Jun 28, 2022 - Economy

Why Russia's bond default may inflict little damage

Illustration of a one dollar bill with a Russian ruble symbol cut out of the center.

Illustration: Aïda Amer/Axios

When Russia defaults, that's generally a sign of financial carnage both inside and outside the country. That's what happened in 1918, and then again in 1998. This time, however, is different.

Why it matters: The cost of Russia's default this week appears negligible and in fact there might be a benefit of defaulting, given that it could then retain possession of dollars that would otherwise go to foreign bondholders.

The big picture: Countries who willfully default on their bonds can end up becoming financial pariahs. But Russia is already cut off financially from most western governments, companies, and payments systems. And it didn't willfully default on its debt obligations — in fact it has sent all of its payments in full.

  • The sanctions on Russia also mean that there's very little outstanding financial exposure to the country, which means it's hard to find bondholders who stand to lose money when they don't receive their coupon payments.

Flashback: Russia was the largest international debtor in the world when it repudiated all of its sovereign debts in 1918. It had the financial wherewithal to make bond payments; it just didn't have any desire to do so.

  • In 1998, Russia caused an international debt crisis when it defaulted on its domestic bonds (those denominated in rubles), which were broadly held by foreign institutions. Struggling with a weak economy, the government simply couldn't afford to keep on rolling them over.

This week's default is mostly a function of the way international financial plumbing works, with banks and clearinghouses barred from transferring Russian dollars to bondholders.

  • Russia claims it's not even a default at all: The country fulfilled all its obligations in full, in terms of making the payment on time. If foreign governments bar that money from reaching bondholders, goes the argument, that's out of Russia's control.
  • The country hopes its willingness to service its debts will help to smooth any eventual re-entry into the international financial system. But western bondholders might still be worried about future sanctions, especially if Vladimir Putin or anybody else with imperial ambitions remains in power.

The bottom line: While "default" is a scary word, Russia hasn't needed access to international capital for years, thanks to strong energy exports and relatively low domestic demand for imports. If you don't need to borrow money, then a bad credit rating does you little harm.

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