The last time the country had defaulted on its foreign debts was during the Russian Revolution, when the Bolsheviks refused to recognize the Tsar’s obligations in 1918. More than a hundred years and the collapse of the Soviet Union later, The Government of Vladimir Putin has incurred in a new suspension of payments that is more symbolic than effective, since the nation had already been marginalized by a large part of the international financial markets since the offensive on Ukraine began and, with it, an avalanche of sanctions.
This Sunday ended the grace period of some bonds that the Kremlin has not been able to return due to the restrictions to operate with dollars and euros that have gripped the nation for four months, according to the US agency Bloomberg. “The Stock Exchanges find themselves in a unique scenario where the debtor in suspension of payments has the will and the resources to pay, but cannot,” stressed the media.
These are two bonds with maturities in 2026 and 2036, for which investors expected to receive 71.2 million dollars and 26.5 million euros. As reported by Reuters, Moscow would have tried to transfer the money at the end of May, but some Taiwan creditors did not receive the money.
Russia had already suspended payments to Russian creditors in the 1998 crisis, but never to foreign investors since the Bolshevik coup. In any case, their access to the markets had already been very limited for months.
An example of this is that none of the three major risk rating agencies, Moody’s, S&P and Fitch, have announced the suspension of payments because these firms have suspended all their business and their analyzes of the country and its companies since March, when the The European Union prohibited this type of activity with Russia,
Yes, Moscow’s creditors could have announced the suspension of payments, but Bloomberg assures that they will choose to keep a low profile while waiting to see how the crisis unleashed by the conflict against Ukraine is resolved. Their situation is complex: the Kremlin has announced that from now on it will pay their obligations by depositing rubles in a financial entity that is under sanctions.
The US Treasury Department made an exception during the first months of the conflict and allowed Moscow to pay its foreign debt. However, this door was closed in May and Putin approved a decree on June 22 to allow the unilateral payment of debts in rubles instead of the amounts originally agreed in dollars and euros.
The Russian Economy Minister, Anton Siluanov, stated that the new mechanism designed by the Central Bank of Russia “is not a suspension of payments”, but the only way that Moscow has to return the money, given that its reserves are frozen and the Most Russian banks have been banned as a result of the sanctions. “The creation of these artificial barriers to the payment of the Russian foreign debt was necessary to hang the label of default. You can say anything and try to put that label, but whoever understands knows that this is not a default”, assured the high official.
Until the beginning of June, Citibank acted as a depositary entity in Russia for the payment of Eurobonds to creditors. Once he stopped being a mediator, he was replaced by the National Settlement Deposit, but was included by the European Union in its list of sanctioned institutions just one day after being designated for that function.
On the other hand, the US, the European Union and other allied countries have frozen much of the fund of 630,000 million dollars in foreign currency and precious metals that Russia had abroad before launching its military campaign. As reported this week by its central bank, this had been reduced to 582.3 billion dollars as of June 17. However, under the pretext of avoiding the freezing of its assets and sanctions, the State Duma, the Russian lower house, is processing a bill that will declare all information on the volume of gold and foreign exchange reserves with which the country has.
The new payment mechanism decreed by Putin is similar to the one used to pay gas bills. In short, Russia pays its obligations at the National Settlement Deposit at the official exchange rate at the time of maturity, and creditors must open special accounts there to withdraw the money. In addition, they must sign that they will never litigate for that money.
In the case of gas, several countries have refused to open these accounts in rubles with Gazprombank because they consider that it leaves them in legal limbo in the future if the Kremlin changes its conditions. Poland, Bulgaria and Finland have already seen how Russia cut off their gas tap for not complying with the Russian payment mechanism.