Russia is on the verge of debt default of $ 150 billion as sanctions cripple the economy

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Russia is on the verge of debt default of $ 150 billion as sanctions cripple the economy

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Russia It is nearing a spiral of historic debt default that could ripple across the global economy after the United States and its European allies hit the Kremlin with a series of crippling financial sanctions.

Moscow’s invasion of Ukraine nearly a month ago – the largest attack on a European state in decades – resulted in a series of economic sanctions from Western nations, including cutting a key part of Russia’s central bank by preventing them. to sell dollars, euros and other foreign currencies in its reserve inventory of approximately $ 630 billion.

The financial fallout prompted credit rating agencies to downgrade their long-term debt rating for the Russian government to “junk” status, with Fitch warning that international sanctions have brought a “huge shock to credit fundamentals. Russian”. He noted that additional penalties remain a distinct possibility.

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Russia sought a way to mitigate the blow: The central bank more than doubled its key interest rate to 20% in early March after some banks were removed from the Swift financial system and the West froze a significant part of its foreign exchange reserves.

But on Wednesday the Kremlin will have to pay $ 117 million in interest on two dollar-denominated bonds; if it fails to make those payments, it will be Russia’s first foreign debt default since the Bolshevik Revolution of 1917, according to JPMorgan Chase.

moscow exchange rate

A man looks at a screen showing Russian ruble exchange rates at a mall bank on March 15, 2022 in Moscow, Russia. (Konstantin Zavrazhin / Getty Images / Getty Images)

The Bank of Canada and the Bank of England, which track global sovereign defaults, estimate that the total value of defaulted public debt in the world was about $ 443.2 billion in 2020, or about 0.5% of the world public debt.

Russian Finance Minister Anton Siluanov said Monday that Moscow will repay creditors of “hostile countries” in rubles and possibly Chinese yuan until sanctions are lifted, with sanctions preventing the nation from accessing its dollar and euro reserve. The ruble has depreciated sharply since Russia attacked Ukraine. As of Wednesday morning, 107 rubles were worth $ 1.

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He said Russia must pay coupons on its Eurobonds and has already asked Western banks to proceed with the transactions.

“Is this a default value?” Siluanov asked during an interview with the Russian state news bulletin. “From Russia’s point of view, we are fulfilling our obligations.”

Russian Finance Minister Anton Siluanov

On 10 November 2016, Russian Finance Minister Anton Siluanov participates in an international conference dedicated to the 175th anniversary of Sberbank in Moscow. (Reuters / Sergei Karpukhin)

Others, however, argue that the payment of dollar-denominated bonds in rubles constitutes a default. It is unclear whether Russia will default on its debt if it pays in rubles. Siluanov accused Western nations of orchestrating sanctions with the intention of creating a default that “has no real economic basis”.

Kristalina Georgieva, head of the Washington-based International Monetary Fund, said Sunday that a Russian default is no longer “unlikely”.

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“Russia has the money to pay its debt, but it cannot access it,” he said in an interview with CBS News.

If Russia fails to meet its obligations, there is a 30-day grace period that provides coverage until April 15. But if Moscow indicates it does not intend to pay its debt, credit rating agencies could default Russia before the final Deadline.

Russia’s central bank is set to meet again on Friday in an effort to avoid a full-blown financial crisis.

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