War in Ukraine: failure or no failure? Understanding the Russian Debt Conundrum


war in UkraineError or no error? Understanding the Russian Debt Conundrum

After invading Ukraine, Russia suffered a shower of financial sanctions. However, the situation is complex. According to experts, Moscow had “enough foreign exchange to repay its debts”.

Russia’s default is inevitable, but the consequences for investors and the country are still unclear.


After six months of western financial sanctions following the invasion of Ukraine, Russia’s default is inevitable, but the consequences for investors and the country are still unclear. The point on this thorny file.

It’s the color of the bug, the flavor of the bug… but no legitimate authority has really made it official. A default is generally declared when a state fails to repay a loan or interest on that loan by a specified date, or when it publicly declares itself insolvent, as Sri Lanka did in April.

The default can then be pronounced by one or more of the three major financial rating agencies S&P Global, Fitch and Moody’s. S&P put Russia into “selective default,” one notch ahead of default, and Moody’s spoke of a “default” after creditors failed to receive $100 million in late June without touching the note.

A default can also be confirmed by triggering insurance that investors take out to protect themselves, namely Credit Default Swaps (CDS), at the initiative of a creditors’ committee composed of large financial institutions. That committee has so far adhered to declare a “credit event” in June after Moscow failed to pay $1.9 million in penalty interest on an April installment.

Because the core of the problem are the sanctions imposed by the West. Rating agencies are no longer allowed to rate Russia, and the body responsible for triggering CDS is groping its way towards new procedures. “This is not a typical default, to put it mildly,” Bild Levon Kameryan, a Russia-specialized analyst at European rating agency Scope Ratings.

“This is not a typical case of default, to say the least…”

Levon Kameryan, Russia-focused analyst at European rating agency Scope Ratings.

Sanctions are also the origin of Russian payment incidents: the USA first made it impossible for Moscow to settle its debts with dollars at American banks, then also with dollars. The country can no longer borrow money on the international markets.

But Moscow “had enough foreign exchange to pay off its debts,” Levon Kameryan points out, recalling “the enormous amounts of foreign exchange” in the state’s coffers that come from the sale of hydrocarbons. That is why the Kremlin is protesting against an “illegitimate” insolvency.

Eyes are on the Creditors’ Committee, which announced on Friday that an auction process could be held in the first half of September to set a compensation price for investors holding the famous insurance CDS. It usually takes thirty days from the credit event to the triggering of the CDS, remembers George Cahill, CDS specialist and partner at the international law firm Alston&Bird. But it’s been almost three months.

Is it serious for Russia?

In view of the magnitude, Moscow does not have to worry too much for the time being. “Russia simply does not depend on international capital markets for fiscal positions and financing needs,” said Liam Peach, emerging markets economist for Capital Economics. Two numbers sum up the situation, according to Scope Ratings’ Levon Kameryan: foreign-currency-denominated bonds weigh around $40 billion, while Russia’s current account surplus in the first half of the year was $166.6 billion thanks to oil and gas sales.

Russia’s public debt is also almost 20% of GDP, much lower than that of comparable-sized economies. However, experts warn of the risks of Russian companies, which are much more heavily indebted in foreign currencies than the state. Also, in the longer term, “a default will further erode foreign investor confidence in the Russian economy and further discourage foreign investment at a time when Russia badly needed it,” concludes Levon Kameryan.


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