Bloomberg claims that Russia, for the first time in a century, has defaulted on external debt, but the Russian authorities fundamentally disagree with the interpretation of the default. Gaidar Institute researcher Evgeny Goryunov, in an interview with Sekret Firmy, discussed the situation around the default, and what to expect in the near future.
On the night of June 27, Bloomberg reported that Russia had defaulted on foreign currency sovereign debt. The grace period during which it was possible to pay overdue coupons on government bonds for $ 100 million expired at the end of the day on June 26.
Default is a situation when a debtor (which can be either an individual or a national government) has failed to pay its obligations to creditors. If a country officially defaults, its credit rating is reduced, and it becomes much more difficult for its government to attract new loans. Before the February events, Russia was one of the most welcome borrowers in the world.
However, in the light of recent events, it has become much more difficult for Russia to pay its debts, as US banks were no longer allowed to receive money from the RF Central Bank and the RF Ministry of Finance because of the sanctions. In addition, the USA did not renew the license that allowed Russia to service its foreign debt, which expired on May 25. In order to somehow pay the bills, the RF Ministry of Finance has decided to settle on Eurobonds in rubles, ensuring the maximum possible equivalence of payments, while Western experts believe that ruble payments mean default. However, the creditors will receive the payments due to them in full, albeit in rubles, which means that it is premature to speak of a default.
Evgeny Goryunov is certain that even if the creditors succeed in declaring a default, it will not affect in any way the lives of the majority of Russians.
“The only negative consequence of the default may be experienced by some of our impressionable fellow citizens, who, upon hearing the terrible word from the 90s, will have a panic attack. But that is all,” he assured.
In 1998, that word was associated with a painful crisis, when this country defaulted on domestic GKO bonds (government short-term commitments). In 2022, the situation is different: everything that could have triggered a default (capital outflow, stock market decline, forex rate changes, etc.) has already happened to the Russian economy.
However, Evgeny Goryunov warns against rejoicing. “In a normal situation, first there would be problems in the economy followed by a default, and then the country would lose the confidence of creditors, and be denied access to world capital markets. In case of Russia, everything is happening in reverse order. First, as a result of sanctions, Russia’s access to the borrowing market was restricted, and it was no longer able to make payments; then (allegedly) a default occurred. Economic troubles will come next, and the main problem will probably be our lagging behind the leading economies. This is very serious,” the expert warns.
“Russia does not (yet) have an urgent need to borrow money, especially foreign currency. It is the excess forex supply that caused the ruble exchange rate to become too strong.”
“A significant obstacle to economic growth is the departure of foreign manufacturers, the discontinued supply of components, and curtailing cooperation. The problem may be not so much the lack of supply of borrowed funds, but the lack of demand for them,” Evgeny Goryunov noted.