This is indeed a default for Russia, according to Moody’s. The rating agency estimated this Tuesday, June 28 in a press release that the non-receipt, on Monday, June 27, of the interest on the Russian debt by the creditors constituted a “default” of payment. Russia was due to pay 100 million in interest on its debt on May 27, a deadline with a one-month grace period that expired last Sunday.
The Russian Ministry of Finance claimed to have paid the money in foreign currency from May 20. But he acknowledged on Monday that the money had not reached creditors as banking intermediaries blocked payments due to sanctions taken by Western countries as a result of the war in Ukraine. Monday, Dmitry Peskov, spokesman for Vladimir Putin, had considered that “these assertions on a Russian default of payment were completely illegitimate”. In an interview with L’Express, Julien Vercueil, lecturer in economics at the National Institute of Oriental Languages and Civilizations (Inalco), of which he is vice-president, believes that this default in payment “endorses the isolation of Russia from international capital markets”.
L’Express: The moment is symbolically significant insofar as Russia’s last default on its foreign debt dates back to 1918 and Lenin’s decision not to pay the debts of the tsarist regime. L’will the economic impact of this event be major or, on the contrary, limited?
Julien Vercueil: The symbolic impact exceeds the economic impact, for several reasons. The symbolic significance of a sovereign default is strong, even if the Russian State has already been, in its recent history, obliged to default on part of its debt. It was 1998, when the great financial crisis marked the height of the country’s long depression following the dissolution of the Soviet Union. The debt then affected by the default was denominated in rubles and the State had maintained the service of its debt in foreign currencies, thus managing its default in a differentiated manner. To find a precedent for a sovereign default of the country on its foreign currency debt, we must therefore go back to the Bolshevik period, more than a century ago. Hence the importance of the symbol.
The economic impact is of less importance. The war of invasion of Ukraine launched on February 24 had already disconnected Russia from international capital markets: investors immediately placed Russia on the list of countries to absolutely avoid, given the geopolitical risk. Capital flight was estimated at more than $60 billion for the first quarter of 2022, which suggests that many Russian nationals have, when they still could, made the same analysis as foreign investors.
The current default is therefore an event that confirms this isolation of Russia from international capital markets. It will also create new disputes between Russia and its unserved creditors, but it does not fundamentally transform its status. Moreover, even if the amounts at stake are significant (notably for creditors), they remain modest on the scale of the country.
Despite Western sanctions, the Russian economy is still resisting, as illustrated by the impressive recovery of the Russian currency, the rouble. How can this good resistance be explained when exports are nevertheless more difficult than before? Is the key factor in the rise of the ruble the sale of hydrocarbons, which constitute the major part of the country’s exports?
It is indeed interesting to analyze the evolution of the course of the ruble since the beginning of the war. It began to plunge (by 50% initially), when capital flight accelerated with the start of the invasion war. The radical uncertainty it caused was in fact first reflected in the Russians’ flight from their currency, a flight reinforced by the first sanctions measures announced by the Western powers. Faced with the danger of a collapse of the financial system, the Russian monetary authorities quickly took measures.
The first was to prohibit individuals from changing their rubles into foreign currency and using their bank assets in foreign currency. This deprivation of liberty was accepted without major difficulty by the Russians and made it possible to limit the bleeding. Similar restrictions were imposed on companies, which were required to change at least 80% of their export earnings into roubles. Finally, the sums that Russian nationals could take with them abroad were severely limited. This exchange control made it possible to contain the sale of rubles, and thus to support its course.
At the same time, imports fell sharply. The Russian authorities have also stopped publishing high-frequency statistics on foreign trade, which makes analysis more difficult, but does not completely prevent it. It is estimated that the fall in Russian imports varies, depending on the Western trading partners, from -50 to -80%… As, at the same time, the prices of raw materials exported by Russia have increased, the level of revenue from ‘exports remained high. The resulting rise in the current account surplus therefore also supported the value of the rouble. In summary, the ruble market has shrunk but its price has appreciated.
At the same time, the current levels of the ruble exchange rate are so high that they make products made in Russia uncompetitive in terms of price with their foreign competitors…
This is a subject of concern that we have seen dawning in the statements of certain Russian officials in recent weeks. The competition, in this case, comes mainly from Asian products (especially Chinese), which already had a substantial market share in Russia.
At the beginning of June, the EU adopted a sixth package of punitive measures against Moscow, including, this time, a gradual embargo on the purchases of crude oil and petroleum products from Russia, which should allow them to be reduced by 90% before 2023. Do you think this moratorium on Russian oil is the most effective way to bring the Russian economy to its knees?
The idea is not to bring the Russian economy to its knees. It is to weaken the capacity for harm of the Russian State, which under the leadership of Vladimir Putin feeds, through its budgetary revenues and its foreign exchange earnings, its aggression against Ukraine. In some years, a company like Rosneft alone was able to contribute 15% of state budget revenue. By reducing the oil revenue which feeds the tax and non-tax revenues of the Russian state, the Western powers intend to impose increasing financial pressure on the political authorities.
Despite the accumulated reserves and the low public debt as a percentage of GDP, Russian public finances are already under strain due to the ongoing recession and the increasing military spending decided by Vladimir Putin and his circle of collaborators: it is estimated that they have doubled since the start of the invasion war.
More generally, in the long term, can Western sanctions have a major economic effect against this country, even if Russia turns more to Asia and particularly to China? Can we even imagine that these economic sanctions force Russia to stop the conflict in the future?
It is difficult today to imagine an economic-political scenario in which the deterioration of the situation in Russia would be such that the power in place – and Vladimir Putin at its head – could be overthrown, bringing in a new team eager to to make peace and agreeing to withdraw from the Donbass, or even from the Crimea.
During the time of the Soviet Union, Stalin caused real famines in his own country, without losing control of power. In Russia, the economic crises have on the whole reinforced the authoritarian tendencies of the powers in place more than they have inflected them. The only counterexample is Perestroika, which resulted in, in Vladimir Putin’s own words, the “greatest geopolitical catastrophe of the 20th century” – the dissolution of the Soviet Union.
The response to the sanctions will therefore be more closed to trade with the West, and in return the search for economic agreements with China and any other country willing to turn a blind eye to the war in Ukraine for, in counterpart, to obtain weapons or Russian raw materials.
Still in the long term, one can imagine that Russia will find it difficult to catch up with its worries linked to the innovation deficit and that it will have difficulty in bouncing back…
Russia’s difficulties in terms of innovation date back to the Soviet period. After a deepening of the stall, caused by the great depression of the 1990s, certain sectors have recovered, in particular in the field of armaments and aerospace.
But the gap cannot fail to widen again with the world technological frontier in most sectors with the breakdown of commercial, technological and scientific cooperation in progress with Western countries. This phenomenon is likely to be reinforced if internal repression leads an increasing number of educated Russian citizens to leave Russia.