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Russia says West trying to push it into default

MOSCOW (AFP) – Russia accused the West yesterday of seeking to push it into an “artificial default” through unprecedented sanctions over Ukraine, but vowed to meet its debt payments.

Russia is due to make an interest payment on its external debt later this week and Moscow warned it will be doing so in rubles if sanctions prevent it from using the currency of issue.

“The freezing of foreign currency accounts of the Bank of Russia and of the Russian government can be regarded as the desire of a number of foreign countries to organise an artificial default that has no real economic grounds,” Finance Minister Anton Siluanov said in a statement.

Ratings agency Fitch last week downgraded Russia’s sovereign debt rating deeper into junk territory, warning that the decision reflects the view that a default is “imminent”.

But Siluanov denied that Russia “cannot fulfil the obligations” of its government debt.
He said Russia “is ready to make payments in rubles” according to the exchange rate of Russia’s central bank on the day of the payment.

While Russia’s foreign currency government bonds issued since 2018 do contain provisions for repayment in rubles, that is not the case for the combined USD117 million in interest payments on two dollar-denominated bonds last Wednesday.

Russia tumbled into default in 1998 when, thanks to a drop in the prices of oil and other commodities, it faced a financial sqeeze that meant it could no longer prop up the ruble and pay off its debts which had swelled due to the first war in Chechnya.

The plunge in the value of the ruble, a spike in inflation and bank collapses caused widespread misery and were seen as helping President Vladimir Putin’s rise to power.

Putin had worked on improving Russia’s finances by keeping debt low and using windfall oil export revenue to amass USD600 billion foreign currency reserves.

But sanctions on Moscow over its “special military operation” in Ukraine, targetted USD300 billion of Russia’s foreign currency reserves held abroad.

Without access to these funds to make payments, Russia could find itself forced to default.
Another ratings agency, Moody’s, warned last week that investors could face losses of 35 to 65 per cent in case of a default but “the unpredictability of government actions to date increases the risk of higher losses”.

“Russia’s ability and willingness to honour debt obligations has steadily deteriorated since the start of the military conflict,” it said.

“It is a unique situation where the sanctioning party will be the deciding factor on Russia’s 2022 default,” said Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance.

She noted that the United States (US) Treasury could unlock part of Russia’s foreign currency reserves to enable payment of the bondholders, who are mostly from countries which have imposed sanctions.

If Russia fails to make the bond payment, an automatic 30-day grace period kicks in and after its expiry it would be considered in default.

International Monetary Fund (IMF) chief Kristalina Georgieva said on Sunday that the while Russia has money to pay its debt, it “cannot access it”.

“I can say that no longer we think of Russian default as an improbable event,” Georgieva told the CBS show Face the Nation.

The Western sanctions on Moscow over Ukraine have delivered an unprecedented blow to Russia’s banking and financial system and will likely lead major disruptions in trade and inflation.

To stave off a default Russia has boosted efforts to prevent money from leaving its borders and to support the ruble, which has already seen a precipitous drop in value against the dollar.

This includes a measure allowing Russian firms to make payments on debts sanctioning countries in rubles.