Government bonds: Russia must repay the next debt

Russia has to repay a government bond worth two billion dollars. Experts are already speculating about a possible national bankruptcy. What would that mean for the global financial system?

It is the largest debt repayment this year: Russia has to repay foreign currency bonds worth two billion dollars today. A real litmus test. Because nobody knows whether the Kremlin will service the debt. And if so, in what currency – in dollars or rubles?

“It has worked so far, the expectations are that it will work again this time, but that is not certain,” says Ulrich Kater, chief economist at Deka-Bank. The entire Western financial world is poking around in the fog on this issue, although the country met its obligations in mid-March – in dollars. But a lot has changed since then, says Alexander Libman, an Eastern Europe expert at Freie Universität Berlin: “Since then, international agencies like Moody’s have not rated Russia, and the debate about stopping natural gas and oil deliveries is ongoing. Accordingly maybe those incentives are already gone.”

Rubles don’t count

So incentives to repay the debt – in dollars. Rubles don’t count, it says so in the fine print. Because that would have significant consequences for investors. According to Libman, a ruble payment would be “frozen in some accounts with the Russian banks. But the owners of the bonds then have no access to these accounts. Technically, one can then speak of default”.

Talk about a so-called technical default, which has the same effect as an actual state bankruptcy – the investors don’t get any money. The risk is great, says Deka expert Ulrich Kater: “There are fifty-fifty chances that Russia will default after all.”

Disrupted payment transfers

Thanks to its oil and gas business, Russia has sufficient foreign exchange reserves – even if they have dwindled significantly as a result of the sanctions. But the main problem is: The payment transfer is disrupted. The major settlement centers of the stock exchanges and banks have partially or completely stopped doing business with Russia, afraid of violating the sanctions. And the Russian central bank can no longer fall back on foreign exchange. However, unlike in the case of companies, this does not automatically lead to state bankruptcy with potentially dramatic consequences for the country’s economy.

“Russian assets are protected by diplomatic immunity, so they can’t simply be frozen,” says Eastern Europe expert Libman. “And the most important thing is that Russia would actually have been able to pay off the debt if the sanctions hadn’t existed. That’s why it’s not quite what we mean by bankruptcy. But in the long term it will mean that it will be very difficult for Russia to get new ones to borrow on the international markets.”

No “Lehman Effect”?

120 billion dollars – that’s how high the foreign debts of investors and banks worldwide are estimated. What happens in the banking world if this two billion dollars and all subsequent debts are not serviced – a new “Lehman shock”? According to Deka chief economist Ulrich Kater, such massive shock waves for the entire financial system as after the collapse of the US investment bank Lehman Brothers are not currently expected. “Although you have to say that the example is only put to the test when there are actually failures, which is not the case today.”

So there is a lot at stake for western banks – but even more for Russia. Western investors are already wary of pumping more money into the country. In the event of a default, the reputation would be ruined forever. But nobody wants to say the word bankruptcy, because Russia is still selling oil and gas – for valuable foreign exchange.