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Russia may not pay its foreign debt for the first time since the Bolshevik Revolution – more than a century ago – further isolating the country from the global financial system, following Western-imposed sanctions over the start of the war in Ukraine.<\/p>\n<\/div>\n
A 30-day period for fulfilling government obligations expired on Sunday.<\/p>\n
However, it may take time to confirm bankruptcy.<\/p>\n
“Although there is a possibility that some magic will happen” and that Russia would secure the money through financial institutions, despite the sanctions, “no one is betting on that,” said Jay S. Auslander, Wilk’s senior sovereign debt lawyer. Auslander in New York.<\/p>\n
“It is very likely that Russia will not be able to make the payments because no bank will move the money.”<\/p>\n
The US Treasury Department last month barred Russia from making billions of dollars in debt payments through US banks.<\/p>\n
In response, the Russian Foreign Ministry said it would pay in rubles the debts billed in dollars, and would offer “the opportunity for later conversion into the original currency.”<\/p>\n
Russia has said it has money to pay off its debts, but sanctions have blocked its foreign reserves.<\/p>\n
“It is not a failure of our state, but an artificial man-made collapse in the international financial system,” said Konstantin Kosachev, deputy speaker of the Russian parliament, according to Russia’s state-run RIA Novosti news agency.<\/p>\n
The United States and the European Union have deliberately created “artificial barriers for Russia to pay its sovereign debt, so that failure remains with us,” Russian Finance Minister Anton Siluanov said last week.<\/p>\n
On the other hand, the argument is that “this happened because of sanctions, but the sanctions are completely under your control,” said Auslander.<\/p>\n
“This whole situation has been under your control, because all you have to do is not invade Ukraine,” he said, referring to Russia.<\/p>\n
How much is Russia’s foreign debt?<\/p>\n
About $ 40 billion.<\/p>\n
Prior to the war, Russia had about $ 640 billion in foreign exchange and gold reserves, and held most of it abroad.<\/p>\n
All those tools are now frozen. Putin’s war in Ukraine plunges Russian economy into crisis<\/p>\n
Russia did not fail to pay its international debts from the Bolshevik Revolution, when the Russian Empire fell and the Soviet Union was created.<\/p>\n
Russia failed to pay its domestic debts in the late 1990s, but managed to manage the situation after securing international aid.<\/p>\n
Investors have been waiting for Russia to go bankrupt for several months now.<\/p>\n
How is it known if a state goes bankrupt?<\/p>\n
So-called rating agencies or a court can decide on the matter.<\/p>\n
Holders of bonds (securities) have contracts that serve as collateral against bankruptcy.<\/p>\n
They can ask a committee of financial representatives to decide whether the state’s failure to make the payment should be compensated, although this stage is not yet considered bankruptcy.<\/p>\n
The Bankruptcy Assessment Commission – a group of banks and investment funds – ruled on June 7 that Russia had failed to pay the additional interest, following a payment on April 4.<\/p>\n
However, the Committee has not taken a follow-up decision, as it is not known how sanctions could affect a solution.<\/p>\n
What can investors do?<\/p>\n
The official way to declare bankruptcy is if 25 percent, or more bondholders, declare that they have not received their money.<\/p>\n
When this happens, according to the provisions, all other bonds are considered bankrupt and their holders can seek a court opinion to compel the state to make the payments.<\/p>\n
Under normal circumstances, investors and the bankrupt government usually negotiate a solution, mainly by offering new bonds, which may have a lower value but at least serve as some form of compensation.<\/p>\n
However, sanctions now preclude negotiations with the Russian Ministry of Finance, and no one knows when the war will end or how much the bankrupt bonds will be worth later.<\/p>\n
In this case, filing for bankruptcy and suing “may not be the wisest decisions,” Auslander said.<\/p>\n
Since negotiations are impossible and there are many unknowns, some creditors may decide not to act.<\/p>\n
Investors who want to avoid Russian debt may be thinking about selling their bonds at a lower price.<\/p>\n
They, too, may not be very vocal, so as not to associate their names with the war.<\/p>\n
When a state goes bankrupt, it can be excluded from foreign markets until the issue of bankruptcy is resolved and when investors gain confidence in a government’s ability and willingness to make payments.<\/p>\n
However, Russia has already been excluded from Western markets, so any return on borrowing is far from over.<\/p>\n
The Kremlin can still borrow rubles inside the state, where it usually depends on Russian banks for their purchase.<\/p>\n
What impact would Russia’s bankruptcy have?<\/p>\n
Western sanctions imposed on Russia over the war have prompted foreign companies to flee Russia and sever trade and financial ties with much of the world.<\/p>\n
Bankruptcy can be considered an additional step towards isolation and disruption.<\/p>\n
Investment analysts have said that Russia’s bankruptcy would not have the same impact on global financial markets and other institutions as it did in 1998.<\/p>\n
At the time, Russia’s failure to meet its financial obligations had prompted the US government to intervene, as it was predicted that inaction could shake the banking and financial systems.<\/p>\n
It is true that bondholders can face huge losses.<\/p>\n
“But while the war itself is having devastating consequences, given the consequences on people, the consequences of rising food and energy prices, non-payment of government bonds would not be of great importance,” said the director of the Monetary Fund. International, Kristalina Georgieva.<\/p>\n
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