Russia gets caught in messy financial web woven by the West

29/06/2022 11:01:00 AM

OPINION: Russia gets caught in a messy financial web woven by the West

OPINION: Russia gets caught in a messy financial web woven by the West

Russia has been forced into a default on its foreign debts. But it’s not because of its inability or unwillingness to pay them.

Advertisement, and technically is one, the ratings agencies that would normally declare the default have yet to do so.APRussia had gone to great lengths, until the weekend, to avoid triggering any defaults, but a pathway through the sanctions net that had been deliberately left open and that allowed US bondholders to receive payments from the Russian government was closed by the US Treasury late last month.

The bizarre aspect of the situation is that Russia has the funds to meet the payments and avoid default –Perversely, it’s not Russia being punished by the default but the foreign bondholders who haven’t received their interest payments.Russia’s finance minister, Anton Siluanov, said of the failure to get the funds into bondholders’ accounts, that anyone could declare whatever they wanted to but “anyone who understands what’s going on knows that this is in no way a default”. At the fundamental rather than technical level, it’s hard to argue against that.

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Russia gets caught in a messy financial web woven by the WestRussia has been forced into a default on its foreign debts. But it’s not because of its inability or unwillingness to pay them. Great for gold prices! Good! StopPutinNOW

Russia gets caught in a messy financial web woven by the WestRussia has been forced to default on its foreign debts. But it's not because of its inability or unwillingness to pay them. | OPINION by Stephen Bartholomeusz Indeed, the government transferred the funds to an agent within Russia. The problem is that the agent is unable to deposit those funds in the bondholders’ accounts because of the sanctions. All down to Russian aggression in Ukraine - no war no default. Russians don't want to default, Ukraine does not want war. All Russian option, no excuses.

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Russia slips into historic default as sanctions muddy next stepsThe grace period for $144 million in foreign currency bond interest payments has ended.

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to save articles for later.to save articles for later.to save articles for later.channelling more sophisticated military equipment to the Zelensky government and imposing import bans on Russian gold.

Normal text size Very large text size Advertisement Russia’s “default” on its foreign currency sovereign debt last weekend is one of the stranger outworkings of the web of sanctions the West has woven around Russia’s finances. While the failure of about $US100 million ($144 million) of interest payments to reach foreign bondholders , and technically is one, the ratings agencies that would normally declare the default have yet to do so. While the failure of about $US100 million ($144 million) of interest payments to reach foreign bondholders , and technically is one, the ratings agencies that would normally declare the default have yet to do so. The West made a Russian default inevitable. The West made a Russian default inevitable. Credit: AP They can’t, because the sanctions prevent them from rating Russian bonds. Credit: AP They can’t, because the sanctions prevent them from rating Russian bonds. The bondholders who haven’t received their money could themselves declare a default but, in a practical sense, it would have no near-term impact. It means a politically sobering lesson in energy economics is behind the desperate attempt of the G7 to test the feasibility of imposing international price caps on Russian oil and gas.

Russia didn’t waive its sovereign immunity in the bonds’ documentation and it is unclear who, if anyone, would have the jurisdiction to hear any claim they might have or whether Russia would observe any judgment if one were made. Russia didn’t waive its sovereign immunity in the bonds’ documentation and it is unclear who, if anyone, would have the jurisdiction to hear any claim they might have or whether Russia would observe any judgment if one were made. Russia didn’t waive its sovereign immunity in the bonds’ documentation and it is unclear who, if anyone, would have the jurisdiction to hear any claim they might have or whether Russia would observe any judgment if one were made. Russia had gone to great lengths, until the weekend, to avoid triggering any defaults, but a pathway through the sanctions net that had been deliberately left open and that allowed US bondholders to receive payments from the Russian government was closed by the US Treasury late last month. Then the EU sanctioned Russia’s National Settlement Depositary, completing the wall around Russia’s ability to transfer funds out of the country. Then the European Union sanctioned Russia’s National Settlement Depositary, completing the wall around Russia’s ability to transfer funds out of the country. Loading The bizarre aspect of the situation is that Russia has the funds to meet the payments and avoid default – it is still raking in billions of dollars a month from its oil sales – and is willing to pay them out. Loading The bizarre aspect of the situation is that Russia has the funds to meet the payments and avoid default – it is still raking in billions of dollars a month from its oil sales – and is willing to pay them out. Indeed, the government transferred the funds to an agent within Russia. Indeed, the government transferred the funds to an agent within Russia. It’s already testing the withdrawal of gas supplies from countries like Germany that are still so dependent on it even as they scramble to find alternatives.

The problem is that the agent is unable to deposit those funds in the bondholders’ accounts because of the sanctions. Perversely, it’s not Russia being punished by the default but the foreign bondholders who haven’t received their interest payments. Perversely, it’s not Russia being punished by the default but the foreign bondholders who haven’t received their interest payments. Perversely, it’s not Russia being punished by the default but the foreign bondholders who haven’t received their interest payments. Advertisement The default is being widely described as symbolic, which was perhaps the point of the decisions by the US and EU to act to ensure Russia couldn’t complete the payments and force it into its first default on foreign debt in more than a century. (The Bolsheviks repudiated Russia’s foreign debt obligations in 1918, and Boris Yeltsin’s government defaulted on $US40 billion of purely domestic debt in 1998). (The Bolsheviks repudiated Russia’s foreign debt obligations in 1918 while Boris Yeltsin’s government defaulted on $US40 billion of purely domestic debt). Russia’s finance minister, Anton Siluanov, said of the failure to get the funds into bondholders’ accounts, that anyone could declare whatever they wanted to but “anyone who understands what’s going on knows that this is in no way a default”. Russia’s finance minister, Anton Siluanov, said of the failure to get the funds into bondholders’ accounts, that anyone could declare whatever they wanted to but “anyone who understands what’s going on knows that this is in no way a default”. Global recession US Treasury Secretary Janet Yellen has been arguing this is the best way to reduce prices and avoid the possibility of global recession.

At the fundamental rather than technical level, it’s hard to argue against that.” At the fundamental rather than technical level, it’s hard to argue against that. The US and Europe presumably wanted to attach the odious label of defaulters to the Russians, as well as signalling that the net of financial sanctions had been completed and that Russia is now largely – albeit not entirely given its relationships with China and India and a handful of others – cut off from the core of the global financial system. It was a manufactured default that will inevitably be followed by others as interest and principal payments on other issues of the $US20 billion of debt owed to foreigners fall due. It was a manufactured default that will inevitably be followed by others as interest and principal payments on other issues of the $US20 billion of debt owed to foreigners fall due. It was a manufactured default that will inevitably be followed by others as interest and principal payments on other issues of the $US20 billion of debt owed to foreigners fall due. It is a messy situation, although Russian bonds have traded at fractions of their face value ever since the first round of sanctions were announced and therefore the bondholders were well aware of the prospect of default. Loading Theoretically, the bondholders could try to sue for payment although, as noted, that’s not straightforward. Loading Theoretically, the bondholders could try to sue for payment although, as noted, that’s not straightforward. The government of Narendra Modi is certainly willing to join groups like the Quad, aimed at countering China’s influence by cementing security ties between India, the US, Japan and Australia.

They could also try to convince a court to allow them to seize assets, including the central bank reserves that have been frozen in offshore jurisdictions, or Russian government properties offshore. They could also try to convince a court to allow them to seize assets, including the central bank reserves that have been frozen in offshore jurisdictions, or Russian government properties offshore. Sovereign and diplomatic immunities would complicate those efforts. Sovereign and diplomatic immunities would complicate those efforts. Alternatively, they could simply wait for the eventual resolution of the war in Ukraine and hope that the sanctions will eventually be lifted and Russia allowed to re-engage with the global financial system and bond markets and be able to repay their debt. As Argentina has demonstrated – even after defaulting eight times on its sovereign debt – for investors, time and attractive yields heal most wounds. As Argentina has demonstrated – even after defaulting eight times on its sovereign debt – for investors, time and attractive yields heal most wounds. As Argentina has demonstrated – even after defaulting eight times on its sovereign debt – for investors, time and attractive yields heal most wounds. Apart from Russia’s demonstrated willingness to pay, there’s no doubt about its capacity to pay. “What this invasion has done, far from weakening NATO, it has actually strengthened it,” he said.

After sanctions were imposed when it invaded Crimea in 2014, Russia went to great lengths to build up its foreign exchange reserves (half of which are now frozen by the Ukraine-related sanctions) and reduce its overall debt and its foreign liabilities. After sanctions were imposed after its invasion of Crimea in 2014, Russia went to great lengths to build up its foreign exchange reserves (half of which are now frozen by the Ukraine-related sanctions) and reduce its overall debt and its foreign liabilities. It has a debt-to-GDP ratio of only about 17 per cent and, with higher oil prices offsetting the limited markets into which it can now sell its oil and the big discounts it has to offer to attract those buyers (primarily China and India), it is estimated to have generated roughly $US100 billion in oil revenues since the start of the invasion. It has a debt-to-GDP ratio of only about 17 per cent and, with higher oil prices offsetting the limited markets into which it can now sell its oil and the big discounts it has to offer to attract those buyers (primarily China and India), it is estimated to have generated roughly $US100 billion in oil revenues since the start of the invasion. The US and Europe presumably wanted to attach the odious label of defaulters to the Russians. The US and Europe presumably wanted to attach the odious label of defaulters to the Russians. The US and EU are now trying to choke those revenues .