1
$\begingroup$

(I apologize beforehand for this extremely clueless question! I have searched for the answer for a long time without success.)

Credit rating agencies have recently declared Russia to be close to default, for having paid "about $650 million of dollar-denominated debt in rubles on April 4."

If Russia does not pay this debt in dollars by May 4 (the end of the 30-day grace period), it will be officially in default.

I have read in multiple articles that this would be a catastrophic event for Russia1.

If so, I do not understand why Russia wouldn't buy the necessary dollars with its rubles.

Yes, I understand that such a move would tend to depress the value of the ruble, but would that be worse than being declared in default?

1 To underscore what a big deal it would be for Russia to default, all these articles point out that Russia has not defaulted on its foreign debt since the time of the Bolshevik Revolution.

Improve this question
$\endgroup$
2
  • $\begingroup$ Regarding your footnote: On 17 August 1998 Russia declared it was devaluing its currency and it also defaulted on its bonds. $\endgroup$
    – Paul Verschoor
    Apr 21, 2022 at 5:19
  • $\begingroup$ It defaulted on domestic debt, and delayed payment on foreign debt, OP question is about USD debt, in that sense his footnote is correct, but my point is, there has been issues after the Bolshevik Revolution. $\endgroup$
    – Paul Verschoor
    Apr 21, 2022 at 6:49

1 Answer 1

Reset to default
4
$\begingroup$

Because Russia is effectively banned from using dollars. Also, Russia has enough dollars to finance its debt. The reason why Russia might default is that they are not allowed to use their USDs. For example, imagine you have mortgage and have to pay \$1000 per month, on your account you have \$100k. Now if your bank would freeze your account it does not matter that you have enough money to pay for your mortgage. Technically default occurs when you don't make payment for any reason. Financial institution that gave you mortgage won't care that you have \$100k on your account if you cant use them.

The sanctions that USA levied on Russia were really unprecedented in that they froze all USD holdings of Russian central bank (see NBCN article on that). Central bank is the bank that state uses to do its banking. Russia does not pay coupons on its bonds with cash. Nowadays all transactions are electronic, and the digital dollars that Russian central bank owns are basically worthless because they are frozen.

Hence, they do not buy more USDs because they cannot effectively use them and because they don't really need to. Russia technically has enough reserves to finance their current debt for very long period of time. According to the Reuters they currently pay about \$117 mil. assuming that this would stay constant with their \$284 bn assets, if they were not frozen, they could service their debt for years to come.

Improve this answer
$\endgroup$
2
  • $\begingroup$ What keeps throwing me off is the contrast between a "frozen balance", i.e. money that Russia owns, but has no access to, and "payment" with dollars that Russia owns AND has access to. If I understand you correctly, Russia cannot use the latter either, not because it doesn't have access to it, but because the creditor is barred from performing any USD transactions with Russia, including accepting a payment in USD. IOW, the frozen balance is, to some extent, irrelevant here. What matters is the prohibition of all USD transactions with its creditors. Is this correct? $\endgroup$
    – kjo
    Apr 17, 2022 at 14:58
  • 1
    $\begingroup$ @kjo its not just that. As mentioned above Russian central bank is the bank Russia uses. Hence any time Russia gets any dollars directly they are deposited at Russian central bank. So any time Russia buys dollars they are immediately frozen. Indirectly Russia could perhaps circumvent this by using some of the non-sectioned banks, but I am not sure if this would work, that would be question for some legal expert because that would not longer be about economics but legal arrangements around the debt payments. Also, in that case then what you talk about could come to place as well. $\endgroup$
    – 1muflon1 ♦
    Apr 17, 2022 at 15:09

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.