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According to TASS, Russia should be able to avoid defaulting on its foreign debt because now, as opposed to 1998, it has enough financial reserves. However, the issue is that a big fraction of its reserves has been frozen due to sanctions.

In the meantime, it seems that Russia managed to avoid the default.

So, if I understand correctly, Russia is (partially) at Western countries' mercy when it comes to avoiding default (at least the ones that hold a big chunk of the frozen assets).

Considering the current context (Russia not backing off in Ukraine, international sanctions at their peak), are the Western countries interested in forcing Russia to default on its debt?

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    Are you asking if forcing a Russian default is a specific goal or intention behind the sanctions? Or whether there is a plan or discussion of a plan to keep the sanctions from forcing a Russian default?
    – divibisan
    Mar 17 at 16:36
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    There's a bias in the question: primarily, what the Western countries want is for Russia to leave Ukraine. So asking whether or not they want Russia to default is like asking whether Putin wants civilians to be killed or the ruble value to plunge, for instance: it's not what they want, but they may be ready to accept it as a collateral damage of their primary goal. Also there is the usual problem that it's not always possible to know what any person or entity "wants".
    – Erwan
    Mar 17 at 16:59
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    "The West" is not entirely monolithic. People in the West owed payments on Russian debts obvious would prefer to be paid. People obligated on credit default swaps don't want Russia to default. Many countries don't really care, because either way, Russia's sovereign debt credit rating is already in the toilet and it has no affordable access to private debt financing from the West for all practical purposes now. The issue may be more complicated for nations that need to pay funds to Russia for natural gas delivered to them by Russian companies.
    – ohwilleke
    Mar 17 at 17:24
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    @Alexei Those seem different to me. A) Is the west deliberately trying to induce a Russian default? and B) Would a Russian default be in the West's best interests? They might be aiming for a default for punishment or additional pressure, despite the harm it might do, or hoping to avoid one despite it bringing additional pressure to bear on Russia
    – divibisan
    Mar 17 at 20:21
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    @Erwan It is tangential, but killing civilians is actually not collateral damage, but directly intended. Flattening buildings does not directly imply that, but it does when fleeing is prevented. Mar 18 at 2:08

5 Answers 5

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Update; things changed last week, compared to the earlier US position; the US Treasury has now stopped a Russian bond payment:

April 5 (Reuters) - The United States stopped the Russian government on Monday from paying holders of its sovereign debt more than $600 million from reserves held at U.S. banks, in a move meant to ratchet up pressure on Moscow and eat into its holdings of dollars.

Under sanctions put in place after Russia invaded Ukraine on Feb. 24, foreign currency reserves held by the Russian central bank at U.S. financial institutions were frozen.

But the Treasury Department had been allowing the Russian government to use those funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.

On Monday, as the largest of the payments came due, including a $552.4 million principal payment on a maturing bond, the U.S. government decided to cut off Moscow's access to the frozen funds, according to a U.S. Treasury spokesperson.

The move was meant to force Moscow to make the difficult decision of whether it would use dollars that it has access to for payments on its debt or for other purposes, including supporting its war effort, the spokesperson said. [...]

JPMorgan Chase & Co (JPM.N), which had been processing payments as a correspondent bank so far, was stopped by the Treasury, a source familiar with the matter said.

So now Russia wants and has tried to pay in rubles instead, which would constitute a default (paying interest in non-agreed currency). They have a grace period to remedy this situation though.


Russia managed to avoid the default because the US agreed to let those payments happen. They were made from "frozen" accounts. As CNN related it on March 17:

Anton Siluanov, Russia's finance minister, told state media Russia Today that the country had made good on its obligations to creditors. > But the "possibility or impossibility of fulfilling our obligations in foreign currency does not depend on us," Siluanov said, according to RT, warning that the payment might not go through if the United States disallows it.

"We have the money, we made the payment, now the ball is in America's court," he said.

A spokesman for the Treasury said the United States would allow the payments to go through.

The two coupons Russia must pay on the maturing dollar-denominated eurobonds serve as the first test of Russia's ability to pay its debts while the world heaves massive sanctions on its economy.

If the US blocked the payment, Russia said it would try to pay in rubles rather than dollars. But that action could constitute a default, Fitch Ratings said Tuesday.

So, there's your answer for now.

Yeah, the people holding the debt are mostly Western investors, I suspect, so that probably weighted in on the decision, but details on that aspect are a bit scarce, at the moment. According to Fox Business citing the WJS, the money was payed from the correspondent account that the Central Bank of Russia has with JPMorgan Chase to Citibank, London, which further distributed them to the (unspecified) dollar-denominated eurobond holders. Furthermore, according to Fox, it seems the US Treasury has said that the current sanctions don't prohibit debt payments:

The Treasury Department has said that current U.S. sanctions do not prevent Russia from making debt payments.

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    This is an excellent answer. You identified the relevant details of the Western financial sanctions, for purposes of currency-specific debt repayment (i.e. coupons) under sanctions conditions. Apr 12 at 9:38
  • Looks like the US is no longer allowing bond payments from Russia. This answer could be updated to reflect that. Jun 1 at 9:14
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In international commerce, a default is a technical term which triggers such things as credit default swaps. Russia defaulting even if it does have money in locked accounts would mean that some insurers have to pay some investors, that other investors may have to write off debts, and that Russian reputation suffers.

On the other hand, there are some indications that 'the West' wants to push Russia into abandoning military operations rather than facing default (near the end of this WSJ article). So if the statement can be taken at face value, 'the West' does not want the default ...

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    The credit default swap problem is a minor matter, though a fascinating one. Russia can make debt payments in roubles but not Euro or $US dollars. Russia has placed adequate funds on deposit at a clearinghouse. Does this constitute a default or not? Default isn't necessarily a mere technical matter, although it mostly is in this case, as most of Russia's foreign debt is held by institutional investors. I think your 2nd paragraph is correct, about the intent of sanctions by the USA and some but not all Western countries. Remember that Germany still needs Russia as a primary source of energy. Apr 12 at 9:44
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To a first approximation, nobody ever wants a default to happen, with a small number of exceptions:

  1. People who have shorted the bonds, or other assets which are correlated with the bonds, stand to make a tidy profit. However, due to Russia's disconnection from SWIFT, it may not be possible for those people to actually get paid (in dollars), depending on the technical details of exactly what they shorted, who their broker was, etc., so they might not be happy with this outcome.
  2. Ukraine would probably be fine with Russia defaulting, because under normal circumstances, it would hurt Russia's economy and make it harder for Russia to continue the war. However, the sanctions were/are already doing that to a much greater degree than a mere default could have, and these effects are not cumulative (i.e. most of the damage that would have been done by defaulting was already done by the sanctions anyway). So from Ukraine's perspective, this is mostly a wash in practice.
  3. From a foreign policy perspective, western governments might be privately pleased with Russia's default, because it can be used as a talking point, and (maybe) as a bargaining chip, depending on how negotiations go. In the longer term (i.e. if we assume this war will eventually end), it also discourages future investment in Russia, even after the sanctions are lifted, and some western politicians might like that for protectionist reasons. However, they are not going to say this part out loud, because protectionism is generally regarded as harmful to the world economy, and in the long run, to the domestic economy as well.
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    "these effects are not cumulative " Why not? They are certainly not excluding each other. A default might close workarounds of sanctions and vice versa.
    – Trilarion
    Mar 17 at 20:33
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    @Trilarion: The primary harm caused by a default is that the defaulting country has a hard time borrowing more money in the future. Sanctions already do that much more effectively.
    – Kevin
    Mar 17 at 20:40
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    But the sanctions do not forbid all trade with all nations. Could a default also make trade more difficult?
    – Trilarion
    Mar 17 at 20:47
  • @Trilarion: A default means that bondholders don't get paid. I fail to see what that has to do with "trade" in general terms, except insofar as it affects the bondholders.
    – Kevin
    Mar 17 at 20:48
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The Russian government does not have a lot of external debt to default on, only about $45bn and some of it can be repaid in roubles, which is probably not a big problem.

In the sanctions, especially regarding the limitations of the SWIFT system, there is an exception for these kind of payments. The sanctions "authorizes U.S. persons to receive interest, dividend, or maturity payments on debt or equity of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation through 12:01 a.m. eastern daylight time on May 25, 2022."

Additionally, Russia still has sufficient income in dollar from exports of resources. $285 million per day from the EU alone for Russian resources imports are mentioned there.

This is not a financial crisis of Russia. It's a political one. However, the sanctions allow to pay that debt. Therefore, if Russia defaults now, it will be because Russia wants that. Western countries ex Russia have no direct influence on that.

Indeed Russia choose so far not to default. It is reported that they made a $117 million payment yesterday and thus are avoiding default.

By the way: Should they choose to default or are driven into default by further developments, the lenders could maybe sue somewhere (in the US for example) and try to get their credit repaid from impounded Russian assets. See for example how Argentinian foreign debt was treated in the past.

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Unlike some of the other issue, on which the opinion about Russia is uniform, the priorities of nation states West of Russia are not even remotely that uniform. In fact, there are conflicting interests even within most countries, some of which would benefit, if Russia were to default, while others would not.

It is almost certainly a subject for speculation whether the balance of those interest is in favor of a default or against a default. There are simply different ways of evaluating how a balance of such priorities can be evaluated.

One way, for example, is to look at the overall outcome. Biden administration is very favorable towards sanctions against Russia for its war of aggression against Ukraine, as a way of reducing the ability of Russia to sustain its war machine. And yet the Biden administration did allow the transfer of funds to make the coupon payments. Since such transfer, as any banking operation, could have been stopped under the umbrella of the sanctions, it does appear that, at least for now, the US does not favor a Russian default.

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