
Russia will not be able to pay its foreign debts for the first time since the Bolshevik Revolution a century ago, further isolating itself from the international financial system, following Western sanctions over its war in Ukraine.
Interest was originally due on May 27, but yesterday ended an additional 30-day period that borrowers have to pay off debt before declaring bankruptcy.
It looks like Russia will not be able to repay the creditors, as no bank is taking over the transfer of its money, says Jay Auslander, a well-known New York bankruptcy lawyer.
Last month, the US Treasury Department closed to Russia the opportunity to pay foreign investors through US banks.
In response, Russian officials said they would pay the debts in rubles and offered such an opportunity. Russia says it has the money to pay off debts, but sanctions have blocked its funds.
Russian officials do not call this bankruptcy. The United States and the European Union have deliberately created artificial barriers to preventing Russia from repaying its foreign debt, said Russian Finance Minister Anton Siluanov.
The other side of the argument is that “this is happening because of sanctions, but sanctions are completely under Moscow’s control, if it gives up its attack on Ukraine,” says lawyer Auslander.
Here are the main things you need to know about Russian bankruptcy:
HOW MUCH IS RUSSIA’S DEBT?
Russia owes about $ 40 billion in securities, nearly half of it to foreigners. Before the start of the war, Russia had about $ 640 billion in foreign currency and gold reserves, most of which were deposited in other states and are now frozen as a result of sanctions.
Russia has not failed to pay its international debts since the Bolshevik Revolution, when the Russian Empire collapsed and the Soviet Union was created. Russia failed with its domestic debts in the late 1990s, but was able to recover after international aid.
Practically, Russia has been failing to pay in the eyes of securities investors for months, says Liam Peach, an economist specializing in emerging European markets at Capital Economics.
Insurance companies that cover Russian debt have been warning for several weeks that the risk of non-payment of debt was up to 80%, while rating agencies such as Standard & Poor’s and Moody’s have placed Russian debt at the level of securities with high risk value.
HOW IS THE DEFINITION OF A COUNTRY DETERMINED?
Rating agencies are the ones that determine bankruptcy, but they have already banned Russia rating. Courts can also declare a country bankrupt. Holders of securities, or the companies that provide them, can ask a committee of representatives of financial firms to decide whether it is a matter of late payment and request its execution, however this is not yet treated as a formal statement of bankruptcy.
The Credit Derivatives Committee, an industry group of banks and investment funds, may be among those making such assessments by warning of a “credit incident,” says Mr. Peach.
The panel ruled on June 7 that Russia failed to pay additional interest on a late payment, which was due on April 4. But the committee delayed taking further action due to uncertainty as to how sanctions could affect the resolution of any settlement.
WHAT CAN INVESTORS DO?
The formal way to file for bankruptcy is if 25% or more of the securities holders say they have not received their money. Once that happens, the bankruptcy extends to all other securities issued by Russia abroad. Holders of securities may then request a court order to enforce the payment.
Under normal circumstances, investors and the bankrupt government usually negotiate a solution in which the holders of securities are given new securities that have less value but that at least give them a partial compensation.
But sanctions have cut ties with Russia’s finance ministry. And no one knows when the war will end, or how much bankrupt securities might be worth.
In this case, non-payment and a lawsuit “may not be the wisest solution,” says lawyer Auslander. It is not possible to negotiate with Russia and at the same time there are so many unknowns, so creditors can decide to “wait for now”.
Investors who wanted to get out of Russian debt may have long since left, but others have remained hopeful of benefiting from some solution in the future. But for now, they can remain silent, to avoid connection with the war.
Once a country goes bankrupt, it can be exempted from borrowing in the securities markets until bankruptcy is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia is already cut off from Western capital markets, so any return on borrowing is still a long way off.
The Kremlin can still borrow in rubles domestically, relying mainly on Russian banks to buy treasury bills.
WHAT WOULD BE THE IMPACT OF RUSSIAN BANKRUPTCY?
But Russian bankruptcy can have a continuing impact by increasing pressure on global securities markets and making investors much more restrained in investments that are considered risky by not wanting to invest money and this is likely to lead to “further bankruptcies in other emerging markets,” said Chris Wafer, a Russian economics analyst at consulting firm Macro-Advisory.
Western sanctions as a result of the war have prompted foreign companies to flee Russia, halting the country’s trade and financial ties with the rest of the world. Bankruptcy would be an additional symptom of this isolation and problem.
Bankruptcy would not have affected the Russian economy at the moment because this country, due to sanctions, has not received international loans for years.
Russia is now making huge profits from selling oil and gas, Mr Weafer said.
But in the long run, when the war is over and Russia makes efforts to improve the economy, “this will be the time when the consequences of bankruptcy will be problematic. “This is similar to when an individual, or a company, has a bad credit history, it will take years to overcome the problem,” said Mr Wafer.