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RUSSIA DEFAULTS ON ITS DEBT. WHAT DOES IT MEAN FOR THE STATE-AGGRESSOR?

19 July 2022

Оleksandr OSADKO, attorney

On May 27, 2022 russia according to the taken contractual obligations had to pay approximately USD 100 mln. on its Eurobonds. But the funds did not reach the creditors’ bank accounts because of sanctions implemented by the civilized world.

Since that the russian government was given a 30-days preferential term for contractual obligations being fulfilled.

But, despite the named russia has not fulfilled its obligations before 27th of June 2022 and has been defaulted on foreign debt firstly since 1918.

How does it happen?

Because of russian aggressive policy the world community has implemented drastic and devastating sanctions.

So, on May 25th, 2022, US Department of the Treasury has repudiated to renew a validity of general license, according to which American investors were able to receive payments on russian bonds.

Anticipating such consequences, leaders of russia reported on May 20, 2022, that the payment of bonds for a total amount of about USD 100 mln. had been carried out.

However, the said funds did not arrive to the recipients.

Understanding the possible consequences of not fulfilling its obligations and the prospect to default, the russian leaders on June 22, 2022, issued a decree concerned the payment of foreign debt in rubles.

However, the named option was not agreed and was not allowed according to the contractual obligations.

As a result, on Monday, June 27, 2022, Moody’s rating agency reported a default in russia.

And what’s next?

Dramatically – nothing.

We do not have to hope that the specified event will somehow influence the policy of the state-aggressor and will force it to focus on the country’s internal problems, especially in the short term.

Given the fact that russia today is the world leader in amount of imposed against it sanctions, a global financial world has been waiting for a long time for russia’s default.

Moreover, international business community since February 24, 2022, has distanced from any further interaction with the state-aggressor.

The greatest attention in the outlined issue is paid to forecasting long-term prospects for putin’s russia.

Therefore, many experts warn about the possibility of so-called cross-defaults. That is, when creditors who have not received the next payment from the issuer have the right to demand early payment of the debt and have the right to foreclose on the debtor’s assets through the court.

Today, the foreign debt of the russian federation is about USD 40 billion, USD 20 billion of which belong to non-residents.

If creditors suddenly want to return their money, the government of the russian federation will not be able to satisfy the specified requirements even in rubles, not to mention that such payments are prohibited by western sanctions.

Summarizing what has been said, we unfortunately will not see the negative consequences of the default of the state-aggressor in “two or three weeks”.

Even if the economic processes that can be launched as a result of the default will have the most critical impact on russia and its economics, we will be able to evaluate the efficiency of these measures only after months or years.

What future awaits russia?

The state-aggressor may repeat a “Venezuela scenario’ in the nearest future. Leaders of Venezuela and russia did not just support each other but they also are commercial partners in different areas.

Even though Venezuela has the world’s largest discovered oil reserves, this has not prevented economic crisis, hyperinflation and default.

Among the economic crisis preconditions are: a significant amount of social subsidies to the population, enormous expenses for improving the image of the government and the state, lack of reforms and foreign debts.

The lack of reforms, total corruption, colossal expenses for the formation of a positive image of the russian federation on the world stage are one of the “basis” of the country, to which billions of dollars are spent from the budget.

Given the fact that the policy of the state-aggressor both on the world stage and on the territory of its own state copies the economic path of Venezuela, we may witness hyperinflation and a total crisis in all spheres of russian economics in the near future. And this process will be accelerated by sanctions and depriving of access to global financial markets.

Post Scriptum

The cynical courage on russian TV is intended to convince the whole world and the population of the russian federation that the state-aggressor has a powerful economics, a strong army and decent social welfare for its population.

However, the reality looks rather different.

We can only state that as a result of the default, prices for goods and services will increase significantly, and inflation will be accelerated. In addition, the fact of default itself will lead to higher prices for the entire supply process. At the same time, interest rates on loans will increase, and business lending institutions or mortgages will cease to exist as a phenomenon altogether.

And this is just the beginning.

The “nuclear” electorate of the state-aggressor will soon feel the “improvement” from the actions of their country in the form of a decrease in social benefits and salaries. There will be a total reduction of job offers both in public sector and among companies working for such sector.

Thus, the war unleashed by russia against Ukraine has buried not only the myth of the power and invincibility of the russian army, but also destroys the russian economics and hopes for the future existence of the russian federation itself.

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