How much of a real issue will Russia's (financial) default be?

Factual Questions
1

What practical implications will we see from (assuming) Russia will default on the $117m tomorrow:

I understand that there is a 30 days grace period.

but once past that:

  • what will be the impact on the country as such (forgetting the war for a moment)?
  • what will be the impact for the war?

The way I understand it, they will lose access to borrowing money on the market, and will have to balance their income stream (taxes, exports, etc…) with their way higher spending …

I assume they will kick the can down the street as much as they can - eg not incurring in low priority cost (like maintainance, street building, general upkeep) … but they will most likely prioritize paying wages for public employees, the army etc… to avoid unrest.

what’s your take on that?

2

Good question. I don’t know about international finance. What comes to mind is the Euro problems, especially Greece - there the other countries (mainly Germany) bailed out assorted banks because the banks were in Germany and the exposure was immense. I guess the question now is how big is the outside exposure is to Russian debt, to whom it is owed. There’s the additional complication of the PR value of being seen helping the Russian financial situation.

Since nobody is running around like a chicken with its head cut off over this, I would guess not very much debt exposure, and not a lot of exposure at any one institution. So they just eat it, and like previous defaults (there’s Argentina once upon a time too) they would have to reconcile outstanding obligations with the debtors when they are ready/permitted to re-enter the world finance market.

Also, there’s the question of lawsuits. Anyone planning to give money to Russia will likely face lawsuits seeking to freeze and take that money - not just from current debtors, but also from the Ukrainian government seeking reparations to rebuild, which is likely in the hundreds of billions (dollars) before all the dust settles, unless any armistice includes discussion of reparations.

Recall when Chile nationalized copper mines under Allende, American mining giants sued and froze copper ore shipments in other countries, effectively cutting off a major source of foreign revenue. Would creditors do the same with any purchases of Russian oil and gas?

Basically a mess all around.

3

IANAEconomist

Borrowing money allows you to afford today what, before, you might have had to have waited decades to be able to afford. And, in theory, if you’re borrowing in order to create something that improves your production levels then you’re also gaining a stronger ability to pay off that loan.

If a country defaults on its loans, my expectation would be that the lenders would be able to go to courts in various nations and request to be able to claim assets owned by the foreign government and to be able to seize money if it is transferred through that nation.

While the Russian government might be able to expect that it will lose some buildings and limos that it has parked around the world, probably the threat of money transfers getting waylaid would be the larger issue, along this front. They’ll have to use more circuitous means of sending money abroad - and likely with higher fees from the intermediaries.

But, from a functional standpoint, they already received the loan money. It’s really the banks who are losing out on this one. So the bigger issue is that they won’t be able to borrow money, any more. Russia can issue bonds to its own citizens and maybe still find some banks willing to lend them money, in China, Iran, etc. but it’s going to have a much smaller pool of money to work with in the future.

If they ever get back into the world’s graces again, they might be obligated to pay some fines before they will be allowed to borrow again and they might be forced to borrow at higher interest rates than before. It’s going to be a slog to get back into good standing. (Though, this is a future problem that may be decades or centuries from mattering in any practical way.)

That said, money is fundamentally a human construct. Today, Russia’s people are paid to do work and, if the government wants them to work for the government, they might have to borrow money to be able to afford all the new workers. But there’s nothing to say that Russia can’t just hire a small gang of mercenaries to roam around, forcing people to work at gunpoint, giving all their material possessions to the government. If the Russian government wants to build a space ship that can take mankind to Mars, it doesn’t necessarily need the money to do it if it can compel a sufficiently large number of people to do all the work.

In a free market, losing the ability to borrow reduces your ability to get work done. In a frighteningly real world, however, your ability to get work done is simply limited by how many people you control, how well you can keep them motivated, and how good you are at identifying capable individuals. A smaller total workforce, though, will always mean that you have fewer extra-talented individuals available. In a global economy, borrowing can allow you to finance projects from the whole world’s supply of top talent.

Their problem will be less that they can’t borrow and more that they’re isolated and dependent on the individuals physically in Russia.

Defaulting is largely an issue with how Russia interfaces with the rest of the world. If it’s not going to be interfacing with us, anyways, then it doesn’t really matter too much. (Again, until they decide to re-integrate.)

Within the nation, the total quantity of rubles effectively equals the total number of assets available to the nation + the amount of labor potential that they have. If you print more rubles, that largely stays the same (after things settle out) and if you collect and burn rubles, that largely stays the same (ditto). Money is just a way for people to trade services and assets, and they use the ratio of non-monetary wealth + rubles in their possession to those in their trade partners’ possession to determine what the value is of a ruble.

When you remove foreign trade partners from the equation, the price of a ruble comes to equate to the capabilities of the Russian economy as viewed only from within itself. When you have foreign trade partners, the value of a ruble is tempered by external trade partners and their monetary + non-monetary wealth.

The Russian market is going to have to recalibrate while it’s unclear exactly what capabilities their nation has. That will be disruptive and damaging to people in the short term, but they’ll make due in part by swapping non-monetary assets, whose relative value compared to one-another is more certain.

None of that has anything to do with their external loans. The craziness comes from becoming an interconnected nation to becoming an isolated nation. Defaulting on the loans has no internal effect since, as said, they’ve already received the money and it’s now just part of the pool of rubles in circulation.

4

Considering that governments went far out of their way to cover the defaults/faults of the financial system in general back in 2008. In defense of a lot of rich people retaining their wealth at the expense of the mass of tax paying wage slaves. I think the serfs will once again take the fall financially for defense of the many kings of finance that might take a hit from this.
This time they can say we are fighting the great madman Putin. Defending the world/rich from the tendrils of Russia.
Wonder who is going to get all those Russkie oligarch yachts at bargain auction prices?

5

As @Sage_Rat said in their excellent post, probably no one, at least not soon. I fully expect all proceeds, as well as the rest of the frozen assets, are going to be tied up in litigation claims for years to come, as Ukraine up to and including individual citizens, sue for a chunk in the various national courts.

So they’ll very likely rot in the water if not subject to sufficient maintenance. Although honestly, the multiple threads on the high cost of owning and maintaining a yacht as well as the huge default risk for creditors on them in various threads makes me wonder if anyone would want them in the first place, even at bargain rates, considering the PR loss that could come from being the buyer.

Maybe sell it to someone who doesn’t care about such things, perhaps a billionaire in China or India who have been dancing around the issues, but it still is going to take a lot of work to get through the courts even then.

6

Good points.
As to the useless aspect of many people owning yachts. After typing the odd word, I looked it up. Surprised to read that it was not actually a substitute measure for penis length.

But being a fan of beautiful watercraft, I have to admit that many of them. Mostly older ones . Are just worth it to bring into existence. Newer ones… Even many of them have a beauty of form. Despite the pimp interiors.

7

My thoughts -

If Russia wants to borrow money in the future, it will have to settle up with the debtors it currently owes money to - this i what Argentina did. However, Argentina had the backing of (I think) the IMF wanting to fix things. Russia may have to do some humiliating somersaults and begging to get to that point. (Settling involved, IIRC, rescheduling payment over a longer term and coming to an agreement about how many cent on the dollar they could logically pay.)

Certainly, any attempt at commerce without settling with Ukraine over how to compensate them for damage that is substantial (and getting substantialer by the day) will likely add to the legal chaos that will make it impossible to do business in the west - until they come to an agreement with Ukraine. I suspect that in this scope of negotiations, if the West can retain its spine, Ukraine will be holding all the cards.

One of the problems is how integrated their economy is. The sanctions hurt bigly. One commentator mentioned aircraft parts, for example. An airline that can’t get parts, or need to pay extra to get them through circuitous routes, will have difficulties. Industries that rely on equipment or some inputs from outside the country will be at a disadvantage.

So, let’s say Russia wanted to build an underwater pipeline to Germany… to pick a random hypothetical. Let’s say somehow sanctions magically disappeared. The question is financing the pipeline. Would the banks consider Gazprom (or Rosfet, or whoever) a separate entity or something too heavily bound up in the Russian government sphere? Regardless, what sort of terms would they take, if the economy of Russia is highly unstable, and the money is speculating on the situation being stable long enough to finish the job and begin exports that could pay the loan back? At the very least, the risk of instability would mean a much higher interest rate. At worst, there would be default judgements from the Ukraine all over the world, just waiting to impound any money that should pay the loan, so the new loan risks default. this sort of risk would apply to any enterprise. Every transaction would have to be cash on delivery, and secret enough to make the transfer before the Ukrainians heard about it. If the western company had been served with notice, it may find itself on the hook if it transferred money to Russia instead of Ukraine.

8

Speaking of airplanes, I just read that there are over 500 airplanes leased to Russians or Russian airlines and still in the country. The article (in yesterday’s NY Times) said they are basically a write-off for the leasing companies. Not only are they unlikely to get them back, they are unlikely to have been properly maintained and–most important–will be impossible to put back in service unless their maintenance logs have been properly kept. Maybe a pilot on the board can explain that in more detail.

9

So Russia’s basically seized a bunch of planes that may not be fully flightworthy?

10

More like, Russia seized planes that are still airworthy at the moment, but rapidly won’t be anymore. Not so much necessarily because the planes will crash mid-flight but rather because no other nation’s air agency will accept them anymore, due to their lack of paperwork.

11

Actually more like - they aren’t making payments on that car, but there’s no money in repossessing it, even if you can get past the junkyard dog. By the time you do, too many scrapes and dents, they wont have changed the oil since it was bought, the dogs have ruined the back seat and the transmission won’t go past second any more. Best you could do is sell off the good parts.

12

Here’s a BBC article on it:

Once they stop keeping the strict maintenance records required for international certificates of airworthiness, doubtful they’ll ever be able to fly outside of Russia again, even if there is a settlement and sanctions ease.

13

And also doubtful that any company will lease any airplane to Russia for the foreseeable future. Russia better start building their own commercial airliners from now on, because they won’t even be able to buy them overseas, much less lease them.

14

Yes, the news articles speak of Putin signing a law to allow them to continue flying in Russia, etc., but that polite descriptive language masks what Russia has done: they’ve stolen twelve billion dollars worth of airplanes.

No way a leasing company will consider them a good risk, for a long, long time.

15

After just two years of haphazard maintenance, no one will want to recover them.

16
17

Russia defaulted on everything about a hundred years ago.

18

let me put it this way … I see a lot of bus and train travel in russias future …

:wink:

19

“We have the money, we made the payment, now the ball is in America’s court,” he (russian finance minister) said.

A spokesman for the Treasury said the United States would allow the payments to go through.

The two coupons Russia must pay on the maturing dollar-denominated eurobonds serve as the first test of Russia’s ability to pay its debts while the world heaves massive sanctions on its economy.

from the CNN article:

.

I cant understand why the american’s aren’t using any leverage here …

“… so you started a war and now you need us to greenlight a payment of yours or your whole country will be bankrupt?”

let’s sit down and hear what you are proposing to sway our opinion

CANNOT understand why this is NOT being done … the USA could dramatically slow any further killing “by means of a secretary”

20

This is a way of drawing more currency reserved out of Russia. I’m not sure what you think forcing Russia to default on its debt would do – they are already not getting any additional loans from anyone, and making them make these payments uses up some of their foreign currency reserves.