Faced with pressure from the West, Russia wants to hold on despite the specter of default, which has never been so present. Since this Wednesday, May 25 at 00:01, Moscow can no longer repay its debt in dollars. The exemption which allowed it until then was lifted by the United States, two days before the next payment deadline for Russia. This relates to just over $100 million in interest on two bonds. According to the Wall Street Journal citing the official Russian news agency Tass, the authorities have already paid the interest.
“Since the refusal to extend this license makes it impossible to continue to honor the foreign debt in dollars, the repayments will be made in Russian currency with the possibility of converting them afterwards into the original currency via the National Settlement Depository (NSD) which will serve as ‘paying agent’, the ministry said in a statement today.
As a reminder, the NSD is a centralized Russian organization responsible for depositing financial securities traded in the country.
“The Russian Ministry of Finance, as a responsible borrower, assures us of its willingness to continue to honor and repay all its financial obligations”, underlines the press release.
Quoted in the document, Finance Minister Anton Silouanov said that “The current situation has nothing in common with the situation in 1998, when Russia did not have enough funds to repay its debts”.
“Today we have the money, and the will to pay is there too. This situation artificially created by an unfriendly country will have no effect on the lives of Russians,” he assures.
The shadow of a payment default never so strong
The exemption granted to Moscow from paying its debts in dollars had been in place since the start of Western sanctions against Russia, in retaliation for the war in Ukraine. It had hitherto allowed him to avoid default.
Washington had decided to “allow an orderly transition and investors to sell their securities”, explained US Treasury Secretary Janet Yellen last week. Joe Biden’s minister then indicated that this exemption would take ” most likely ” end.
Like all states, Russia borrows money in the form of bonds, often in dollars, and must regularly pay interest and repay capital. If it were unable to do so, it would find itself in default on its foreign debt, which amounts to around 4,500 to 4,700 billion rubles (about fifty billion euros at the current rate), or 20 % of total public debt.
And, although in fact, the country can already no longer raise funds because of Western sanctions, default would cause it to permanently lose all access to a major source of financing or force it to pay prohibitive interest rates. For their part, holders of unpaid debts risk losing all or part of their money.
Besides the May 27 deadline, the Russian government still has to honor 12 payments by the end of the year.
ZOOM: THE ROUBLE AT THE HIGHEST FOR FOUR YEARS
The Russian currency hit its highest level in four years against the dollar earlier this week. On Tuesday, the dollar was trading against around 56 rubles, a level seen since February 2018, and the euro was trading against 57.6 rubles, a record since 2015.
This is due to the severe capital controls put in place by the Russian Central Bank. The Russian currency has also benefited from the opening of accounts in rubles by a large number of foreign companies that are clients of the Russian gas giant Gazprom in order to pay for their gas purchases. And this despite the fact that the European Union has considered, on several occasions, that this mechanism amounted to circumventing the sanctions imposed on Russia.
On Monday, the Ministry of Finance announced the forthcoming reduction in the proportion of Russian exporters’ income that they had to transform into rubles, from 80% to 50%, a sign of an easing of the exchange control measures put in place by the authorities to prevent a collapse of their national currency. The strengthening of the ruble in fact deprives the budget of part of its income and weighs on exports.
Vladimir Putin presented the strengthening of the ruble as proof of Russia’s resistance to Western sanctions. As for the government, it declared this Wednesday, May 25 to grant ” special attention “ to this strengthening process, affirming that this theme was addressed in “all meetings dedicated to economic issues”.