What if Russia defaults on government bonds?

IMF Managing Director Kristalina Georgieva attends the G20 Health and Finance Ministers Meeting in Rome in October 2021. Photo: AP

This risk became more apparent after the head of the International Monetary Fund, Kristalina Georgieva, admitted that Russia’s default was no longer an “impossible event”.

The AP news agency assessed the problems that would arise in the event that Russia fell into default.

Why do Western experts think Russia is likely to default?

On March 15, Russia faced interest payments of $117 million on two types of US dollar bonds.

But Western sanctions in response to Russia’s campaign in Ukraine have placed severe restrictions on banks and their financial transactions with Russia. Russian Finance Minister Anton Siluanov said the government had issued instructions to pay in dollars, but added that if banks were unable to do so because of sanctions, payments would be made in rubles.

Thus, Russia has the money to pay, but cannot do so because sanctions have restricted banks’ transactions with Moscow and frozen much of the country’s foreign currency reserves.

Currently, rating agencies have downgraded Russia’s credit rating to below investment grade. Fitch gives Russia a “C” credit rating, and in its view, “a sovereign default (i.e. default when a government defaults on its national debt) is imminent.”

The Russian ruble is depreciating sharply due to US and European sanctions. Photo: Reuters

Some Russian bonds allow payments in rubles under certain circumstances. But bonds that are due to pay interest on March 15 are not. And signs suggest that the ruble’s value will be determined by the current exchange rate, which has already plummeted – meaning investors (creditors) will receive far less money.

Even for bonds that allow payments in rubles, things can be complicated. “Rubles are clearly not worthless, but they are depreciating rapidly,” said Clay Lowery, executive vice president at the Association of Financial Institutions at the Institute of International Finance.

Ratings agency Moody’s said that “all equal, payments in rubles are also defaultable by our definition… However, we need to understand the facts and circumstances of the transactions.” specific translation before making a decision [đánh giá] default”.

People line up to withdraw money from an Alfa bank ATM in Moscow on February 27, 2022. Photo: AP

How much does Russia owe abroad?

Russia’s foreign debt totals about $491 billion, with $80 billion due over the next 12 months, according to Algebris Investments. Of these, $20.5 billion are in USD-denominated bonds held by non-Russian residents.

How do you know if a country is in default?

The rating agencies can downgrade the country’s rating to default, or the court can decide on that status.

Bondholders (lenders) who fail to repay can ask a committee of representatives of the finance company to decide whether default will trigger a large settlement. And this is still not an official declaration of the nation’s default.

Cases can be complicated. “There will be a lot of lawyers involved,” says law firm IIF’s Lowery.

Impacts if Russia defaults on debt

Investment analysts are cautiously calculating that a Russian default would not have as big of an impact on global financial institutions and markets as the 1998 default. At the time, Russia’s default. ruble bond debt became the top incident of the financial crisis in Asia.

The US government had to step in and ask the banks to bail out the Long Term Capital Management Fund, a large US hedge fund whose collapse could threaten the stability of the banking and financial system. larger goods.

An electronic screen shows the exchange rate between the US dollar and the euro against the Russian ruble in Moscow, February 24, 2022. Photo: AP

This time, however, “it’s hard to say 100 percent in advance, because every government default is different and the global impact will only be seen once it’s already happened,” said expert Daniel Lenz, assistant euro rate strategy manager at DK Bank in Frankfurt.

The impact outside of Russia could be mitigated as foreign investors and companies have reduced or avoided transactions in Russia since a round of sanctions imposed by the US and the European Union in 2014 following Russia’s annexation. enter the Crimean peninsula.

IMF Managing Director-General Georgieva said that, although war has devastating human consequences and has wide-ranging economic impacts on food and energy prices, a Russian default would be “certain.” certainly not systematically related” in terms of risk to banks around the world.

Bondholders or creditors – such as funds that invest in emerging market bonds – can suffer severe losses. Moody’s current rating implies that creditors will suffer a loss of between 35% and 65% on their investment if a sovereign default occurs.

What happens when a country defaults on its debt?

Often creditors and defaulting governments will negotiate a settlement in which bondholders are awarded new bonds of lower value but at least partially compensate them. However, it is difficult to see how that can happen now that the war is on and Western sanctions prevent many dealings with Russia, its banks and companies.

President Vladimir Putin launched a military campaign in Ukraine on February 24, leading to many Western countries imposing sanctions on Russia. Photo: TASS

In some cases, the creditor can sue. In this case, the Russian bonds are said to come with provisions that allow the majority of creditors to come to an agreement and then impose that settlement on the minority. But again, it’s unclear how that will work as many law firms are cautious in dealing with the Russian side.

Once in default, a country may not be able to borrow from the bond market until the default is resolved and investors regain confidence in its ability and willingness to pay. government.

The Russian government can still borrow rubles in the country, where it mainly sells bonds to Russian banks.

Russia is suffering the severe economic impact of sanctions, which have sent the ruble plummeting and disrupted trade and financial ties with the rest of the world. A default would be yet another manifestation of political and financial isolation from Moscow.

According to Thu Hang