Russia prepares for a default that brings back the humiliation of 1998

Russia accuses Western countries of trying to cause an artificial default with economic sanctions that freeze its assets abroad, a situation that is resurfacing the humiliating memory of 1998, when it could not pay its debt.

“Statements according to which Russia cannot meet its obligations regarding its public debt do not correspond to reality”, insisted the Ministry of Finance, assuring that “The freezing of foreign currency accounts of the Bank of Russia and the Government can be considered as the desire of foreign countries to provoke an artificial default.”

For Russia, it is not only about its future access to financial markets but about a matter of honour.

For two decades, and especially since the 2014 crisis, Moscow has made an effort to build good financial health, with a very low debt ratio and reserves of more than US$600 billion accumulated thanks to oil.

But now, in retaliation for Russia’s military intervention in Ukraine, some $300 billion of those foreign reserves are frozen by Western sanctions.

A challenge for Russia when dealing with various foreign currency debt payments due in March and April.

Eurobonds issued since 2018 can be redeemed in rubles. But this is not the case with the first due date, this Wednesday, a US$117 million refund.

“This is a unique situation in which the party imposing the sanctions will decide on the Russian default in 2022″ said Elina Ribakova, deputy chief economist at the International Institute of Finance (IIF).

Western sanctions have crippled parts of the Russian banking and financial system and caused the ruble to plunge. A default automatically cuts off a state’s access to financial markets and jeopardizes its profitability for years.

The trauma of 1998

After the collapse of the Soviet Union, Russia alone inherited the $70 billion debt of the defunct empire. It took more than a quarter of a century to get rid of this burden.

The painful and chaotic decade of the 1990s culminated in a humiliating debt default in 1998, when the Russian economy was weakened by, among other things, a financial crisis in Asia and the colossal cost of the first Chechen war.

Twelve years had to pass before Russia could request loans in international markets again, with a new bond issue in 2011.

In the early 2000s, the country benefited from the influx of petrodollars thanks to the rise in oil and gas prices, which allowed it to accumulate reserves and definitively close the chapter on Soviet debt, with the last refunds in 2017.

In recent years, Russia has worked hard to rebuild its reputation as a flawless borrower, efforts that now risk being cut short.

“Russia has the money to pay its debt, but it doesn’t have access to it. What worries me most is that there will be consequences beyond Ukraine and RussiaIMF chief Kristalina Georgieva said in an interview with CBS on Sunday.

Although he ruled out the possibility of a global financial crisis, he stressed that the increase in food and energy prices caused by the crisis could lead to famines, especially in Africa.