Russia is preparing for a default that revives the humiliation of 1998

Russia accuses Western countries of trying to provoke an artificial default with economic sanctions that freeze their assets abroad, a situation that is reviving the humiliating memory of 1998, when I cannot repay their debt.

“The statements that Russia cannot meet its obligations in respect of its public debt do not correspond to reality,” the Ministry of Finance insisted on Monday, stating that “the freezing of foreign currency accounts of the Bank of Russia and the Government can be regarded as the desire of foreign countries to provoke an artificial default”.

For Russia, this is not only about its future access to financial markets, but a matter of honour.

For two decades now, and especially since the 2014 crisis, Moscow has been striving to build good financial health, with a very low debt ratio and reserves of more than $600 billion accumulated thanks to oil.

But now, in retaliation for Russian military intervention in Ukraine, the share of those reserves abroad, some $300 billion, is frozen by Western sanctions.

A challenge for Russia when it comes to dealing with several foreign currency debt payments due in March and April.

- “Unique Situation” -

Eurobonds issued since 2018 can be refunded in rubles. But this is not the case of the first expected due date, this Wednesday, a reimbursement of $117 million.

“This is a unique situation in which the party imposing sanctions will decide on the Russian default in 2022,” said Elina Ribakova, deputy chief economist at the International Finance Institute (IIF) on Monday.

The economist points out that “unless the US Treasury allows to unlock part of Russia's 300 billion dollars of frozen assets (...) we will probably see a default”.

However, there is a certain ambiguity around the first expiry of March 16, as the situation is unprecedented. JPMorgan analysts believe that payments should be possible.

The US Treasury specifies that interest can be paid until May 25, 2022 for Americans, on bonds issued before March 1, 2022 by the Central Bank of Russia, a Russian sovereign fund or the Ministry of Finance.

After that date, they will need an authorization in order to continue receiving those payments.

Western sanctions have paralyzed part of the Russian banking and financial system and led to the collapse of the ruble. A default automatically cuts off a State's access to financial markets and jeopardizes its profitability for years.

- The trauma of 1998 -

“This would be Russia's first sovereign default since 1998 (when there was a default on its domestic debt) and the first sovereign default on foreign currency debt since Lenin rejected government obligations in 1918,” Capital Economics analysts emphasize this Monday in a note.

After the collapse of the Soviet Union, Russia alone inherited the 70 billion dollars of debt of the vanished empire. It took more than a quarter of a century to get rid of this burden.

The painful and chaotic 1990s culminated in a humiliating debt default in 1998, when the Russian economy was weakened, among other things, by a financial crisis in Asia and the colossal cost of the first Chechen war.

It took twelve years before Russia could borrow again on international markets, with a new bond issue in 2011.

In the early 2000s, the country benefited from the influx of petrodollars thanks to the rise in oil and gas prices, which allowed it to accumulate reserves and close the Soviet debt chapter definitively, with the latest repayments in 2017.

In recent years Russia has endeavored to rebuild its reputation as an impeccable borrower, efforts that now run the risk of being cut short.

“Russia has the money to pay its debt, but it does not have access to it. What worries me most is that there will be consequences beyond Ukraine and Russia,” said IMF chief Kristalina Georgieva in an interview with CBS on Sunday.

While ruling out the possibility of a global financial crisis, he stressed that rising food and energy prices caused by the crisis could lead to famine, especially in Africa.

BUR/PC-ME/MB/JVB/EG