Russia defaults on foreign debt for the first time in more than a century after it missed deadline
In 1918, the Soviet revolutionary Leon Trotsky said to Western creditors in amazement at the Bolsheviks’ rejection of Russia’s foreign debt: “Gentlemen, you have been warned.”
He reminded them that tsarist-era debt forgiveness had been a key manifesto of the failed uprising in 1905. More than a century later, Russia is on the brink of another default, but this time there was no warning.
Few expected that the Kremlin’s invasion of Ukraine would provoke such a brutal response from the West that has nearly disconnected Russia from global financial and payment systems.
These are Russia’s major debt events in the past century:
Just before the 1917 revolution, Russia was the world’s largest net international debtor, having borrowed heavily to finance industrialization and the railways.
But because the Bolsheviks saw the tsarist industrialization drive as a failure for the working class, they rejected all foreign debts.
“They said, ‘We don’t pay and even if we could, we wouldn’t pay.’ And that was a political statement,” said Hassan Malik, senior sovereign analyst at Loomis Sayles and author of the book “Bankers and Bolsheviks: International Finance and the Russian Revolution.”
Despite Trotsky’s memory, the default shocked the world, especially France, whose banks and citizens suffered enormous losses.
“Investors didn’t take it seriously because they thought it would be so self-damaging,” said Malik, who estimated debt at at least $500 billion at 2020 prices and possibly more.
It wasn’t until the mid-1980s for Moscow to acknowledge some of that debt.
1991: USSR TO RUSSIA
After the collapse of the USSR in 1991, Russia stopped paying off some of the overseas debt it inherited from former Soviet states.
Andrey Vavilov, Russia’s deputy finance minister between 1994 and 1997, said the Russian Federation had about $105 billion in Soviet-era debt at the end of 1992, with its own debt of $2.8 billion.
Before accepting the inherited debt, the Paris Club recognized Russia as a creditor nation, wrote Vavilov in his book “The Russian Public Debt and Financial Meltdowns.” And when Russia agreed with the group of nations to restructure $28 billion in debt in 1996, it was allowed to shift major Soviet-era debt payments into the next decade.
But with a financial crisis just around the corner, it would take until 2017 for the communist-era backlogs to be cleared.
1998: RUBLE DEBT STANDARD
By 1997, Russian export earnings dwindled due to the crashing oil prices. External debt, which amounted to nearly 50% of GDP in 1995, had risen to 77% by 1998, according to Vavilov, who blamed the hefty IMF/World Bank loans for their contribution to the stack.
Russia raised very little tax revenue and relied on short-term treasury bills known as GKO to cover its expenses. But it became increasingly difficult to turn it around and soon spent increasing amounts to defend the ruble.
“The more the government insisted on backing the currency and repaying its debts, the more investors decided it was time to sell,” says Chris Miller in his book “Putinomics: Power and Money in Resurgent Russia.” ‘.
A month before the bankruptcy, the IMF put together a $22.6 billion aid package, but “the market expected another $20 billion announcement,” Martin Gilman, the IMF representative in Moscow at the time, wrote in his book “No. Precedent, No Plan: Inside Russia’s 1998 Default’.
On August 17, 1998, Russia threw in the towel, devalued the ruble, announced it could no longer pay its ruble debt and introduced a three-month moratorium on some foreign debt.
Russian banks that had invested heavily in T-bills and had extensive exposure to foreign exchange quickly went bankrupt.
2022: A FORCED STANDARD
Due to the difficult financial problems in 1998, Moscow ensured that the payments of Eurobonds continued. Now it has a lot of money, but can’t dodge it by default.
To evade sanctions, the Kremlin is proposing foreign creditors to open Russian bank accounts to receive payments in currencies other than the dollar.
Non-U.S. investors can theoretically agree, but U.S. bondholders cannot, after a US Treasury permit allowing them to accept Russian payments expired in May.
Miller, author of “Putinomics,” said Russia would fight tooth and nail to avoid a Eurobond default.
“The officials of the central bank and the Ministry of Finance have built their careers on stabilizing Russia as a creditor that can be trusted in international markets,” he said.
“It’s built into their identity to make sure a default doesn’t happen again.”