MOSCOW —
Russia accused the West
on Monday of seeking to push it into an “artificial default” through
unprecedented sanctions over Ukraine, but vowed to meet its debt payments.
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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 organize 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.
Ready to pay
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 $117 million in interest payments on two dollar-denominated bonds on
Wednesday.
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 organize an artificial default that has no real economic grounds.
Russia tumbled into default in 1998 when, thanks to a drop in the
prices of oil and other commodities, it faced a financial squeeze 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 $600 billion foreign
currency reserves.
But sanctions on Moscow over its “special military operation” in
Ukraine, targeted $300 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 percent 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 honor
debt obligations has steadily deteriorated since the start of the military
conflict,” it said.
‘Unique situation’
“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
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 chief Kristalina Georgieva said 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.
Amid
piling sanctions, a flurry of Western companies — from H&M to Ikea — have
suspended their business operations in Russia. There are growing fears Russian
authorities may try to “nationalize” or seize the assets of the local
subsidiaries.
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