Page 11 - aruba-today-20220627

A11
business Monday 27 June 2022
EXPLAINER: What’s the impact of a Russian debt default?

By The Associated Press at knocked-down prices
(AP) - Russia is poised to in hopes of profiting from
default on its foreign debt a settlement in the long
for the first time since the run. And they might want
1917 Bolshevik Revolution, to keep a low profile for a
further alienating the coun- while to avoid being asso-
try from the global financial ciated with the war.
system following sanctions Once a country defaults, it
imposed over its war in can be cut off from bond-
Ukraine. market borrowing until the
The country faces a Sun- default is sorted out and in-
day night deadline to meet vestors regain confidence
a 30-day grace period on in the government’s ability
interest payments originally and willingness to pay. But
due May 27. But it could Russia has already been
take time to confirm a de- cut off from Western capi-
fault. tal markets, so any return to
“While there is a possibil- borrowing is a long way off
ity that some magic could anyway.
occur” and Russia gets the The Kremlin can still bor-
money through financial row rubles at home, where
institutions to bondhold- it mostly relies on Russian
ers despite sanctions, “no- banks to buy its bonds.
body’s making that bet,” What would be the impact
said Jay S. Auslander, a top of Russia’s default?
sovereign debt lawyer at Western sanctions over the
the firm of Wilk Auslander in war have sent foreign com-
New York. “The overwhelm- panies fleeing from Russia
ing probability is they won’t and interrupted the coun-
be able to because no try’s trade and financial ties
bank is going to move the with the rest of the world.
money.” Default would be one more
Last month, the U.S. Treasury symptom of that isolation
Department ended Russia’s and disruption.
ability to pay its billions in Treasury Secretary Janet Yellen arrives to meet with Irish Finance Minister Paschal Donohoe at the Investment analysts are
Treasury Department, Thursday, June 2, 2022, in Washington. Russia is poised to default on its for-
debt back to international eign debt for the first time since the 1917 Bolshevik Revolution, further alienating the country from cautiously reckoning that
investors through American the global financial system amid its war in Ukraine. (AP Photo/Andrew Harnik, File) a Russia default would not
banks. In response, the Rus- have the kind of impact
sian Finance Ministry said it About $40 billion in foreign er the rating to default or foreign bonds are also in on global financial markets
would pay dollar-denom- bonds, about half of that a court can decide the default, and bondholders and institutions that came
inated debts in rubles and to foreigners. Before the issue. Bondholders who could then seek a court from an earlier default in
offer “the opportunity for start of the war, Russia had have credit default swaps judgment to enforce pay- 1998. Back then, Russia’s
subsequent conversion into around $640 billion in for- — contracts that act like ment. default on domestic ruble
the original currency.” eign currency and gold re- insurance policies against In normal circumstances, bonds led the U.S. govern-
Russia calls any default ar- serves, much of which was default — can ask a com- investors and the default- ment to step in and get
tificial because it has the held overseas and is now mittee of financial firm ing government typically banks to bail out Long-
money to pay its debts but frozen. representatives to decide negotiate a settlement in Term Capital Manage-
says sanctions have frozen Russia has not defaulted whether a failure to pay which bondholders are ment, a large U.S. hedge
its foreign currency reserves on its international debts debt should trigger a pay- given new bonds that are fund whose collapse, it was
held abroad. since the Bolshevik Revolu- out, which still isn’t a formal worth less but that at least feared, could have shaken
“There is money and there tion for than a century ago, declaration of default. give them some partial the wider financial and
is also the readiness to when the Russian Empire The Credit Default Determi- compensation. banking system.
pay,” Russian Finance Min- collapsed and the Soviet nation Committee — an in- But sanctions bar dealings Holders of the bonds — for
ister Anton Siluanov said Union was created. Russia dustry group of banks and with Russia’s finance min- instance, funds that invest
last month. “This situation, defaulted on its domestic investment funds — ruled istry. And no one knows in emerging market bonds
artificially created by an debts in the late 1990s but June 7 that Russia had when the war will end — could take serious losses.
unfriendly country, will not was able to recover from failed to pay required ad- or how much defaulted Russia, however, played
have any effect on Rus- that default with the help ditional interest after mak- bonds could wind up be- only a small role in emerg-
sians’ quality of life.” of international aid. ing a payment on a bond ing worth. In this case, de- ing market bond indexes,
Tim Ash, senior emerging Investors have expected after the April 4 due date. claring default and suing limiting the losses to fund
market sovereign analyst Russia to default for months. But the committee put off “might not be the wisest investors.
at BlueBay Asset Manage- Insurance contracts that taking further action due choice,” Auslander said. While the war itself is having
ment, tweeted that the de- cover Russian debt have to uncertainty over how It’s not possible to negoti- devastating consequences
fault “is clearly not” beyond priced a 80% likelihood of sanctions might affect any ate with Russia and there in terms of human suffering
Russia’s control and that default for weeks, and rat- settlement. are so many unknowns, so and higher food and en-
sanctions are preventing it ing agencies like Standard What can investors do? creditors may decide to ergy prices worldwide, de-
from paying its debts be- & Poor’s and Moody’s have The formal way to declare “hang tight for now.” fault on government bonds
cause it invaded Ukraine. placed the country’s debt default is if 25% or more Investors who wanted out would be “definitely not
Here are key things to know deep into junk territory. of bondholders say they of Russian debt have prob- systemically relevant,” In-
about a Russian default: How do you know if a coun- didn’t get their money. ably already headed for ternational Monetary Fund
How much does russia try is in default? Once that happens, provi- the exits, leaving those who Managing Director Krista-
owe? Ratings agencies can low- sions say all Russia’s other may have bought bonds lina Georgieva has said.q