Russia Staring Down its First Default Since the Bolshevik Walked Away from Czarist Debts in 1918

The rubber is about to meet the road for Russia with regards to its debt payments this Sunday. The grace period on around $100 million of missed bond payments runs out. Whilst there won’t be an official declaration as given the ostracizing of Russia by most of the world it is largely symbolic. Russia disputes the designation as you would expect. Nevertheless, the bond documents are clear, if investors do not have their money by the deadline, there will be an “event of default” on Monday morning.

The default will have an effect, the official Russian stance will laugh it off, Putin will call on China or for instance, but the noose is tight, and the Russian people are hurting as evidenced by the cost of living there. Russia is in deep financial distress, even though Putin denies it. Inflation is rampant, not that Russia is alone in that but officially their stance is they are not.

Expectations of rising prices reached the highest level on record, according to a Russian central bank survey of more than 13,000 businesses in April. Planting costs for farmers will rise by between 20% and 40%, according to the survey. – WSJ

, which are Investors have expected Russia to default for months. Russian CDS insurance like contracts that cover Russian debt have priced an 80% likelihood of default for weeks, and rating agencies like Standard & Poor’s and Moody’s have placed the country’s debt deep into junk territory.

The sanctions make the default different in many ways. One of these differences is declaring it a default as ratings agencies have sanctions banning them from Russian business. Bondholders could group together to make their own statement, but they may prefer to wait to monitor the war in Ukraine and the level of sanctions as they try to figure out the chance of getting their money back, or at least some at Bloomberg surmised.

The Credit Default Determination Committee, an industry group of banks and investment funds ruled on June 7 that Russia had failed to pay required additional interest after making a payment on a bond after the April 4 due date. In this case the committee put off taking further action due to uncertainty over how sanctions might affect any settlement.

“A declaration of default is a symbolic event,” said Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo. “The Russian government has already lost the opportunity to issue dollar-denominated debt. Already as of now, Russia can’t borrow from most foreign countries.”

Russian Finance Minister Anton Siluanov had this to say; “There is every ground to suggest that in artificially barring the Russian Federation from servicing its foreign sovereign debt, the goal is to apply the label of ‘default’. Anyone can declare whatever they like and can try to apply such a label. But anyone who understands the situation knows that this is in no way a default.”

Meanwhile for Russians the cost-of-living continues to skyrocket. Sugar costs two-thirds more than a year ago, fruit and vegetables costs one-third more, according to government data. Overall, food prices are up by one-fifth, double the increase recorded in the U.S. in April. Pasta costs almost 30% more than it did a year ago, while prices of cereals and beans are up 35%, the data shows.

Overall the prices Russian households pay for the goods and services they consume were 17.8% higher in April than a year earlier, compared with annual inflation rates of 8.3% in the U.S. and 7.4% in the eurozone.

Inflation has stayed high since an initial surge after Russia invaded Ukraine in February, which set off a wave of economic sanctions which brings us to the default. Detergents and cleaning products cost 30% more than in April 2021, while electrical goods and household appliances are 28% more expensive. Russia’s huge oil and gas production means that gasoline prices rose by just 6%.

The impact is harsher on Russian families because a larger share of their household budgets goes to food. According to the U.S. Department of Agriculture, food accounted for nearly 29% of the average Russian household’s spending in 2020, compared with 7.1% in the U.S. and 9.4% in the U.K.

“Many companies still have Western parts and goods in stock. Some will last a few months, some may last a year. But the stocks will run out eventually, and scarcity will drive up prices,” said Janis Kluge, a specialist in the Russian economy at the German Institute for International and Security Affairs.

While the war itself is having devastating consequences in terms of human suffering and higher food and energy prices worldwide, default on government bonds would be “definitely not systemically relevant,” International Monetary Fund Managing Director Kristalina Georgieva has said.

ource: WSJ, Bloomberg

From The TradersCommunity Research Desk