What the Russian debt default means

27 June, 06:36 PM

For the first time since 1918, Russia is in technical default on its sovereign debt, denominated in foreign currency. It’s a major strategic blow to its reputation.

Short-term, not much will change for Russia after this. Its economy won’t suddenly collapse, Putin, won’t drop dead, sugar won’t vanish from the stores, and Russia will still be able to fund most of its expenses.

In the matter of debt payments, Moscow has been on life support for a while. The plug was pulled on May 25, when the U.S. Office of Foreign Assets Control did not renew a special dispensation to allow Russia to make sovereign debt payments.

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On May 27, this caused Moscow to miss $100 million in payments, and everyone was counting down the 30 days of the grace period. Now it has elapsed, and the long-awaited Russian technical default is finally here. The last time it happened to Russia was back in 1918. However, there are crucial differences between a regular default and the one we’re seeing now, after four months of unprecedented Western financial sanctions.

First, a default always has a dire effect on the debtor. The country is cut off from capital markets, its banking sector is blocked, ratings plummet, and investors take their capital elsewhere. Naturally, the civilized world isn’t keen on doing business with such a country. But all of that has already happened to Russia. Essentially, a “moral default” occurred on Feb. 24. Today, it became a nominal one. Hence, the consequences for Russia won’t be too noticeable – most of them were already there for several months.

Second, a default could be followed by a series of cross defaults, where other investors start demanding early bond payments. Russia has several dozen billion dollars of such debts. It is, however, rather naïve to demand urgent repayment from a country that is openly stealing everything it can get its hands on – from washing machines to hundreds of planes. Not to mention, there is little incentive for Russia to pay back any debts – the default has already happened.

Third, a technical default doesn’t mean Moscow is out of cash. While the West continues buying their oil and natural gas, they won’t hurt for it. That’s why this default is “technical” – they have the money, but are simply unable to use it.

A more common default occurs when a country has no cash on hand to make debt payments – that’s not the situation Russia is currently in, unfortunately.

This might lead you to conclude that this technical default is irrelevant – but that’s not the case.

This technical default is the final note in Russian economic history. It’s also another argument for eschewing any further dealings with Moscow.

The Russian default will appear in all financial reports and will spook even risk-hungry investors. Even the notorious Leroy Merlin will have fewer arguments to justify its continued operations in Russia.

It is also another humiliation for Russia and its dictator when some U.S. government agency can cripple a would-be world power.

It’s a powerful signal to the entire world, branding Russia to remain a blank spot on the global economy for decades to come.

Western sanctions will only ramp up further: recent developments suggest that the Russian gold embargo is imminent, and natural gas exports are next. Russia’s credit ratings will be penalized for 15 years – provided, of course, that Russia as we know it will last that long.

Even without acute immediate repercussions, Russia’s technical default is a nail that will keep the coffin of its economy firmly shut.

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