- Russia has been meeting its debt obligation despite sweeping sanctions over the Ukraine war.
- The Kremlin says that Russia has the ability to pay its debts, but that the West wants it to default.
- A default would affect Russia’s creditworthiness, making it harder for the country to borrow.
Even after the United States and its allies imposed sweeping sanctions on Russia, President Vladimir Putin’s administration has been able to pay off the country’s debts.
Investors have been closely watching Russia’s debt payments in anticipation of a default that could hit the country’s financial system and beyond. But Russia once again avoided a default on Thursday when he sent $447 million in dollar bond payments processed by JPMorgan, sources told Bloomberg.
“There have been questions about the ability and willingness to pay on the part of the Russian government, but this is all happening in the context of sanctions,” said Hassan Malik, an expert on the Russian financial system and a senior sovereign analyst in Boston. investment management consultant Loomis Sayles, told Insider.
“That’s what makes this current situation very different from a run-of-the-mill emerging market debt crisis,” he added.
A Russian default event would affect the country more than it would affect the global financial system.
Sanctions are hampering Russia’s foreign currency debt payments, as they must go through international intermediaries. The Kremlin has on at least two occasions accused the West of trying to engineer an “artificial default” with such sanctions.
“The fact is that from the beginning we have said that Russia has all the necessary funds and the potential to avoid a default – there can be no defaults,” Kremlin spokesman Dmitry Peskov said on March 17. Reuters. “Any default that could arise would have a totally artificial character.”
Russia has so far been able to meet all of its debt obligations, and it could be because a default event would matter more to the country than to the rest of the world.
The impact on the world’s financial systems would be limited, as Russia does not have extensive global financial ties, according to Insider. harry robertson reported in March.
The country’s external debts are also quite low, Malik said. Russia owed $39 billion through foreign-currency bonds at the end of 2021, according to JPMorgan estimates. Compared, Greece it defaulted on 205.6 billion euros ($277.5 billion) in sovereign debt in 2012.
But a default would affect Russia’s solvency and “clearly make it difficult for the government to get funding from other sources,” Malik said.
So for the US and its allies, “part of the strategy could be to contribute to these financial dislocations that Russia is now experiencing as a result of the moves in Ukraine,” he added.
Russia has been able to pay its debt in dollars in part because the Treasury Department of the US Office of Foreign Assets Control on March 2 it issued a temporary license allowing Americans to receive dividends and bond payments on Russian securities from the finance ministry, the central bank or the national wealth fund.
That license will expire just after midnight on May 25, and Russia will still have to make about $2 billion worth of external sovereign bond payments before the end of 2022, according to Reuters.
Russia’s credit rating has been downgraded to junk
Widespread condemnation of Russia’s war in Ukraine and sweeping sanctions have hurt the country’s credit rating.
The Big Three Credit Rating Agencies: S&P Global, Moody’s, and Fitch – they have cut all Russian credit rating to junk status. On March 23, research firm MSCI said that 23 investors still he believed there was a 50% chance that Russia would default on its debt in the next 12 months.
Before the Ukraine war, Russia’s bonds were generally well regarded, said Warut Promboon, head of credit research at Bondcritic, an independent research firm based in Hong Kong. Companies like gas giant Gazprom and state-owned bank VTB were “professionally run” and gave high returns, Warut told Insider.
“They absolutely have the ability to pay,” said Warut, who has rated several Russian bonds in the past. However, he also said that he is not running out of buying Russian bonds at this time due to the risk of Putin’s unpredictable nature and the sheer amount of power that he wields.
“Putin can do a lot of things,” Warut said, including ordering authorities or companies not to pay their debts if sanctions become too intense, or ordering payments to be issued in rubles instead of dollars.
“There is nothing you can do as a bondholder if the head of a country is against you,” he told Insider.