- Russia has met its debt obligations despite heavy sanctions on the war in Ukraine.
- The Kremlin says Russia has the ability to pay its debts, but that the West wants it to default.
- A default would impact Russia’s creditworthiness, making it more difficult for the country to borrow.
Even after the United States and its allies imposed sweeping sanctions on Russia, President Vladimir Putin’s administration was able to honor the country’s debts.
Investors have been closely monitoring Russian debt payments in anticipation of a default that could ripple in the country’s financial system and beyond. But Russia once again avoided a default on Thursday when it sent $ 447 million in dollar bond payments processed by JPMorgan, sources told Bloomberg.
“There have been questions about the Russian government’s ability and willingness to pay, but all of this is happening in the context of sanctions,” Hassan Malik, Russian financial system expert and senior sovereign analyst at Boston- Loomis Sayles, consulting firm for investment management, he told Insider.
“This is what makes this current situation very different from a common emerging market debt crisis,” he added.
A Russian default event would affect the country more than it would impact the world financial system
Sanctions are hindering Russia’s foreign currency debt payments, as they have to go through international intermediaries. The Kremlin has accused the West on at least two occasions of attempting to engineer an “artificial default” with those sanctions.
“The fact is that from the beginning we have said that Russia has all the funds and the potential necessary to prevent a default – there can be no defaults,” Kremlin spokesman Dmitry Peskov told Reuters on March 17. “Any default that could arise would have a completely artificial character.”
So far Russia has been able to meet all of its debt obligations and it may be because a default event would be more important to the country than the rest of the world would.
The impact on global financial systems would be limited, as Russia does not have broad financial ties globally, Insider’s Harry Robertson reported in March.
The country’s foreign debts are also quite low, Malik said. Russia owed $ 39 billion in foreign currency bonds at the end of 2021, according to JPMorgan estimates. By comparison, Greece defaulted on 205.6 billion euros ($ 277.5 billion) of sovereign debt in 2012.
But a default would affect Russia’s solvency and “clearly make it difficult for the government to organize funding from other sources,” Malik said.
So, for the United States and its allies, “part of the strategy could be to contribute to these financial upheavals that Russia is suffering from as a result of the moves against Ukraine,” he added.
Russia was able to honor its dollar debt in part because the U.S. Treasury Department for Foreign Assets Control issued a temporary license on March 2 that allows U.S. persons to receive dividends and bond payments on Russian securities from the finance ministry, central bank or equity fund.
That license will expire shortly after midnight on May 25, and Russia will still have about $ 2 billion in external sovereign bond payments to be made by the end of 2022, according to Reuters.
Russia’s credit rating has been reduced to junk
Widespread condemnation of Russia’s war in Ukraine and sweeping sanctions have hit the country’s rating.
The big three credit rating agencies – S&P Global, Moody’s and Fitch – have all reduced Russia’s credit rating to junk status. On March 23, research firm MSCI said 23 investors still believed there was a 50% chance that Russia would default on its debt over the next 12 months.
Before the war in Ukraine, Russian bonds were generally well regarded, said Warut Promboon, head of credit research at Bondcritic, an independent research firm based in Hong Kong. Companies like gas giant Gazprom and state-owned bank VTB were “professionally run” and delivered high returns, Warut told Insider.
“They absolutely have the ability to pay,” said Warut, who has valued several Russian bonds in the past. However, he also said that he is not ending up buying Russian bonds right now due to the risk that comes with Putin’s unpredictable nature and the enormous amount of power he holds.
“Putin can do a lot of things,” Warut said, including directing authorities or companies not to pay their debts if sanctions become too severe, or directing payments to be issued in rubles rather than dollars.
“There is nothing you can do as a bondholder if the leader of a country is against you,” he told Insider.