Investors breathed a sigh of relief last week after the Russian government made an interest payment of $117 million on its foreign debt. But a much larger payment is due on April 4, to the tune of $2.2 billion, and creditors are much less optimistic that Russia will pay this time.
“The last payout was a small investment in credibility, but when Russia has to start writing multibillion-dollar checks it’s a different calculus,” Jay Newman, a former portfolio manager at Elliott Management and author of “Undermoney,” told The Post. ”. “I don’t think it’s realistic for Russia to put up the $2.2 billion.
The bond payment last week spooked investors because it was unclear whether Russia’s central bank would be able to use its frozen reserve of US dollars to make the payment, and whether US banks would work with the country to transfer the money. There was also a dispute over whether Russia could pay the debt in its own currency. Russia’s Finance Ministry insisted the country could pay in rubles, but people with knowledge of the contract say it is required to be paid in dollars.
For some smaller installment payments, Russia can pay in rubles. But for the previous payments of $117 million and the next payment of $2.2 billion, the terms require that Russia must pay in US dollars.
Russia passed last time. But debt experts have a bleak view of what comes next. These folks tell The Post they don’t think Russia’s ability and willingness to meet its past debt obligation means anything as far as the future is concerned, especially as Russia faces nearly $4.8 billion in debt payments this year. .
And April 4 will be the first big test: “Two billion is real money,” warns Newman.
The Treasury Department clarified Russia can use frozen funds to make debt payments until May 25. After that, the country will likely need to get the money from other sources: borrow cash or sell oil to countries like China or India.
“If they’re making payments with funds that they can’t otherwise access, it’s basically fun money,” said Newman, who spent 15 years recovering $2.4 billion in debt from Argentina after he defaulted. “But once they have to raise money and choose to pay bonds instead of buying guns and food, it’s a more difficult decision.”
And it’s not just an economic issue. Even if Russia can make another payment, some experts worry that Russia will simply refuse.
Newman argues that the harsh sanctions imposed by the US can backfire, and that removing Russia’s ability to access world markets and trade removes the country’s motivation to continue paying down debt.
“If Russia is isolated from the rest of the world, you have to doubt that they will continue to pay,” Newman said. “It is unusual for a country under persistent and growing economic sanctions to maintain payments; these sanctions have unintended consequences.”
Newman is not alone in his belief that Russia may not meet the multi-billion dollar payment in April.
“I expect a full Russian debt default,” Robert Kahn of the Eurasia Group political risk consultancy told The Post. “It is a political problem, not just an economic one. Why do they want to pay us back when we extradite them from the economic system?
While Russia owes US banks nearly $15 billion, economists don’t expect a debt default to hurt global markets significantly in the long run. According to the International Monetary Fund, Russia’s relative isolation from the rest of the world makes it “not systemically relevant.”
Still, the conflict, and the continuing fallout, have already affected the global economy.
The Organization for Economic Cooperation and Development estimates that the conflict will lower global growth by one percentage point and increase inflation by more than two percentage points. Other economic experts say the war has increased the Probability of a recession in the US from 10% to 35% over the next year.