The Kremlin pays back bonds in rubles after Washington’s new crackdown on markets. The White House: “Putin threw decades of development”
WASHINGTON – TURIN. The specter of Russian default hits the financial markets. And the short circuit served. Borsa Italiana lost more than 2% on the ground, on the negative wave that affected all trading venues globally. Of concern are coupon payments on outstanding Russian bonds denominated in dollars. Some have already been repaid in rubles, which will lead the rating agencies to declare selective bankruptcy once the grace period, which is valid for thirty days, has ended. Then, the fate of the Russian economy will be in the hands of Vladimir Putin alone.
There are two factors that are depressing the mood of the markets. On the one hand, because the timing is not clear. On the other hand, because the negative externalities of the new financial crackdown on Moscow by the US Treasury may be high. Which banned the use of foreign currency current accounts that the Bank of Russia and other Federation entities have with US banks. Therefore, no type of transaction can be transmitted to a counterparty in a currency other than the ruble. Not in dollars, not in euros. It follows that the next coupons relating to the Federation’s sovereign bonds, especially those denominated in foreign currencies, will be subject to a violation of the initial contract.
Selective bankruptcy is therefore no longer such a remote scenario. Especially in the face of inflation that grows by 2% week by week, as explained by Brian Deese, head of the US National Economic Council. The spokesman for the Moscow government, Dmitry Peskov, tried – in vain – to reassure the markets by claiming that Russia has “all the necessary resources to repay its debt”. Who reiterates the line drawn for days by the Kremlin: “As is known, a large part of the reserves have been blocked abroad, therefore, if the block continues and the operations carried out with frozen currency are blocked, the coupons could be paid in rubles “. A € 594.82 million coupon of a Eurobond expiring this month (and a second one with maturity in 2024) was in fact paid by Moscow in the national currency. According to Ice Data Services, Russia’s probability of default within a year has skyrocketed to 99 percent. Credit default swaps (CDS), or derivatives that act as insurance against the bankruptcy of a subject on an annual basis, cost an initial commission of $ 7.3 million, plus $ 100,000 per year. Translated: the crash is getting closer and closer.
On the US side, the response continues to be clear-cut and decisive. As senior officials of Joe Biden’s administration explain, “Russian GDP could contract with double-digit percentages.” Specifically, White House officials explain, it is possible that Moscow “returns to 1998 levels”, when the Russian Federation had to declare default. “15 years of economic development will be canceled,” Biden added. It follows that Moscow will leave the G20. Even more significant is the attitude circulating in Washington: “Putin is making it impossible for the Russians to travel.” In other words, the race towards a return – at least economically – to the Soviet Union is proceeding with great vigor. Finally, the no less marginal attack under the diplomatic dialectic front. “It is not possible to revoke Russia’s participation in the International Monetary Fund (IMF),” said Janet Yellen, US Treasury Secretary. But there may be a de facto ouster through the severance of relations between Washington and Moscow.
The next sanctioning pinwheel could be decisive. And analysts are aware of this. “It is difficult for Russia to avoid a sovereign default,” notes Timothy Ash, an analyst at Blue Bay. Although Washington, and Brussels, are pointing out that exposure is limited, there could be a major impact, especially for Moscow. “The investors weren’t paid. And they will remember it, ”Ash explains. “It will have devastating long-term consequences,” he says. There are also repercussions for both sides of the Atlantic. For now there is no talk of recession, given the caliber of the economic rebound of 2021, but a lot will depend on the timing of the hostilities in Ukraine.
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