Western countries' ban on Russia, how will it be able to repay the debt?

Posted on 16th Mar 2022 by rohit kumar

Following the attack on Ukraine and sanctions from Western countries, Russia may be in a position to default on debt repayments.

 

Russia has to pay $117 million in interest on Wednesday to investors in two bonds issued in the international market. These bonds were issued for dollars.

 

But Russia's foreign exchange reserves of $ 630 billion have been frozen at this time.

 

Credit rating agencies have also warned that Russia is "destined to default" in repayment of its debts.

 

The International Monetary Fund has said that it is concerned about the impact of Russia's failure to repay its debt, but it does not believe that it will lead to a global financial crisis.

 

Why might Russia fail to repay the debt?

 

The government of Russia and government companies like Gazprom, Lukoil, Sberbank have a debt of $ 150 billion from foreign investors.

 

The liability of most of these loans is in dollars or euros. And since Russian business entities cannot use their dollar or euro accounts abroad because of the ban.

 

If Russia fails to repay the loans on time, it will be the first time since 1998 that it will default.

 

This Russia is going to be the defaulter for the first time after the 1917 revolution in the matter of repaying the loan taken in foreign currency. Then the new Bolshevik government refused to repay the previous year's debts.

 

What if Russia pays in rubles?

 

Russia's foreign ministry has said it would like to pay international investors in rubles if it is prevented from making payments in dollars or euros.

 

But the problem is that in the two bonds issued in dollars for which payment is due on Wednesday, there is no provision for giving money in any other currency.

 

But Russia's other loan agreements have a provision that payments can be made in other currencies. If this happens, then the ruble can be used in the payment of loans.

 

But it will depend on whether the payment will be made in rubles with the same value of dollars or euros that investors would expect.

 

What difference will it make to the banks and countries that lend to Russia?

 

Investors in Russia have noticed in recent times that the value of their investments has registered a decline.

 

The problem is that Russia's financial situation has deteriorated so quickly that some people have not had a chance to sell their investments.

 

Credit rating agency Moody says that the rating scale of 21 points tells how safe a country is in terms of investment. Russia has come from the bottom to second place on this scale and it can go even lower.

 

Moody's Chief Credit Officer Colin Ellis told the BBC: "We are indicating that not only do we expect Russia to not repay the debt, but we are also telling investors how much they could lose. You can lose up to 35 to 65 percent of your investment.

 

One of the consequences of not repaying the loan officially can be that the lenders may start making claims. These credit swaps work like insurance. Lenders buy these in advance so that they can compensate for the loss due to the failure of any company or country.

 

What does this mean for the global economy?

 

The last time Russia failed to repay a loan was in 1998. Then global financial markets were shaken by this. According to William Jackson, chief economist of Capital Economics, if Russia defaults now, it will be symbolic but it will hardly have any real effect.

 

The International Monetary Fund says that it will cut its forecast of progress in the global economy to 4.4 percent for the year 2022 because of the war. IMF chief Kristalina Georgieva also believes that Russia's default will not have a huge impact on the global financial system.

 

However, she warns that the sanctions imposed on Russia could cause a major collapse in the economy there as well as increase the prices of food and energy around the world.

 

However, an unknown factor here is how big the debt default of Russian companies could be and how it could affect those investing in Russia.

 

The financial difficulties and challenges that Russia is currently facing, will only increase if the debt is not repaid.

 

Before the invasion of Ukraine, Russia was included in the most reliable countries in terms of debt repayment. The debt on Russia was not too much. But now the situation has changed dramatically.

 

Foreign companies are leaving Russia in large numbers, Russia has already imposed strict rules on money outflow to save the ruble and the economy. However, due to sanctions, Russia's economy may shrink by 7 percent this year.

 

The inflation rate here was already at a high of 9.15 percent even before the invasion of Ukraine in February. It is feared that this year it may increase even more.

 

Russia's Central Bank has already increased the interest rate on loans from 9.5 percent to 20 percent.

 

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