Photo: AP / Scanpix / LETA

Should Russia be afraid of default?

By attacking Ukraine, Russia quarreled with the whole world. In such a situation, should she even repay debts to foreigners?

“Russia managed to avoid default” - such headlines appeared in world agencies on May 3, when less than a day before the deadline, holders of Russian Eurobonds finally began to receive their money. In fact, they should have received them almost a month earlier, but retribution became a real quest for the Russian government. No, there was money. But sometimes it's not about the money.

How much does Russia owe

In total, Russia has 16 trillion rubles of internal debt (denominated in rubles, which are issued in the required quantities by the Russian Central Bank) and $57 billion of external debt (in foreign currency). It's actually quite a bit. Typically, the size of the debt is compared to the size of the economy, in the case of Russia it is approximately 15% of gross domestic product - one of the lowest in the world. With an income of 100–200 thousand rubles a month, we take out a mortgage worth millions of rubles - and nothing, almost everyone copes (mortgage defaults in Russia are less than 1% ).

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In addition, the debt is spread over time: it must be repaid in parts when the maturity date of a particular Eurobond arrives. According to one of them, it was necessary to return $2 billion to creditors a month ago, and the Ministry of Finance, after much ordeal, was still able to do this, and the longest Eurobond ($7 billion) is repaid in 2047. Until the bonds are repaid, you only have to pay interest on them - the so-called coupon, usually twice a year (from 1.125 to 12.75% per annum).

In general, servicing such debt is not a problem, especially since new issues can be placed if necessary: ​​before the war, Russia was one of the most desirable borrowers in the world. This was reflected in the ratings: according to all three leading world rating agencies, these ratings were of “investment” level, that is, even the most conservative (cautious) investors were allowed to buy Russian bonds. Finally, Russia has a nest egg - the National Welfare Fund, which had 13.6 trillion rubles before the war. This amount includes shares of Sberbank and Aeroflot affected by the sanctions, but even after deducting them, about 10 trillion remained.

However, a problem arose.

There is money, but you can’t pay

Having money is not enough to pay. The Russians have experienced this themselves: you have, say, 20,000 euros in the bank, but you cannot withdraw even half from the account (until September 9, there is a temporary procedure for withdrawing cash: no more than $10,000 in six months). You can also transfer no more than $10,000 per month to your foreign account, and it doesn’t matter how much money you have. This is our response to Western sanctions.

Something similar happened to the Ministry of Finance: sanctions make it difficult to pay. In ordinary life, everything is simple: if there is money in the account, the Ministry of Finance transfers it to the bank - the payment agent, which transfers it to the depositories (they store the bonds and maintain a register of their owners), and they transfer them to the bond owners (in fact, everything is a little more complicated, but in general So). But, firstly, approximately half of the country’s international reserves, which includes the National Welfare Fund - that very nest egg - are frozen (this is approximately $300 billion, says Finance Minister Anton Siluanov), and secondly, American companies and citizens are prohibited from receiving payments from sanctioned persons.

What's frozen

This is not known exactly. The Central Bank publishes data on the size of reserves once a week, but reveals their structure with a six-month delay - this information is “sensitive to markets.” The last data before the war was published in mid-February, then reserves amounted to $643.2 billion. The structure of reserves was last disclosed at the beginning of this year: then most of them were kept in euros - 33.9% ($218 billion), dollars accounted for 10.9% ($70 billion), pounds - 6.2% ($40 billion) . Based on the structure of the reserves, approximately half of them were kept in countries that imposed sanctions against Russia.

Even with all the sanctions and arrests, Russia has enough money to pay its bills. But the main sanctions are that you cannot pay

What happens? The Ministry of Finance wants to transfer the required amount, but it is blocked. Or he finds money that is not blocked and sends it to his agent to distribute it among creditors, and he returns it back: he is afraid of violating sanctions. The financial system is designed in such a way that a dollar payment will necessarily go through an American bank, and sanctions prohibit American organizations from receiving payments from the Central Bank and the Ministry of Finance. Plus, the bank does not know the ultimate holders of the securities: who knows, what if there are Americans or those under sanctions among them? Violating the sanctions, even by accident, will cost you more, and the bank, out of harm’s way, refuses to process the payment. And the creditors don’t care who is to blame: they didn’t receive their money. This is a default.

Fight for payment

In mid-March, the Ministry of Finance approved a temporary procedure for payments on Eurobonds: it gives a payment order to agent banks to transfer money, and if they do not fulfill it, the order is revoked and the money is paid in rubles at the Central Bank exchange rate.

As soon as the Ministry of Finance declared: “If you don’t take it in dollars, we’ll pay in rubles,” a debate flared up whether this would be a default or not. It turned out that the opportunity to pay in rubles was provided in advance for Eurobonds issued after 2018 (plus or minus $13 billion). What about earlier releases? Experts, including the Fitch rating agency, came to the conclusion that the ruble payment would mean default.

An explanation from the Ministry of Finance appeared on March 14, before the first payment since the beginning of the war: on March 16, $117 million was to be transferred under two issues of dollar bonds with maturities in 2023 and 2043. Despite the general license , issued in advance by the division of the American Ministry of Finance responsible for compliance with sanctions (Office of Foreign Assets Control, OFAC), and allowing, as an exception, to receive payments on Russian sovereign Eurobonds, doubts remained. The paying agent, the London branch of Citibank, at first did not want to transfer the money, but after the US Treasury explained that sanctions do not yet prevent payments to service Russia's sovereign debt in dollars, it did transfer. In the end, everything went smoothly and Eurobond holders received their money. And on March 28, the Ministry of Finance paid a $102 million coupon on bonds maturing in 2035.

The West has a clear logic: we have seized half of your reserves, but we will not allow the other half, which we did not reach, to be spent on war

It seemed like we could breathe out: the license expired on May 25. But it was not there! On April 4, the day of the next payment, the United States decided to “ cut off Moscow’s access to frozen funds .” From that moment on, they prohibited Russia from making any payments on the national debt in dollars from accounts in American banks. As a representative of the US Treasury explained, the goal was to force Moscow to choose how to use the dollars to which it still had access (including export earnings): for debt payments or to finance the war in Ukraine. This is an understandable logic: we have seized half of your reserves, but we will not allow you to spend the other half, which we did not reach, on the war.

But it seems that the Russian Ministry of Finance knew something: even before it was faced with a choice, it announced the redemption of the Russia-2022 bonds, which had to be repaid on April 4. The Ministry of Finance offered to sell him these securities at par, but for rubles at the Central Bank exchange rate. This was not a gesture of desperation: the majority of bondholders agreed . Some of the Eurobonds were in the portfolios of Russian investors, many kept them in the National Settlement Depository (part of the Moscow Exchange group), and the currency from their redemption still could not be withdrawn abroad - in general, the Ministry of Finance bought 72% of the issue, and instead of $2 billion, repay $552 million remains (plus coupons on this and other bonds, for a total of almost $650 million more). But Citi, of course, did not transfer this money.

Russia had a month to make a choice. This is a common practice - if the debtor does not pay, he is given a month to correct himself: you never know what went wrong, maybe it was a technical glitch? This is called a technical default. But if after a month the creditor does not receive money, the default becomes real. For Russia, this deadline was May 4.

As a result, the Ministry of Finance seems to have paid from “available” dollars. The United States allowed London-based Citibank to make payments, Bloomberg reported on April 29, citing a representative of the US Treasury, and on the evening of May 3, investors began receiving money .

Not a terrible default

Considering the irreconcilable position of the Russian government: all sanctions were introduced out of nowhere and will only benefit us; we will replace everything with imports and the economy will become stronger; reserves frozen illegally; and in general, we have fulfilled all our obligations - the decision to pay off our debts may seem strange. Default is not a death sentence, but, unfortunately, a nuisance that happens from time to time. The 1998 default hit the Russian economy hard, but then it grew for several years at a rate that had long been unheard of even before the war. Investors began lending money to Russia again in 2000. And in the history of Argentina there are nine defaults, two of them in this century, and the default in 2001 was the largest in world history (almost $100 billion).

The Russian economy would hardly have noticed the default. Usually its main consequences are: economic decline and rising inflation, devaluation and fall of stock indices, capital outflow and the inability to attract new capital for some time, and more. This will not scare today’s Russia: as Konstantin Sonin, a professor at the University of Chicago and the Higher School of Economics, wrote on his Facebook page, “everything that could get worse as a result of a default has already gotten worse... all the bad consequences of a default are already in place, there will be no new ones. Under other circumstances, refusal to pay debts could lead to a deterioration in the investment climate, but the investment climate cannot deteriorate anymore.”

Terrible default

Why then is the Ministry of Finance desperately trying to avoid default? The fact is that it can still have consequences, and very serious ones.

In a normal situation, after a default, negotiations begin on debt restructuring. The borrower is unable to pay, but wants to save face and the opportunity to attract investments in the future - albeit not immediately. And creditors want to return at least part of the money. But in the case of Russia, the situation is unusual, and negotiations are unlikely to be possible.

Investors may act harshly against Russia - not only for financial, but also for moral reasons, Lee Buchheit, the world's leading expert on sovereign debt restructuring, told Bloomberg: “Support for Ukraine is almost unconditional ... Some investors may want to strike [Russia] a blow by speaking up for a just cause . One way to do this is to vote after the grace period to demand that the Russian bonds be redeemed and then go to court to enforce that decision.” Buchheit is referring to cross-default: failure to fulfill obligations on one issue, as a rule, gives rise to holders of other bonds in the country to demand early repayment. That is, the entire national debt of Russia can be recovered.

And now it’s time to remember that if there is a court decision, collecting this money may not be so difficult. are increasingly being made Russia's reserves have been frozen for a much larger amount, and proposals to use this money to restore Ukraine. Frozen does not mean taken away: only a court can confiscate them. And a default would greatly simplify this. “A sovereign default can serve as an additional argument for bringing legal claims against the country’s foreign assets, for example, against part of the reserves that are frozen in foreign banks,” explains Oleg Vyugin, chairman of the supervisory board of the Moscow Exchange, former first deputy chairman of the Central Bank.

In normal, peacetime times, it is extremely difficult to foreclose on the assets of the Central Bank: it has a special status, it is independent from the state. Its property is federal property, but the state and the Central Bank are not liable for each other’s obligations. Until now, no one has been able to reach the assets of the Central Bank, not even the Swiss Noga, which for more than 10 years has been seizing Russian assets around the world, trying to recover the $1.5 billion that was awarded to it by international arbitration in Stockholm. In times of military sanctions, everything may turn out to be much simpler.

“All foreign assets of the state are at risk of confiscation. Moreover, these risks affect not only production assets and shares in foreign companies, but also exported goods and export revenue.”

But that's not all. Theoretically, cross-default could be extended to the debts of Russian state-linked corporations. And there are completely different amounts. Russia's total external debt - state debt plus corporate and bank debt - stood at $454 billion as of April 1. It is difficult to say how much of this amount can be attributed to the state, but as sanctions on private companies and banks show, this issue can be approached very creatively. a direct question about cross-default on the company in an interview Minister Siluanov did not answer .

This amount is already more than all the seized reserves of the Central Bank. But they can try to foreclose on any property that the court deems to belong directly, and perhaps even indirectly, to the Russian state, Andrei Ryabinin, a partner at the Delcredere Bar Association, told Kommersant. “All foreign assets of the state face the risk of confiscation,” writes BCS expert Igor Galaktionov. “Moreover, these risks affect not only production assets and shares in foreign companies, but also exported goods, export proceeds and any other obligations in favor of the borrower.”

In general, Russia has every reason to avoid default on its government debt.

So what now?

Will Russia be able to avoid default? Nobody knows this yet. The next series is May 27: on this day, coupons must be paid for two issues with maturities in 2026 and 2036. “Russia-2036” for 1 billion euros was issued after 2018, it can be paid in rubles, and “Russia-2026” for $3 billion was issued before 2018 and does not provide for such an opportunity, the coupon for $71 million must be paid in dollars. The US Treasury license that allows payments expires two days earlier. From the explanations of the US Treasury it follows that after the deadline, American residents will be able to apply for permission to receive payments on Russian Eurobonds. And the payment authorization itself can be extended. Or, conversely, introduce a new ban, like on April 4.

Editor: Maxim Solyus