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Russia may avoid default getting access to frozen gold and currency reserves, say experts

In total Russia has 15 current bond loans due from 2022 to 2047

MOSCOW, March 15. /TASS/. Russia has all chances to avoid a default, using its gold and currency reserves, which are currently frozen over the sanctions. If the sides fail to agree on how Moscow will be able to perform its external debt payments though it is the west that will be hit, experts interviewed by TASS suggest.

Earlier, Moody’s rating agency downgraded Russia’s sovereign rating to junk ‘Ca’ level, while Fitch - from B to C, noting that the sovereign default was inevitable.

International Monetary Fund Managing Director Kristalina Georgieva said that the organization no longer considered a default in Russia improbable.

A default is a failure to fulfill a loan agreement, meaning a failure to repay interest or the main debt on debt liabilities or on terms of an agreement on a bond issue in due time. A default may be announced both by companies and individuals, and by states (sovereign default) unable to service all or part of their liabilities. A sovereign default occurs if a state cannot meet its obligations to domestic or external private creditors (usually commercial banks) in due time.

In modern Russia, a default occurred in 1998 when the country failed to repay domestic short-term bonds.

Why Russia may face a default

According to the figures provided by the Finance Ministry, as of February 1, 2022, Russia’s external state debt amounted to $59.5 bln, including indebtedness on external bond loans equaling $38.97 bln. In total Russia has 15 current bond loans due from 2022 to 2047.

On March 16, Russia is to repay coupons on the external debt to the tune of $117 mln. The state has funds to repay debts, though it cannot use its gold and currency reserves due to the sanctions, which means it cannot repay in foreign currency. According to Finance Minister Anton Siluanov, the country has accumulated around $640 bln, of which it cannot use around $300 bln now.

Responding to the sanctions on March 5, Russian President Vladimir Putin permitted repaying foreign currency debts to ‘unfriendly’ countries in rubles. According to the decree, debtors - companies or the state itself - can open an account in Russian banks in the name of a foreign creditor and transfer payments to it in rubles at the exchange rate of the Bank of Russia as of the date of payment. Creditors from the states that did not impose sanctions, can receive a payment in euros or dollars if the Russian debtor receives a corresponding permit.

The Finance Ministry intends to exercise this right. The next payments on Russia’s sovereign Eurobonds are on March 16. The finance chief has already stated that Moscow would repay debt in foreign currency only if its currency accounts are unfrozen. In the event of a refusal or the lack of a reply from agent banks Russia will repay and service its currency liabilities in rubles.

However, this will substantially change the terms of servicing Russia’s external bond debt, which will most likely be regarded as a default.

Is it possible to avoid default?

Russia has chances to avoid this scenario, Chief Strategist at Aton Alexander Kudrin believes. "I think, considering the revised OFAC license, theoretically it allows performing all necessary payments, for example, using the frozen funds of the Central Bank’s international reserves and thus avoid a default," he explained.

On March 14, Siluanov stated that Russia was ready to perform state debt payments in rubles at the exchange rate of the Bank of Russia, particularly as it was possible on Eurobonds issued since 2018.

If it occurs, the upcoming default will be poles apart from the situation of 1998 when Russia was in desperate need for money, whereas today there are enough funds, it simply cannot use them, Alfa-Capital’s analyst Alexander Dzhioyev said.

"The principal difference is that Russia was in desperate need for money then, and the default occurred not because of technical inability to pay on bonds, but because very many bonds were issued, and the wheel stopped working at some point as no refinancing was available, which ruined all the mechanism. Whereas now reserves are sufficient, but it is impossible to use them," the expert said.

"From the viewpoint of economy in general - export, import, the possibility to provide food - the situation in principally different now. The default in 1998 was painful mainly for Russia, whereas now it is painful for the majority of countries. Moreover, for Russia it is not the most painful," Dzhioyev added.