Debt Repayment Deadline: How Far Is Russia From Bankruptcy?

Today is payday: Russia has to pay off debts in the hundreds of millions to international creditors. The question is: can and will the Kremlin do this? And what happens if not?

The memories come alive again: 1998, national bankruptcy in Russia. Could this be repeated now? Even veteran financial experts like Jochen Felsenheimer from Xaia Investment do not want to make any predictions. “We’re dealing with a situation where there’s no blueprint for it,” says Felsenheimer. Because the devil is in the detail: Russia now has to pay exactly $117 million in interest to international investors for two bonds. The problem: The Russian central bank’s dollar accounts abroad are frozen, the money is stuck.

More of a question of will?

Can interest rate dollars still get to investors in some other way? Russia expert Andreas Männicke from East Stock Information Services has an idea. He thinks of the Russians’ hoard of gold: “You could sell gold and use it – 100 million isn’t much – to pay off your debts.” The prerequisite, however, is that someone buys the gold from them and exchanges it for dollars – for example the Chinese.

But even if Russia can pay, the question is whether the Kremlin wants that too. Maybe that’s the much more crucial point, says bond expert Felsenheimer: “There is definitely an argument for Russia that says, ‘we’re keeping the money now because we can’t expect any more payments from the West in the future anyway’.”

No immediate payment default

However, the Russian Finance Minister Anton Siluanov has already approved the two interest payments at the beginning of the week. However, he left open whether the country would pay in hard dollars or in soft rubles, which is actually not allowed in this case. If Russia does not pay its interest, the so-called coupon, or only in rubles, then the country would probably be branded as insolvent – that is, slide into state bankruptcy.

However, not immediately, says bond expert Felsenheimer. “After the date of the coupon payment, he has another 30 days to make up the payment,” he explains. “Only when this deadline has also passed will there be a payment default.”

The income is sufficient

But even if the state bankruptcy were confirmed in mid-April, that did not mean that the state would not have a single kopek left. It just meant that the Kremlin couldn’t—or wouldn’t—pay dollars to international investors.

For the civil servants in the country and for the pensions, this would not have any consequences, says Russia expert Männicke. “I don’t see any problems paying civil servants’ salaries. Well, Putin will take care of that, otherwise he’d have an uprising right away.” And that, according to Männike, will and can prevent Putin. Because the international business, especially with oil, brings a lot of income to Russia, from which the state budget feeds; so much income that the Kremlin can use it to pay off most of its debts – for now.