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expert forecasts and analyst opinions

With the start of the special operation in Ukraine, a chain reaction was launched to introduce unprecedented economic sanctions against Russian institutions, commercial structures, and individual citizens. One of the toughest decisions was the blocking of Russia’s gold and foreign exchange reserves. This measure is taken to provoke an artificial default in Russia in 2022 which the representatives of the West explicitly stated.

What is a default

In a broad sense, a default is a refusal of an entity to repay debts to creditors. In relation to the country, this event means the inability of financial institutions to repay domestic or foreign debt.

The causes of public debt are:

  • inefficient economic strategy that leads to crisis phenomena;
  • violation of the balance of volumes of internal or external debts;
  • foreign policy reasons (sanctions against economic entities, banks);
  • the country’s dependence on prices for energy or raw materials;
  • budget imbalance caused by a sharp increase in expenditure items;
  • a change in the political regime and the subsequent refusal of previously accumulated debts.

The concept of “default” is close in meaning to the bankruptcy of individuals and legal entities. However, unlike it, it means only a condition that is not accompanied by legal procedures for the full or partial resolution of disputes with creditors.

The structure of the Russian public debt

Basically, Russian government debt is expressed in the value of federal loan bonds (OFZ). These debt securities are considered the most reliable investment instrument.

According to the Ministry of Finance, as of March 1, 2022, the state’s debt to foreign investors amounted to $58.5 billion.

What’s happened lately

On February 24, 2022, Russian President Vladimir Putin announced the start of a special operation to demilitarize and denazify Ukraine. The United States and EU countries immediately responded to this event by developing a package of economic sanctions. One of the points of the decision was the “freezing” of the gold and foreign exchange reserves of the Russian Federation, placed in foreign credit institutions.

The blocking of reserves led to the inability of the Bank of Russia to technically carry out transactions to repay external public debt.

An attempt to create an artificial default of the Russian Federation

According to the Bank of Russia, as of April 1, 2022, the volume of the country’s external debt amounted to S453.5 billion. Since the beginning of the year, this value has decreased by $26.5 billion, or 5.5%, which was facilitated by a decrease in the total amount of foreign debt of other sectors.

On April 4, 2022, the US Department of the Treasury announced that the Russian Federation can no longer use the previously “frozen” reserves of the Central Bank stored in American banks to cover the external public debt. Thus, it hopes to artificially provoke a default in Russia.

The foreign correspondent bank refused to fulfill the payment orders, so on April 6, 2022, the RF Ministry of Finance redeemed the debt on Eurobonds in the amount of $649.2 rubles. However, investors will be able to convert the paid funds into foreign currency only after the “defrosting” of the reserves of the Russian Federation. Rating agencies immediately downgraded Russia’s overall creditworthiness and warned that covering the public debt in rubles could lead to a sovereign default.

Official comments of the Russian side

After the statements of the US Treasury, the press secretary of the President of the Russian Federation Vladimir Putin commented: “Russia has all the necessary resources to service its debts.”

Later, Finance Minister Anton Siluanov explained that Russia intends to apply to an international court in case of failure to fulfill its obligations through the fault of the United States and the European Union. However, official representatives of the Government do not believe that the dispute will be resolved quickly and in favor of the Russian Federation.

Default forecast in Russia

To make an objective assessment of the current situation, it is worth recalling the actual default of 1998. At that time, the state was unable to fulfill its obligations under domestic short-term bonds, against which a large-scale economic crisis erupted.

It’s obvious that 2022 default in Russia will be different, since the Russian Federation has all the resources to pay off the state debt. The problem lies only in the lack of technical capabilities for making payments in foreign currency and fulfilling obligations to foreign investors. In this case, the risk of a technical default is very high.

Assessing the risks of declaring default

In fact, on April 4, 2022, Russia did not comply with the terms of the prospectus for one of the Eurobond issues, according to which coupon payments must be made in foreign currency. It is not yet reported whether the payment orders have been executed in ruble terms. Therefore, on 05/04/2022, 30 days after the “delay”, we can expect the announcement of a technical default. However, many economists see 2 obstacles for this event to occur:

  1. A default can be declared only after at least 25% of foreign investors declare default on obligations. In fact, the Ministry of Finance of the Russian Federation bought back 72.4% of the issues of securities, and almost all holders should make claims. This is unlikely.
  2. There is no one to confirm the default, because according to a special order of the EU, members of the “Big Three” of international rating agencies will leave Russia by April 15, 2022. At the end of March, the sovereign rating of the Russian Federation was withdrawn by Moody’s and Fitch Ratings, now it will be done by Standard & Poor’s

Thus, the fact of technical default will take place with a high probability. However, this does not indicate that Russia does not have the resources to pay off its debt. A unique situation is emerging, which is very difficult to assess and predict the consequences.

Table: Public debt of the Russian Federation in 2019 – 2022, billion rubles

Data taken from the Consultant Plus website.

Indicator

2019

2020

2021

2022

The volume of public debt

15,439.5

17,201.9

19,117.7

21,204.0

% of GDP

14.2

15.2

15.9

16.5

including on state guarantees

3351.4

3448.9

3,533.5

3613.6

% of GDP

3.1

3.1

2.9

2.8

Domestic public debt

11,142.2

12,981.3

14,643.7

16,619.3

% to total volume

72.2

75.5

76.6

78.4

including on state guarantees

1,793.2

1,823.2

1,853.2

1,883.2

External public debt

4,297.3

4220.6

4474.1

4,584.8

% to total volume

27.8

24.5

23.4

21.6

including on state guarantees

1558.3

1625.7

1680.3

1,730.4

Expert opinions

Experts do not yet agree on whether Russia will default. The ambiguity of the situation was commented on by Sofia Donets, an economist at the Moscow office of the investment company Renaissance Capital. In her opinion, “the Russian Federation has no problems with servicing its debt … but the state when operations with Russian securities are not unfrozen and their servicing is technically impossible for a certain circle of investors is synonymous with default.”

Mikhail Belyaev, an analyst at the Russian Institute for Strategic Studies (RISI), believes a default is impossible. According to him, the downgrading of Russia’s credit rating is connected only with geopolitical events and has no real economic basis.

Andrey Movchan, founder of the investment company Movchan’s Group, considers the fact of default due to the “freeze” and the inability to accurately determine the amount of foreign exchange reserves to have taken place.

Most experts agree that there is no reason to panic. The Ministry of Finance of the Russian Federation has made every attempt to pay off its external debt, and default on obligations does not depend on Russia’s wishes and decisions.

Comments of foreign experts

Some Russian bonds can be paid in rubles under certain circumstances, but foreign investors do not currently own these securities. Foreign analysts believe that the amount in rubles will be determined by the current exchange rate. Since the quotes of the Russian currency have fallen sharply, investors will receive much less money. If justified expert forecasts, default in Russia 2022 will take place in May.

On April 13, Fitch said the local currency payment on the bonds in question “would constitute a sovereign default after the 30-day grace period expired.”

The US-based Institute of International Finance predicts that Russia’s economy will shrink by 15% this year due to tougher sanctions and a growing economic boycott. According to the organization’s analysts, a default and even a signal of its occurrence will accelerate events.

How the default will affect the Russians

Russia has almost a month to try to negotiate with creditors to repay the debt in ruble terms. If it does take place default in Russia in 2022, consequences will be unpleasant. This event will lead to the inability to receive external loans, the deterioration of the conditions for cooperation between foreign and Russian commercial companies. In addition, foreign states will consider it possible and will begin to seize the property of the Russian Federation in order to fully cover the unpaid funds.

According to most experts, the announcement of a technical default will not immediately affect the lives of ordinary Russians. However, in the long term, this will cause a decrease in investment activity, a suspension of economic growth and a decrease in the general standard of living of citizens.

At present, all the prerequisites for the onset of a technical default of the Russian Federation have been created. The Bank of Russia is unable to carry out the necessary transactions to pay off debt to foreign investors. However, the country has the necessary resources and has made every effort to fulfill its obligations. In fact, an unprecedented situation has developed for which no precise forecasts can be provided.

If negative things come true forecasts, default in Russia 2022 will take place and will have unpleasant consequences for the Russian economy in the long run. But the Ministry of Finance and members of the Government of the Russian Federation are confident that the country has sufficient potential to recover within 1-2 years.

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