EM Thematic May 03, 2022 / 09:13 am UTC

Russia: Delaying The Inevitable Default

By Francesca Beausang

After attempting to pay its debt in rubles to no avail, Russia just paid over USD 600mn in Eurobond obligations by tapping into FX reserves through non-sanctioned mortgage banks. While this only delays an inevitable debt default, it highlights the record fuel export revenues which Russia can still draw on.

In combination with the mother of financial sanctions imposed on Russia by the West, i.e. the freezing of the Central Bank of Russia (CBR)’s USD 300bn FX reserves held abroad (out of USD 640bn), the imposition of a dollar payment requirement for the West was meant to ensure that Russia could not draw on reserves held abroad to make payments. More than 21% of Russian reserves are held in France and Germany combined, 7% in the U.S., while another 21% are held in gold and 14% in China, whose support of Russia has been somewhat hesitant in practice despite its friendly rhetoric. Instead, it would seem that the Finance Ministry used domestic FX reserves from energy exports to make its debt service payment. After all, majority state-owned Gazprom announced a net profit of RUB 2.1trn for 2021, up from RUB 135bn in 2020, and most of its payments will have been settled in USD. But can Russia claim this debt service payment as a victory? It rather suggests that the purpose of the West’s sanctions, i.e. to derail funding of the Ukraine war effort, which is largely driven from Russia’s energy exports cash cow, is being achieved. Furthermore, this foreign debt service payment of the last hour does not change the fact that on May 25, the U.S. Treasury will withdraw Russia’s debt payment waiver, and most likely precipitate default two days later, when Russia has another debt service payment due. An extension of the waiver is indeed highly unlikely.

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I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.