Russia dodges default for now

Three investors who asked not to be named said that their custodian bank had received the payments. At least one major international clearing house has received and processed the payments for Eurobonds due in 2022 and 2042, according to people familiar with the deal but not authorised to comment publicly.

The complications over the payment of $650 million in interest and principal arose after Russia was subjected to wide-ranging financial and economic sanctions following the invasion of Ukraine. The sanctions affect some of the country's biggest creditors and include asset seizures and the freezing of the country's foreign reserves.

The sovereign debt saga began when funds were blocked at the beginning of April, triggering a 30-day grace period that ends on Wednesday. Russia has tried to circumvent the sanctions by paying in roubles, but the terms of the bonds do not allow this. Then, when the default appeared to be days away, the government unexpectedly announced on Friday that the money was finally on its way.

For now, Russia has avoided its foreign-currency debt delinquency since the Bolsheviks came to power and repudiated the Tsars’ borrowings in 1918. But Tuesday’s payments may prove a temporary respite,

Bloomberg said. 

US sanctions currently include a wide range of exemptions from the payment of government bonds. This exemption expires on 25 May and the Treasury Department has not yet said whether it will be extended. If not, this will create a serious obstacle to the payment of interest on government bonds due a few days later. The next possible date for a Russian default could therefore be 25 May.

The Russian budget is in a particularly stable position, with revenues of 1,200 billion roubles coming into the central budget from the sale of oil and gas in March alone. The foreign currency coverage of this rouble sum beefs up the central bank's reserves, which the central bank is likely to keep in an account that is not (or cannot be) subjected to Western sanctions. The problem is not a lack of solvency, but the technicalities of conducting transactions, as financial sanctions have made dollar and euro transactions virtually impossible. In addition, there is the possibility of a technical default, where the Russians simply refuse to settle their foreign currency obligations - something that the Russian Treasury does not seem to be intending to do at the moment. A possible technical default would have no impact either on Russia's war activity in Ukraine or the state of the economy, which is in any case very gloomy.

Russian budget vs. oil and gas revenues

The rise in oil and gas prices in 2021 is already reflected in Russia's budget revenues: their share of budget revenues has risen from 28% in the fourth quarter of 2020 to over 40% in the first quarter of this year - meaning that 4 out of every 10 roubles in the Russian budget come from oil and gas sales.

Only VAT accounts for a similar share of budget revenue.

The share of oil and gas revenues in the budget grew by 4.9 percentage points in March this year compared to the same month of 2021 and by a staggering 17.9 ppts compared to the whole of 2021.

In March, the budget received RUB 1,208 billion from the sale of natural gas, crude oil and oil derivatives.

Energy revenues are an integral, dominant part of the Russian budget, and the Russian state's economy is in fact largely based on them, without which it could not exist, so to speak.

Public debt is very low, and the refinancing needs for this year are amply manageable.

Paying for expiring debt in roubles instead of foreign currency can be considered a default in a technical sense. However, the inflow of oil and gas revenues makes it almost impossible for liquid FX reserves not to exceed current maturing liabilities.

So the possibility of a selective default of the country because of its low foreign currency debt is entirely up to the Russian government. If it goes down this path, it will do so either to avoid foreign currency outflows or to respond to the Western countries' moves by using the rouble as a kind of counter-sanction.

The fact is that nobody cares, except the investors that hold Russian FX bonds. Russia's sovereign debt rating is not in investment category any longer, and it couldn't care less if it pays its FX debt or not, the budget is doing just fine.

As import duties, sales taxes, corporate income tax revenues may fall, the Russian budget will be even more exposed to gas and oil revenues. In a kind of verbal market manipulation, the Russians are also doing their best to keep gas and oil prices high (e.g. cutting off gas to Poland and Bulgaria, asking for gas payments in roubles, etc.) The fiscal situation, however, will remain this favourable only as long as Russia's partners are willing to buy its oil. An EU embargo on Russian oil imports would hurt Russia, as the target of nearly half of oil its sales is Europe.

Note that a much larger share of revenues comes from oil than from gas: the ratio is roughly 75-25% in favour of oil. Oil also accounts for a much larger share of exports (cc. 2.5 times). If the EU puts a stop to Russian oil imports, Moscow could say goodbye to budget surpluses for years.

Cover photo: Getty Images