Attempts to prevent Moscow from paying its foreign debt may undermine the Western financial system
Western media is reporting that Russia is facing a default on its foreign debt for the first time since 1918. Moscow was forced to make interest payments on bonds in rubles after Washington blocked dollar payments.
Moscow has rejected the assertions and has accused Washington of trying to engineer an artificial default, explaining that the country is willing and able to service its foreign debt. The transition to ruble payments does not imply a debt default, Finance Minister Anton Siluanov has stressed.
Under a new payment mechanism, which was recently announced and signed into law by President Vladimir Putin, Moscow considers its obligations completed “if they are fulfilled in rubles in an amount equivalent to the value of obligations in foreign currency” at the exchange rate on the day the funds are transferred to the central depository (NSD), through which they will be paid to creditors.
In May, the US ended a bond payment waiver that had allowed Moscow to service its debt in dollars. The Russian Finance Ministry subsequently said that, in order to defend its reputation as a reliable borrower, Russia would service its Eurobond obligations in the national currency, the ruble, if it were unable to pay in foreign currency.
Countries in default cannot borrow money cheaply through international financial institutions because they are considered a risk.
There is no reason for Moscow to issue bonds. The country runs a low debt of around 16% of GDP, because it traditionally doesn’t rely heavily on borrowing. In comparison, most Western countries run debts close or well over to 100% of their GDP.
In terms of the Western financial system, it doesn’t matter. Sanctions make it impossible for Russia to trade as it used to. Most Western companies have pulled out and borrowing money from Western financial institutions is not possible. This makes Russia’s credit rating in the West meaningless.
However, investment analysts acknowledge that holders of Russian bonds could take serious losses as a result of Western actions and file lawsuits against the US government, which prevented Russia’s dollar payments. Moscow points out that attempts to push Russia into default only undermines the reputation of the Western financial system.
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