Investors breathed a sigh of relief last week after the Russian government made an interest payment of $117 million on its foreign debt. But a much larger payment is due on April 4 – to the tune of $2.2 billion – and creditors are much less optimistic that Russia will pay this time.
“The last payment was a small investment in credibility, but when Russia has to start writing billion dollar checks, it’s a different calculation,” said Jay Newman, former portfolio manager at Elliott Management. and author of “Undermoney,” at the Post. “I don’t think it’s realistic for Russia to offer the $2.2 billion.
The bond payment last week panicked investors as it was unclear whether Russia’s central bank would be able to use its frozen reserve of US dollars to make the payment – and whether US banks would work with the country to transfer the money. There was also a dispute over whether Russia could pay the debt in its own currency. The Russian Ministry of Finance insisted that the country could pay in rubles RUBUSD,
but people familiar with the contract say it must be paid in dollars.
For some small installments, Russia is allowed to pay in rubles. But for the previous payments of $117 million and the upcoming payment of $2.2 billion, the terms state that Russia must pay in US dollars.
Russia won last time out. But debt experts have a grim view of what’s to come. These people tell The Post that they don’t think Russia’s ability and willingness to honor its previous debt means anything going forward, especially because Russia is facing nearly 4, $8 billion in debt payments this year.
And April 4 will be the first big test: “Two billion is real money,” warns Newman.
The US Treasury Department has clarified Russia can use frozen funds to pay off its debt until May 25. After that, the country will likely have to get the money back from other sources – borrow money or sell oil to countries like China or India.
“If they’re making payments with funds they wouldn’t otherwise have access to, it’s basically play money,” said Newman, who spent 15 years recover $2.4 billion in debt from Argentina after defaulting. “But once they have to collect money and choose to pay bonds rather than buy weapons and food, it’s a tougher decision.”
And it’s not just an economic issue. Even if Russia is able to make another payment, some experts fear that Russia will simply refuse.
Newman argues that the harsh sanctions imposed by the United States could backfire – and that removing Russia’s ability to access global markets and trade removes the country’s incentive to keep paying its debt.
“If Russia is cut off from the rest of the world, you have to doubt that it is still paying,” Newman said. “It’s unusual for a country under growing and persistent economic sanctions to maintain payments – these sanctions have unintended consequences.”
Newman is not alone in believing that Russia may not make the multi-billion payment in April.
“I expect a full Russian debt default,” Robert Kahn of political risk consultancy Eurasia Group told The Post. “It’s a political issue, not just an economic one. Why do they want to pay us back when we extradite them from the economic system? »
With Russia owing nearly $15 billion to US banks, economists do not expect a debt default to cause global markets to fall significantly in the long term. According to the International Monetary Fund, Russia’s relative isolation from the rest of the world makes it “systemically irrelevant”.
Yet the conflict – and its continuing fallout – has already damaged the global economy.
The Organization for Economic Co-operation and Development estimates that the conflict will reduce global growth by one percentage point and increase inflation by more than two percentage points. Other economic experts say the war increased the probability of a recession in the United States from 10% to 35% over the next year.