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- Is the US trying to engineer an artificial default for Russia?
Is the US trying to engineer an artificial default for Russia?
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Russia is believed to have defaulted on its debt for the first time since 1998 after missing a key deadline.
Russia has the money to make a $100m payment, which was due on Sunday, but sanctions made it impossible to get the sum to international creditors.
The country had been determined to avoid the default, which is a major blow to the nation's prestige.
Kremlin spokesperson Dmitry Peskov, said "statements of a default were absolutely unjustified".
He added that an intermediary bank had withheld the money and that the reserves were blocked "unlawfully".
The White House said that Russia had defaulted on paying yields on its international bonds, crediting sanctions for effectively cutting Russia off from the global financial system.
Russia's finance minister called the situation "a farce" and said the situation is not expected to have short-term impact.
This is because Russia does not need to raise money internationally as it is reaping revenue from high-priced commodities such as oil, according to Chris Weafer, chief executive at Moscow-based consultancy Macro Advisory.
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Western media are reporting that Russia is facing a default on its foreign debt for the first time since 1918. Moscow was forced to make interest payments on bonds in rubles after Washington blocked dollar payments.
What is Russia’s reaction to default claims?
Moscow has rejected the allegations and has accused Washington of trying to engineer an artificial default, explaining that the country is willing and able to service its foreign debt. The transition to ruble payments does not imply a debt default, Finance Minister Anton Siluanov has stressed.
How does Moscow plan to service its foreign debt?
Under a new payment mechanism, which was recently announced and signed into law by President Vladimir Putin, Moscow considers its obligations completed “if they are fulfilled in rubles in an amount equivalent to the value of obligations in foreign currency” at the exchange rate on the day the funds are transferred to the central depository (NSD), through which they will be paid to creditors.
Why is Russia making bond payments in rubles?
In May, the US ended a bond payment waiver that had allowed Moscow to service its debt in dollars. The Russian Finance Ministry subsequently said that, in order to defend its reputation as a reliable borrower, Russia would service its Eurobond obligations in the national currency, the ruble, if it were unable to pay in foreign currency.
What does being in default mean for a country?
Countries in default cannot borrow money cheaply through international financial institutions because they are considered a risk.
How does that impact Russia?
There is no reason for Moscow to issue bonds. The country runs a low debt of around 16% of GDP, because it traditionally doesn’t rely heavily on borrowing. In comparison, most Western countries run debts close or well over to 100% of their GDP.
How much damage does a default do to the country’s economy?
In terms of the Western financial system, it doesn’t matter. Sanctions make it impossible for Russia to trade as it used to. Most Western companies have pulled out and borrowing money from Western financial institutions is not possible. This makes Russia’s credit rating in the West meaningless.
How does this impact Russia’s remaining trade partners?
In terms of China, India and other major partners it has no negative effect. Russia’s trade with its BRICS partners has grown by almost 40% in the first quarter of 2022 from the $164 billion reached last year. Russia’s trade partners haven been eager to replace Western businesses in Russia.
What are Moscow’s alternatives to borrowing in Western institutions?
Financial institutions, such as the BRICS New Development Bank (NDB), which was established by the member states Brazil, Russia, India, China and South Africa, with the aim of financing infrastructure and development projects in emerging nations, could be a good option for Russia.
What’s the potential fallout?
The West denies that a possible Russian default could have the kind of impact on global financial markets and institutions that came from an earlier default on domestic debt in 1998. Back then, Russia’s default on ruble bonds pushed the US government to step in and get banks to bail out a major American hedge fund whose collapse, it was feared, could have shaken the wider financial system.
However, investment analysts acknowledge that holders of Russian bonds could take serious losses as a result of Western actions and file lawsuits against the US government, which prevented Russia’s dollar payments. Moscow points out that attempts to push Russia into default only undermines the reputation of the Western financial system.
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