Economic|The Russian attack
Investors have been preparing for Russia’s non-compliance since the beginning of the war. Therefore, insolvency is unlikely to disrupt the financial markets.
Russia is threatened with insolvency due to sanctions imposed by Western states, even though it has paid its $ 650 million maturing bonds and interest at the last minute.
Russian government bond prices have plummeted, a sign that investors consider insolvency very likely and are already prepared for it.
Head of the Bank of Finland’s Monetary Policy Implementation Department Niko Herralan in his view, it is only a matter of time before Russia fails to pay its government loan repayments or interest.
“The insolvency is not expected to be a major disruption in the financial markets, as the market has been preparing for insolvency since the start of the war and the exposure of Western banks and investors to Russian government debt is only moderate,” Herrala says.
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The state cannot go bankrupt.
Herrala considers it possible that Russia will at some point simply decide not to pay interest and repayments on its loans, as it does not make sense to use its foreign exchange reserves for them.
“Russia has already been isolated from Western financial markets by sanctions. If it stuck to its obligations and avoided insolvency, it would not be of much use, because due to sanctions, Russia will not be able to obtain new funding from Western banks and investors, ”says Herrala.
Russia has so far emphasized that it has sufficient funds and also a willingness to repay maturing loans and interest. Herrala believes this is primarily a policy by which Russia is artificially trying not to lose its face in the financial markets. Despite the fact that many companies and investors have voluntarily withdrew from Russia in protest of the war of aggression.
“Avoiding insolvency hardly improves the perception of Russia in the eyes of Western citizens or investors at all. Russia may imagine that avoiding insolvency would improve its position in the financial markets once the war is over. I think it is unlikely that Western financial markets will open up to Russia long after the war is over. ”
The largest revenue item for the Russian government is taxes on energy production and exports.
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State insolvency usually results in lengthy litigation.
State insolvency is a different matter than the insolvency of a company.
The temporary insolvency of a company usually leads to corporate restructuring and the permanent insolvency to bankruptcy. Bankruptcy simply means that a court decision turns a debtor’s assets into money to pay off debts.
The state, in turn, cannot go bankrupt because there is no court or regulated procedure that could turn state assets into money to pay off debts.
State insolvency usually results in lengthy lawsuits that seek to reconcile how much the state will eventually pay off its defaulted debts.
Government bonds are usually entered into under English law, which means that their disputes are settled in British courts.
Financial markets an experienced forensic researcher Klaus Tuori also considers that Russia’s insolvency is not significant.
“The market has been preparing for insolvency for a long time, so it’s hard to imagine that there was any panic in the financial markets as a result. It seems that the sanctions have worked as intended and that investors also know, ”says Tuori.
Tuori emphasizes that after the insolvency, the terms of the bonds and credit risk derivatives will be examined. A credit risk derivative is an insurance policy used to purchase collateral in the event of a debtor’s insolvency.
“Russia’s foreign loans have largely been concluded under English law. Due to the sanctions, the interpretation of the terms and conditions of bonds and credit risk derivatives will almost certainly result in complicated litigation to determine whether the terms have been met, ”says Tuori.
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