Subject to very heavy sanctions since it invaded Ukraine a month and a half ago, Russia is in an increasingly delicate position on the international financial scene. The financial rating agency S&P Global Ratings lowered, on Saturday April 9, Russia’s rating for its payments in foreign currencies to the level of “selective default”, the last step before the general default. This situation raises several questions.
How does a state repay its debt?
When a State or a company repays a loan in foreign currency or pays interest linked to a loan of this type, the sum is transferred to an account opened by a national bank at a correspondent bank abroad. The latter must check whether or not it is possible to proceed with the payment. After this compliance analysis, it deposits the money in a sub-account which will be controlled by a paying agent bank, before the sums are paid out to bondholders.
What does default mean?
A country is considered in default when it is unable to honor its financial commitments to its creditors. These, which may be other States, but also financial institutions, such as the International Monetary Fund or the World Bank, or investors in the financial markets. The default is qualified as partial when the State does not reimburse part of its obligations.
Who declares a country in default?
A government can declare itself in default of payment, by announcing that it stops repaying its debt maturities. This is what Russia did in 1998 for its internal debts. Default of payment can also be pronounced by a rating agency, after a grace period.
The default can still be formalized by a private creditor publicly revealing that a country has stopped reimbursing it, or by the American agency ISDA (International Swaps and Derivatives Association), which governs credit default swaps, a kind of insurance against default of payment.
The three major rating agencies S&P, Fitch and Moody’s serve as arbiters to declare a country in default. But Fitch and Moody’s have already abandoned the evaluation of the debt of the State and Russian companies, within the framework of the sanctions decided against Moscow. The S&P agency was to cease ratings by April 15, but finally announced on Saturday that it was immediately stopping doing so.
Why does Russia find itself in this situation?
For several weeks, Russia has averted the danger of a default, the US Treasury having allowed the use of foreign currency held by Moscow abroad to settle foreign debts. In March, Russia thus paid several tranches of interest, demonstrating its willingness and ability to repay.
But since Monday, the US Treasury Department no longer allows Russia to repay its debt with dollars held in US banks. As a result, JPMorgan, which served as the correspondent bank, blocked a payment. As a result, the Russian Finance Ministry announced on Wednesday that it had settled in rubles nearly $650 million due on April 4.
Following the move, ratings agency S&P on Saturday downgraded Russia’s rating for foreign currency payments (but not ruble payments) to “selective default.” This is the last stage before general payment default. This means that S&P believes that Russia will be able to settle other future maturities on time.
What would be the impact of a Russian default?
A default by Russia would have “a rather limited direct effect on the rest of the world”estimated at the end of March Gita Gopinath, the number 2 of the International Monetary Fund (IMF), and “does not represent a systemic risk to the global economy”. The amounts of the payment deadlines that Moscow must honor “are relatively small on a global scale”. VSsome bankswhich are more exposed, could however be hit harder.
Can Russia still escape it?
“There is no basis for a real fault”, swept the spokesman for the Kremlin, Dmitry Peskov, questioned during a press briefing on Wednesday. And to affirm that “Russia had all the necessary resources to honor its debts”. The Russian ministry finances warned creditors of “unfriendly” countries on Wednesday: the money will be refunded to them in rubles deposited in a Russian account and they will only be able to convert these rubles on condition that Russia’s funds abroad be unlocked. According to Elina Ribakova, of the Institute of International Finance in Washington, this is for Moscow “show they can pay”.
“The Russian state, like many Russian companies, is pushed into a technical fault, an unprecedented event”explains to AFP Slim Souissi, a specialist in banks and state failures. “The reimbursement must be made under conditions that are at least as favorable as what was initially agreed”, he says. Gold, “to the extent that the repayment is in rubles, while the bond contract stipulated a repayment in dollars only, this can be considered as a default”.
“Theoretically”creditors can “bring a lawsuit against the Russian state for reimbursement”according to Slim Souissi. Even if the room for maneuver seems quite limited. Russia could also have any default in payment challenged in court on the grounds that it was prevented from honoring its foreign debt by the financial sanctions taken against it.
In practice, the fate of Russia is in the hands of the US administration. The Treasury granted it an exceptional right to draw on its frozen dollar reserves abroad, this license could be renewed at the end of May. “If this were not the case, then the probability of a default would be much higher”analyzes on RFI the consultant Anne-Laure Kiechel, a specialist in the debt of the States.