted to 166.6 billion dollars in the first half, thanks to oil and gas sales.
Russian public debt is also close to 20% of GDP, much less than that of economies of comparable size. However, experts warn of the risks run by Russian companies, which are much more indebted in foreign currencies than the State. In the longer term, moreover, “a default will continue to undermine the confidence of foreign investors in the Russian economy and further discourage foreign investment at a time when Russia badly needed it,” concludes Levon Kameryan.
(AFP)
