The capacity of a State to repay the money that creditors lend it marks a clear line between solvent countries and those that are not. Russia has come dangerously close to that second group in recent hours, and uncertainty still persists about whether or not it has been able to pay the debt maturities of 117.2 million dollars (106 million euros) that expired this Wednesday. The Russian Ministry of Finance assures that it gave the order to make the payment to the London branch of Citibank with which it usually operates, but it still does not know if it has been made or, on the contrary, it has been paralyzed due to the sanctions.
Several investors holding Russian debt securities cited by Bloomberg They pointed out that they had not yet received the money at the close of operations on Wednesday. In the event that the transaction could not be carried out, Russia would have a grace period of 30 days to pay its commitments, or else it would suffer its first suspension of payments in foreign currency for more than a century, when the Soviet regime born of the Russian Revolution refused to take over the debts contracted by the tsarist regime.
Aware of the blow to the country’s economic credibility that not fulfilling its commitments would mean, the Russian Finance Minister, Anton Siluanov, has insisted that Moscow has the funds to meet its obligations and has done so. However, he did not guarantee that investors would receive the capital due to international sanctions that keep Russian reserves frozen and restrict their financial maneuvers. Siluanov summoned the United States, which he accuses of wanting to provoke default artificially, to clarify whether he is going to allow him to pay his debts. “The possibility or impossibility of fulfilling our obligations in foreign currency does not depend on us. We have the money, we made the payment, but now the ball is on the side, first of all, of the US authorities,” Siluanov said Wednesday in an interview with RT.
Having denied access to a good part of its 640,000 million dollars in reserves, the Kremlin had slipped that it could repay its debt using rubles, greatly devalued after three weeks of harsh sanctions, but that alternative route has been closed by the agencies of qualification. Unlike others, the bonds that expired this Wednesday, issued in 2013, did not contemplate the option to pay in rubles, and Fitch warned that any payment in the Russian currency will not be valid and will be equivalent to the suspension of payments.
The best news for Russia is that it still has an extra month to get out of the mess. The bad news is that the calendar brings new imminent debt maturities: only in the remainder of the month, Russia must return another 614 million dollars, and in April it has even greater commitments, greater than 2,000 million. A defaultas the phenomenon of non-payment is known in English, would be the umpteenth economic blow for Moscow, as it would culminate its isolation from international markets and raise its financing costs by closing the main gateway for funds used by governments to cover their expenses.
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Risk of contagion
In the event of Russia’s suspension of payments, the International Monetary Fund considers that the amounts that would remain in the air are not high enough to pose a systemic problem for the global economy, although they would add concern. The actual exposure of funds and financial institutions to Russia is not always known, which can lead to surprises.
The chief economist of the World Bank, Carmen Reinhart, recalled this week that when Russia went into receivership in 1998 after failing to meet its debt maturities in rubles, the hedge fund US Long-Term Capital Management (LTCM) had to be bailed out by the Federal Reserve. “Remember LTCM? That was not necessarily on anyone’s radar at the beginning of Russia’s breach in August 1998,″ he warned.
Russia has issued 15 international bonds with a nominal value of around 40 billion dollars, a figure that rises to 150 billion dollars of debt if you add that of large companies, especially from the powerful Russian energy sector, such as Gazprom and Lukoil, which may also be in trouble to meet their payments. Among the affected investors, names such as Pimco, the world’s largest fixed-income fund, have come to the fore.
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