As we wrote in money.pl at the beginning of May, an important date is approaching for Russia. Recall that transactions between US citizens and the Russian Ministry of Finance, central bank or national wealth fund are allowed only on the basis of a temporary license issued by the US Office of Foreign Assets Control (OFAC). This license will expire on May 25.
On Wednesday, US Treasury Secretary Janet Yellen said it was “unlikely” that the US would extend its license to Russia. – When we first imposed sanctions on Russia, we created an exception that allowed for a certain period of time for normal transactions. However, it was expected to be temporary. I think it is likely that this license will expire, Yellen said.
Thus, the US Treasury Secretary gave a clear signal as to what the United States would do – and thus what Russia would do in the near future.
Bankruptcy of Russia. An important date is approaching
Already on Monday, “Bloomberg” reported that that Joe Biden’s administration is reluctant to renew the license. We reported some time agothat the West has two options when it comes to paying off Russia’s foreign liabilities.
It can block dollar payments, which would technically force the Kremlin to declare bankruptcy, or allow Putin to pay off foreign debt with oil and gas revenues that would otherwise be spent on warfare.
– So in order to pay off dollar bonds, Putin has probably used the record levels of foreign currency that Russia has accumulated through the sale of oil and gas since the beginning of the invasion of Ukraine. Soon, however, he may also lose this crucial income – argued Maksymilian Hess from the American think-tank Foreign Policy Research Institute, adding that the departure of Europe from Russian oil and gas would be a blow to the economy of this country.
Therefore, as reported by Bloomberg, Washington has still not made a final decision which option to choose. Biden, however, was inclined to block payments to the Kremlin as he wanted to “maintain the financial pressure on the country.” Janet Yellen’s Wednesday words seem to confirm this scenario.
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See also: The ruble exchange rate returns to normal. Belka: Many predicted Russia’s bankruptcy
Russia’s Finance Minister replies
Russian Finance Minister Anton Siluanov replied to all of this on Wednesday. He said that Russia had the cash to pay off foreign investors and that the state was not going to go bankrupt. According to him, if the license enabling the servicing of the debt in dollars is not renewed, the Kremlin may settle the payments in rubles.
– We will not declare any insolvency, we have the money. Unless the Western countries decide that the financial infrastructure there will be closed to us. On May 25, our license for the right to repay foreign debts expires. They gave us a license, they gave us the right to pay our debts. On the 26th they can say: “Russia, you don’t have such a right anymore.” And then they will immediately call out: “You see, Russia has not paid its debts.” We will pay, but in rubles, which means we have money – argued Siluanow quoted by Interfax.
Russia is facing a precipice
The US license is one thing, but two days later – on May 27 – Russia has to pay its liabilities on dollar bonds maturing in 2026 and in euros maturing in 2036.
As “Bloomberg” informs, in the case of the first debt securities, Russia has the option to repay liabilities only in dollars, euros, Swiss francs or pounds to accounts in Switzerland, Great Britain or the European Union. In the case of euro-denominated bonds maturing in 2036, Russia may repay in its national currency.
The problem is that if Russia repays its dollar bonds in rubles, it will be treated as a government bond default for rating agencies such as Fitch or S&P. This will mean the country’s technical insolvency.
The market already knows what the ending of this story will be. As reported on Wednesday by “Bloomberg”, the current valuation of CDSs (derivatives that provide security in the event of default) indicates that Russia at 90 percent. will declare bankruptcy within the next year. It would be the country’s first declaration of insolvency in foreign debt since 1917.
Russia’s Insolvency. What is it all about?
In his opinion, the problem Russia has today is simple. It cannot incur any new debt. – He can’t go out and start selling his bonds. Its credibility is on junk levels, and a technical bankruptcy would undermine the confidence of the markets even more – explained the expert.
When asked how the collapse of such a country would affect Russian society, Kubisiak replied that we should imagine a situation where Russia faces a double-digit recession with high inflation at the same time.
– Interest rates there are now around 15 percent. This country has very high expenses, and if it is also unable to incur debt and increase its deficit, then the maintenance of the state starts to fall apart. From the Russian perspective, this may be a recipe for a dramatic economic situation that will stay with them for longer, argued the economist.