The US has brought Russia closer to default

The US Treasury on Tuesday officially announced that it would not renew a license that allows you to receive currency from Russia through sovereign bonds. This means that as early as July Russia may face a default.

What's happened?

On May 25, the US Treasury Department's general license expires, under which holders of Russian sovereign bonds can receive payments from Russia. On Tuesday evening, the ministry announced that they would not renew the license. This means that Russia still faces a default.

When will it happen?

Coupon payments scheduled for May 27 were made by the Ministry of Finance in advance, at the end of last week, clarifies RBC . The next dollar payments are scheduled for June 23-24 (after the US Treasury license expires, Russia will only be able to make payments on bonds denominated in euros and only to non-US holders). If payments fail, a formal default may await Russia at the end of July, after the 30-day grace period expires.

What does all of this mean?

The very word “default” causes Russians to instantly associate with August 1998 – the collapse of the ruble, the collapse of the banking system and the loss of savings. But the analogy is hardly applicable to 2022: in 1998, the default became the direct cause of the crisis, and today it will become just one of its formal signs.

The Russian authorities prefer to call a possible default formal, because in fact they have the money to pay off their creditors. And, indeed, in the short term, the effect of the default is unlikely to be noticeable. External debt has generally declined since 2014 and is now below 30% of GDP. This year, the Ministry of Finance is not going to borrow, and the financial markets of the EU and the US are actually closed to Russia and without any default.

What do I get from this?

But all this does not mean that the default will go unnoticed by Russia. “It will be a huge default, probably the biggest in emerging markets since 1998,” Bloomberg wrote, citing Jonathan Prine, portfolio manager at Greylock Capital Associates. The US Treasury will keep Russia in default as long as Putin remains in power or until Russia completely leaves the territory of Ukraine, Tim Ash of Bluebay Asset Management predicted in a conversation with the agency. This means high borrowing costs, low investment, slow [economic] growth, declining living standards, and a general economic downturn. Even Chinese creditors will not want to lend to Russia as long as it remains in default, and if they do, at very high interest rates, he said.

Find out more

We talked about how the Russian authorities tried to avoid default and what will happen if it occurs here .