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Currently the following things are true:

  1. Western countries have frozen most of Russia's foreign currency reserves
  2. Russia is either in default or would be soon

However #1 is seen as fair and justified by the West, while #2 seems to be at least somewhat condemned. But isn't it only fair for a country to stop paying their debts if their foreign accounts are frozen? This is somewhat nonsensical as the primary reason why the debtors aren't getting their money back is because the debtors own nation has frozen Russia's assets, thus preventing payments from happening. In other words, it would be strange for the West to blame Russia for not paying back after freezing the money they were supposed to use for payments.

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    it's not fair or unfair. it's a fact which determines certain other outcomes. the question of what's "fair" for a government to do is squarely in the "what should a government do" territory though. so it's not suitable for this site.
    – wrod
    Apr 12, 2022 at 4:51
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    I voted to reopen. Currently, it is closed using this reason: "Opinion-based This question is likely to be answered with opinions rather than facts and citations. It should be updated so it will lead to fact-based answers." No, it is not opinion-based. The Q is asking about an inconsistency in facts, and does not explicitly ask for opinions. The Q has 3 answers, which attempt to address this Q using facts and references, not opinions. Apr 12, 2022 at 16:49
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    @TimurShtatland I think the asker is constructing something not really based on reality. Since when is fairness a concept in reality and what have personal finances to do with politics? Only opinions can come forward as answers. Some will say fair, others unfair. We will not learn much. If JonathanReez wanted to ask about the legal framework or the political acceptance or some general philosophical analysis instead (in war and love everything is fair or not?), but he didn't do so yet.
    – Trilarion
    Apr 12, 2022 at 21:01
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    @TimurShtatland edited now Apr 12, 2022 at 21:14
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    This is a good question about the social rules and expectations of politics. Generally speaking, in interpersonal dynamics, attempting to enforce an obligation against someone while at the same time sabotaging their attempts is considered bad faith and absolves the other party of whatever it is you wanted them to do. For example, I promise my sister that I will attend her wedding, but she calls in a bomb threat to the airport the morning I am flying out so my flight gets canceled. Her bad faith absolves me of the social obligation of trying another means of travel. Aug 8, 2022 at 14:29

7 Answers 7

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"most of Russia's foreign currency reserves" is not accurate. Only about half were frozen; TASS and Reuters agree on this figure. That still leaves hundreds of billion of dollars with which they could pay. But they don't want to pay (just) with/from those.

Never mind that your question is a false dichotomy. It's perfectly acceptable to the US government for both things to happen. (Even more so because Russia has frozen assets that could be used to pay creditors, after wrecking Russia's credit rating and netting some legal fees that may even exceed the debt in question, if some past examples--cough, Argentina--are considered).

The more recently stated US position is exactly that Russia must [try to] pay without being able to access all of their funds abroad [or default, although that was left unsaid].

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 [U.S. Treasury] spokesperson said.

It's also worth noting that the missed payment was less than Russia's typical one day income from gas & oil (and at recent prices just from gas)... which still gets paid even by the Western customers to various unfrozen & unsanctioned Russian banks (Gazprombank etc.) But I'd grant that there are probably some legal difficulties even in Russia forcing Gazprombank to pay the sovereign bonds.

So "acceptable" for whom? Obviously Russia thinks it's not acceptable, hence their recent payment in rubles (to an account in Russia that's not really accessible to the creditors, due to a combination of Western sanctions and even more so to the Russian capital controls imposed in response).

So yeah, Russia might argue it's like a "guy in a coma", to use Roger Vadim's analogy, while the US might be saying that it's more like Boris Becker, i.e. refusing to pay while it still has plenty of assets (and foreign income in the case of Russia).


As some may be unaware of the Argentine case details, here's a partial summary, from an IMF book chapter:

The Argentine debt crisis after 2001 is the best-known example for how large the legal costs of default can become. Dozens of hedge funds filed suit against Argentina in New York, litigated for full repayment, and repeatedly attempted to seize Argentine assets abroad. Fifteen years later, those holdout creditors achieved a major victory in court, which ultimately forced the Argentine government into a settlement of more than $10 billion – a multiple of the debt’s original face value (Cruces and Levy Yeyati 2016; Hébert and Schreger 2017).

And interestingly enough, Argentina had troubles with later payments while that litigation was going on not due to sanctions, but because of court decisions:

some contracts do not consider a payment to be made until each creditor has received the funds. For instance, Argentina’s 2005 and 2010 exchange bonds specified that “the Republic’s obligation to make payments hereunder ... shall not have been satisfied until such payments are received by the Holders of this Security” (Republic of Argentina 2005). The distinction between the debtor’s payment and the ultimate creditor’s receipt became salient when a U.S. federal court blocked Bank of New York Mellon as trustee for Argentina’s exchange bonds from distributing the government’s interest payment to the bondholders. [fn:] Argentina had paid Bank of New York Mellon in violation of the court’s injunction designed to compel ratable payment to holdout creditors whenever the exchange bondholders were paid.

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    so, they sued argentina in NY and won. why would officials of argentina accept court's decision, whatever it was? why would they pay those 10B?
    – user2701
    Apr 13, 2022 at 9:20
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    @BЈовић: 'cause Argentina still wants to do business with America, I guess. But it's better that you ask that as a separate question. Mind you, the court battles did take 15 years, so Argentina didn't give up that easily. It was probably a matter of relative costs at that point.
    – Fizz
    Apr 13, 2022 at 9:30
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    Why can't they pay their debt in rubles instead? Apr 14, 2022 at 12:20
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    @AbdelAleem because the creditors don't want rubles. Rubles weren't part of the loan agreement.
    – Seth R
    Apr 14, 2022 at 14:27
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    @AbdelAleem why can't I pay my mortgage in user253751bucks?
    – user253751
    Apr 14, 2022 at 17:24
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Just to follow up on your example with a specific example, it is perfectly 'ok' to freeze a bank account and still expect your debts to be paid.

This would be somewhat akin to my bank freezing my salary account for some reason, but then still expecting me to make mortgage payments, which seems completely unfair.

I know someone who recently had all of their bank accounts frozen as they were caught being a handler for a crime ring. They would essentially take money from one account, deposit it in another and keep a % 'for their trouble'. Even though their bank accounts are frozen, they are still expected to make their payments on their credit cards and mortgage and student loans etc.

When an entity takes on debt, it includes when and how to make the repayments for that debt. It is up to the entity to not take any action that may make them unable to make the repayments. If the entity is unable to avoid entering a situation where it can't make the repayments, that indicates that the entity is a risky investment and future debt would be more expensive.

Expanding on this, you mentioned fairness... fairness has nothing to do with anything here. It is entirely about the likelihood of a debt being repaid. You can blame Russia, or China, or the US, or Ukraine it doesn't matter what caused Russia to not be able to pay debts just that they ended up in a position where they couldn't and this indicates they are a less reliable debtor than others who have never been in this position. A more reliable debtor would have avoided the situation where they missed a debt payment.

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    @JonathanReez Not at all. Someone lent Russia money. Russia has taken actions preventing them from paying it back. The reasoning for why they can't pay it back is not material... they have put themselves in a position to not be able to pay their debts. If I put all my money under a mattress and get robbed, so that I cannot pay a debt is it my fault I was robbed? No but it is my responsibility to ensure I can pay my debts. It is my fault for storing money where it wasn't safe. What if China conquered 90% of Russia so they had no more funds? Still Russia's responsibility to pay their debts. Apr 12, 2022 at 19:22
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    if a person borrows you money but then robs your safe, their entitlement to get their debt back becomes murky at best. Same thing happened here with Russia. I'm 100% opposed to the war but think that them defaulting is completely justifiable. Apr 12, 2022 at 19:49
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    Banks are not states. A better analogy is that I give my money to the neighbor's dad for safe-keeping, take a loan out from his kid, kidnap and torture their friend and then whine about it when the dad tells me I can't have my money until I release the victim. Defaulting on debts causes future unfavorable loan terms - impactful, but not a war crime. Russia's money, of course, is frozen - not stolen. If they want it back, they can unilaterally cease-fire, retreat and signal agreement to reparations at any time.
    – user121330
    Apr 12, 2022 at 22:24
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    @JonathanReez Nobody cares if its "justifiable" or not. And Russia has an easy way to avoid defaulting - pull their troops out of Ukraine and stop slaughtering tens of thousands of civilians. Or do you think that would be too much bother for them? Apr 13, 2022 at 3:07
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    @DJClayworth tbh, it's not certain or even likely that all sanctions will be lifted if Russia pulls out all soldiers tomorrow and says "sorry for being so nasty, won't happen again" (which is itself not likely).
    – gerrit
    Apr 13, 2022 at 7:40
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It's not about what is "fair" or "acceptable" or who is "to blame". It's about the consequences.

"Default" is not a bad thing because people think it's "unacceptable" for Russia to not pay its debts. Russia is entirely capable of simply refusing to pays its debts and there is nothing much people can do about it.

The issue is the consequences. If Russia refuses to pay its debts, people will stop investing there. People (and countries) invest almost always because they expect to get something back - at least to get their investment or loan back at the end of the process. If Russia can't do that it has serious a impact on the likelihood of getting more investment. People will especially refuse to invest if the sanctions are ongoing, meaning that Russia is unlikely to be able to pay its debts any time soon.

There is another impact. Putin, like most dictators, portrays himself as a strong man leading his people to unbounded success - militarily, politically and economically. Being unable to pay your debts rather gives the lie to the idea of the Russian economic success story. It's not only embarrassing, it's a sign that everything is not quite as rosy as it's been portrayed.

As for the idea that it's unfair to freeze Russian assets and then expect them to pay their debts - argue that with the tens of thousands of dead Ukrainians and see how far you get.

The punishment of having to default is hugely less than Russia deserves for the atrocities they have committed in Ukraine, from the invasion itself to the civilian slaughter to the wanton destruction to the massive damage to Ukraine's economy.

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    It still seems a bit childish to freeze Russia's assets and then accuse them of defaulting. If you want to stop investments into Russia, you can do so without going through a charade of making them go into default. Apr 13, 2022 at 1:16
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    No, you can't stop private investments from countries that don't want to impose sanctions. But if they won't get their investments back then the investments will dry up. As for "childish", see my response to "unfair" above. Apr 13, 2022 at 3:02
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    AFAIK Russia only defaulted on debt to countries that are part of the Unfriendly List. So debtors outside the Western bloc were not impacted anyway. Apr 13, 2022 at 3:28
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    Then there's your answer. Russia isn't "defaulting" because they can't pay, they are choosing not to pay people they see as their enemies. Your problem is you are discussing this as if it were a reasoned debate between economists while thousands of people are being killed. Apr 13, 2022 at 14:48
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    @DJClayworth are you aware that there was a war in Ukraine since 2014? A war in which thousands of Ukrainians were killed, many more wounded and many more displaced. Many of them killed by their own army. If you're gonna condemn Russia for killing Ukrainians, at least be consistent. Apr 14, 2022 at 12:29
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This would be somewhat akin to my bank freezing my salary account for some reason, but then still expecting me to make mortgage payments, which seems completely unfair.

If one owes money to bank A, but receives a salary to an account in bank B, then A is certainly within its right to demand payments - they don't care where/how the money comes from. To large extent this logic applies even when the debt and the account are in the same bank - the debt likely does not imply that one make payments from a specific account, e.g., one may pay by cash or ask one's aunt to pay it.

However, cases when one is prevented from paying by circumstances beyond the one's control (e.g., the one is in a coma after a car accident), are usually previewed in the loan contract, so one may avoid penalties/default. This is what the legal dispute about the Russian debt will likely focus upon.

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    Going by the Argentine debt precedent, being blocked by legal means to make a certain payment is in no way comparable to a physical person falling in a comma. What will more likely happen is that foreign holder will get their money from frozen Russian assets + muchos legal fees, which in Argentina's case exceed the original debt. Causing Russia that kind of trouble may well have been the intent of the US in this case...
    – Fizz
    Apr 12, 2022 at 8:10
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    @Fizz Russia said that it will dispute the default, but I think the outcome is pretty obvious here. Apr 12, 2022 at 8:13
  • @Fizz Given how different Russia and Argentina are, and their reliance on the american markets, I don't think the precedent is worth much. If a vulture fund tried to sue Russia the more probable outcome is a tea with novichock rather than a settlement in court.
    – Rekesoft
    Apr 12, 2022 at 9:30
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Neither the sanctions, nor the default are "acceptable" - at least not in regard to those suffering from the consequences.

Both are last resort measures having far-reaching, unpleasant and diverse side-effects.

A Russian default is an indirect mechanism to transfer some of the burden related to sanctions to those who back Russia by investing there.

This can be viewed both as a short-term releif mechanism for Russia (assuming they do have the money available, but prefer to keep them for other purposes) as well as a penalty for the investors in Russia (indended by those imposing the sanctions).

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Imagine that you are a taxi driver. One night you got drunk, ran a red light, and crashed into another car. The other driver sued, and the court did two things:

  1. Fined you for drunk driving and running the red light and took your driving license, thus limiting your ability to make money.

  2. Ordered you to pay restitution for the other driver's car you smashed.

"Wait a minute!" - you say "How can I possibly pay for the smashed car after you took my money in fines and prevented me from making my usual wages? Since my financial strain was caused by the other driver's state, would it be fair that the complainant pays for his own car repair, now that his lawsuit caused my inability to pay for it?"

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  • Except that Russia's money is "frozen" rather than taken away as a fine. Apr 14, 2022 at 17:58
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It’s not a matter of acceptable or not, it’s a matter risk management.

Freezing funds reduces confidence that a depositor will get their money back, defaulting reduces confidence that an investor will get their money back. In that sense they are the same. But funds being frozen is a known risk that depositors who fear it have already mitigated as much as they can. Defaulting will be a new thing, which future investors will have to mitigate as much as they can — by increasing rates to compensate for the lack of confidence.

The US and other Western powers have already taken whatever economic damage that a habit of freezing funds under some circumstances imparts, applying that rule to Russia doesn’t change things as it is seen as being consistent with precedent. Russia hasn’t yet dealt with the results of not paying their bills as agreed, and may try to avoid the problem entirely.

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