On 27 June, Russia defaulted on its obligations in rubles, and that was enough to decree the Kremlin’s default.
The declaration of Russia’s alleged default
Sanctions and foreign debt position put Russia in trouble
On June 27, 2022, Moscow refused, or rather was technically prevented, from paying its obligations to foreign countries.
The overdue debt to foreign countries totals $100 million, and since it is only possible to pay it in dollars, foreign countries have called for default, though it was immediately denied by Moscow.
Basically, the failure to pay depends on an impediment triggered by sanctions on the trans-continental country. This is the first time since 1918 that the Kremlin has defaulted on a payment to foreign countries.
Between Sunday and Monday, the 30-day window of time during which it was possible to evade payment of the bonds, which at this time has not yet happened due to Russia’s willingness to settle in rubles, came to an end.
In essence, the money is there but not in the fiat currency that is expected, and it remains to be seen by the rating agencies as to how they are assessing the situation, i.e., whether a state can be declared in default when it lacks resources or even if these diverge only by currency.
Anton Siluanov, Russian finance minister, explained:
“Anyone can declare what they want and can try to attach any label to Russia. But anyone who understands the situation knows that it is in no way a default”.
Foreign currency reserves depleted for Putin’s country
The non-payment was not only due to a currency divergence, which could have been circumvented by a normal financial transaction, but also to the fact that Putin’s country has been effectively ousted from the international payments system. In fact, it is foreign countries that do not allow Russia to send payments.
This paradoxical situation could lead to the cancellation of 100 million in debt (in this case) because there is neither lack of resources nor intent, but on the part of the recipient there is a refusal of the transaction.
If things are interpreted this way, it will be hard to please the investors.
Economists at the Nomura Research Institute explained to Bloomberg:
“A declaration of default is a symbolic event. The Russian government has already missed the opportunity to issue dollar-denominated debt. Right now, Russia cannot borrow from most foreign countries”.
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