The Conversation by Nasir Aminu and Rodrigo Olivares-Caminal 7/1/2022
Russian debt default: two experts explain what it means for Russia and for global financial markets
Nasir Aminu, Senior Lecturer in Economics and Finance, Cardiff Metropolitan University
Russia’s failure to pay US$100 million in US dollar- and euro-denominated interest payments on June 27 2022 shows the Kremlin is running out of options to respond to western sanctions. The default on foreign debt was not unexpected. The economic sanctions placed on Russia since it invaded Ukraine in February have limited the country’s financial capabilities. This debt default, therefore, is a result of western governments’ ban on all transactions with the National Central Bank of Russia and the freezing of its foreign reserves, worth more than US$600 billion.
In theory, the debt default on foreign creditors is surprising because Russia’s finances remain strong despite a protracted war in Ukraine. The country reportedly continues to receive revenues of about US$1 billion per day from the sale of oil to China, India and other Kremlin-friendly importers. This income means Russia did not default because of an inability to pay.
Russia’s default will have a relatively small impact on global financial institutions, including its own financial sector. There is always a risk of global contagion – when an event has an indirect or unexpected effect on another part of the market – but foreign investors have had less exposure to Russia since it annexed Crimea in 2014. The few investors that do have high exposure are already looking to sell, although they face difficulties due to the western sanctions.
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Rodrigo Olivares-Caminal, Professor of Banking and Finance Law, Queen Mary University of London
Russia’s missed interest payments were on two of its sovereign bonds: the 2026 US dollar and 2036 euro bonds.
In addition to the actual currency of these bonds, both allow interest payments to be made in pounds or Swiss francs if, for reasons beyond its control, Russia is unable to make payments in US dollars or euros. The 2036 euro bond goes even further by adding the Russian rouble as a possible alternative payment currency. These additional options may seem useful, but creditors might prefer to avoid a currency mismatch by having Russia make repayments in the original currency of the bond.
These bonds also include a currency indemnity clause, which would allow Russia to be discharged from its repayment obligations if the investor receives or recovers the entire amount due on the bond. Any payment in roubles must match the original amount owed when converted into US dollars or euros, however. In this case, roubles would probably be most useful to Russia since it has been largely cut off from the international financial markets.
More:
https://theconversation.com/russian-debt-default-two-experts-explain-what-it-means-for-russia-and-for-global-financial-markets-186130
