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Russia on the verge of default

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This Wednesday, March 16, Russia must pay 117 million dollars in interest on its loans. The major ratings agencies, Fitch, Moody’s and S&P Global, all downgraded Russia’s rating, predicting that a default is “imminent”. Fitch also lowered that of 28 major Russian groups, including Gazprom and Lukoil, believing that they too could quickly no longer honor their refunds.

This deadlock is a consequence of the sanctions. Low in debt (at 17.5% of its GDP), rich in income from its raw materials, Russia is nevertheless economically fragile. By freezing the assets of its central bank, the developed countries have prohibited it from using a good half of its reserves, valued at more than 600 billion dollars. The ruble has fallen by 30% in a few days and the Bank of Russia must work to support its currency. However, the banishment of the country forces it to sell off its production at a price 20% lower than the market price.

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The precedent of 1998

To limit capital flight, the Kremlin introduced exchange controls. Cash withdrawal from foreign currency accounts opened in Russian banks was limited to $10,000. Furthermore, Russia has decreed that the creditors of countries “hostile” may be reimbursed in rubles, not dollars. If she takes action, it will amount to default. “Russia wants to avoid having foreign currencies leave its territory, which will be used to finance its warexplains Ludovic Subran, chief economist at Allianz. In the coming months, the State and companies must repay around 9 billion dollars: keeping this amount means covering more than a week of the country’s import needs. »

→ EXPLANATION. How Russia is trying to limit the scope of Western sanctions

Kristalina Georgieva, the managing director of the IMF, ruled out that a Russian default could cause a global financial crisis. But for this country, it is a return to the 1990s during which the Russians experienced a period of chaos.

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A country that is in default of payment is cut off from any possibility of borrowing for many years, except to receive assistance from another richer country. However, it is not certain that Russia can currently find such an ally.

After defaulting on its debt in 1998, Russia took twelve years to be able to issue debt again. In a statement, its finance ministry accused developed countries of wanting to provoke “an artificial default of payment”. In fact, it is indeed the materialization of the threats of the developed countries, which have said they want to “paying Russia the cost of its aggression against Ukraine”.

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