A default will lead to a final outflow of investments.
About the imminent default in Russian experts and analysts started talking back in March. Since then, the situation has only worsened, given the sanctions and the inability to pay debts in foreign currency. What are the consequences for Russia and its population? April, if she does not pay off her debts on March 16. However, the aggressor still managed to find money and made payments on Eurobonds in dollars. Thus, Russia avoided a technical default.
The fact is that if the payments were in rubles, then investors would interpret such a step as a technical default. However, in early April, the Russian Ministry of Finance announced that it had made payments on Eurobonds maturing in 2022 and 2042 in the amount of $649.2 million in rubles according to the Central Bank rate, since the correspondent bank did not allow payment in dollars.
Russia has promised investors the opportunity to convert the amount into foreign currency as soon as Russia's foreign currency accounts are unblocked. Therefore, the Kremlin considers the obligations «fulfilled», however, in most cases, foreign creditors do not recognize the Russian currency as repayment of foreign currency debt.
< p> Moreover, while Russia is waging war against Ukraine, its accounts cannot be unblocked, because they are under sanctions. So we can already talk about the so-called technical default.
When to expect a default in Russia
Russia has a 30-day grace period to still make payments in foreign rather than national currency. The chief investment director of the Berlin company Capitulum Asset Management, Lutz Rogmeier, said that if dollars instead of rubles are not credited to the accounts, this will mean a default.
Thus, taking into account the grace period, a default in Russia should be expected already May 5. This was announced by the head of the Council Committee on Finance, Tax and Customs Policy Danilo Getmantsev .
Unfortunately, today we cannot state the default of Russia. This refers to the default of individual Russian companies, such as the railway. But we expect the default of Russia itself in early May, when Russia will not be able to pay its foreign obligations in foreign currency,
— he said.
However, even if Russia again manages to somehow find the necessary amount in dollars, the world will talk about the default of the aggressor country again on May 27. It will be officially announced June 26, taking into account the 30-day grace period.
This is because on May 27 Russia will again have to make foreign currency payments on its debts. If GL9A's license is not renewed, then she will not be able to do so. Recall that the special license GL9A from the US OFAC allows such payments only until May 25th. Therefore default for Russia is inevitable and it's only a matter of time.
What is default
Default in simple words is the inability of the state to fulfill its debt obligations. Default is divided into the following types: technical, ordinary (full) and sovereign, which, by the way, Russia already announced in 1998. Currently, analysts and experts predict a complete default .
What will happen in Russia in case of «bankruptcy»
First of all, in the event of a default, investment outflow. Also, the country will not be able to get new loans, because investor confidence will be lost. No one wants to take risks in the short term by investing, and not know if they can be returned.
Accordingly, the flow of currency into the country will also decrease, which will lead to an even greater depreciation of the national currency . Note that the Russian ruble has already fallen to unprecedented records since the beginning of the war. Also, the default is accompanied by sharp inflation, which makes the goods of domestic exporters more competitive.
It should also be noted that a country is not an enterprise that, after declaring a default, can be liquidated and forgotten. Consequently, even if a country declares a default, it will have to deal with its debt and somehow negotiate with creditors.< /p>
If the country stubbornly refuses to at least try to repay the debt and agree on refinancing or other alternatives, then this will have fatal consequences. We are talking about the seizure of state assets, complete international isolation, courts, restrictions on investment, etc. Thus, the country will become a global exile that no one wants to deal with.
How the default will affect the ordinary population
Another consequence of the default is the poverty of the population, because the national currency will depreciate, and the inflation rate will rise. To live even earlier, it seemed, an ordinary life, it will become expensive. Despite growth prices, the wages of the population will not increase, but rather will become even lower, since purchasing power will decrease.
Also, due to the outflow of investments, most businesses will go bankrupt, which will only increase the unemployment rate. Consequently, taxes will be the only source of filling the budget. Therefore, the population may well expect reductions in social programs, such as subsidies, pensions and benefits< /strong>.
In March, Russians have already felt the following changes:
- Prices increased by 6.6% , and since the beginning of the year — by 8.91%, according to Rosstat.
- The population experienced a deficitfor a range of goods and services. 84.5% of the Russians surveyed said that it was most difficult to find sugar in stores, by the way, it rose in price the most in March.
- Inflation reached 15.66% year on year.
- Business has reduced wages 16% of workers since the start of the war in Ukraine.
Examples of other countries defaulting
When Greece defaulted in 2015, in return for assistance from the IMF and the European Bank, it pledged to introduce austerity, carry out structural reforms, privatize state assets, and cut pensions and social benefits.
Also in the country the retirement age was raised to 67 years, business taxes were raised from 13% to 24%, some enterprises went bankrupt. In Argentina, due to the default, in 2001 salaries and pensions were cut by 13%.
It's interesting to know! Most often, defaults occurred in South American countries: Ecuador, Mexico, Uruguay and Argentina. Each of these countries defaulted at least 8 times. Ecuador and Honduras spent more than 120 years in a state of default, Greece — more than 90 years.
Default for Russia is not the first time
In 1918, after the revolution, the Bolsheviks led by Lenin refused to make payments on the debt obligations of tsarist Russia. By that time, the royal debt was one of the largest, and the refusal shocked the debt markets, emphasizes Reuters.
The bonds lost their value, and some holders of these securities used them as wallpaper for walls. The government under After World War II, Stalin refused to provide loans to the United States and Sweden.
The case of refusal to fulfill debt obligations in 1918 was not the last. So in 1998the Russian Federation did not find the funds to fulfill its debt obligations on government short-term bonds. Then the default ended with rapid inflation and a furious fall of the ruble. By the way, in early March, inflation in Russia exceeded 2% per week, approaching the crisis indicators of 1998.