Western media reported that Russia is facing a situation of foreign debt default for the first time since 1918. Russia was forced to repay foreign debt in rubles after the US blocked payment in USD.
Russia's reaction to bad debt declarations
Moscow has denied reports of Russia's bankruptcy and accused Washington of trying to create an artificial bankruptcy case, explaining that the country is ready and capable of repaying foreign debt. RT quoted Finance Minister Anton Siluanov as emphasizing that the transition to ruble payments does not mean bankruptcy.
How does Russia plan to repay foreign debt?
Under the new payment mechanism just announced and signed into law by President Vladimir Putin, Russia considers its obligations to have been fulfilled if they are made in rubles with an amount equivalent to the value of foreign currency debt at the exchange rate on the day the money is transferred to the central deposit agency (NSD), thereby they will be paid to creditors.
Why does Russia pay for bonds in rubles?
In May, the US stopped extending the exemption for Russia to pay USD bond interest. The Russian Finance Ministry later said that in order to protect its reputation as a reliable borrower, Russia would pay interest on euro bonds in national currency - rubles - if it could not pay in foreign currency.
Does debt restructuring mean anything for a country?
Depository countries cannot borrow money at low interest rates through international financial institutions because they are considered risky.
How does that affect Russia?
There is no reason for Russia to issue bonds. The country has low debt, about 16% of GDP, because Russia has traditionally not relied much on debt. Meanwhile, most Western countries have debt of nearly 100% or more than GDP.
How much damage does a bankruptcy cause to the country's economy?
For the Western financial system, that is not a problem. The sanctions make it impossible for Russia to trade as before. Most Western companies have withdrawn money and borrowing money from Western financial institutions is impossible. This makes Russia's credit rating in the West meaningless.
How does debt restructuring affect Russia's remaining trading partners?
For China, India and other major partners, this does not have a negative impact. Russia's trade with BRICS partners increased by nearly 40% in the first quarter of 2022 from the 164 billion USD reached last year. Russia's trade partners have long been eager to replace Western businesses in Russia.
What alternatives does Moscow have for borrowing from Western institutions?
Financial institutions, such as the BRICS New Development Bank (NDB) - founded by member states Brazil, Russia, India, China and South Africa, with the aim of financing infrastructure and development projects in emerging countries - could be a good choice for Russia.
What are the potential consequences?
The West denies that a possible Russian bankruptcy could have an impact on global markets and financial institutions, such as the 1998 domestic bankruptcy in Russia. At the time, Russia's ruble bond failed prompted the US government to intervene and guarantee to save a major US speculative fund from collapse. If this speculative fund collapses, it could shake the broader financial system.
However, investment analysts acknowledge that Russian bondholders could suffer serious losses due to Western actions and file a lawsuit against the US government for preventing Moscow from paying in USD.
Moscow pointed out that efforts to push Russia into bankruptcy only undermine the prestige of the Western financial system.
