At least, that’s the story Vladimir Putin is sticking to after Russia belatedly paid $US117 million ($158 million) in interest on outstanding loans to foreign investors last Wednesday.
The debt, two US-dollar-denominated government bonds — essentially IOUs issued by the Kremlin — had to be repaid in American currency, something Russia has found itself short of in recent weeks.
Moscow maintained the cash had been deposited in the bank and ready for payment. After a few days of uncertainty and delays, sparking intense speculation Russia might default on the payment, the money reportedly has reached investors.
According to The Washington Postthe Russian government deposited the money with JP Morgan Chase which, in turn, forwarded it to Citibank for dispersal to investors.
But with another interest payment more than five times that amount due within a fortnight, the episode has raised the spectre of a major sovereign debt default — an event that normally sends the financial world into a tailspin.
Recall, if you will, the angst surrounding the Greek debt crisis of 2015, when the country failed to make a 1.6 billion euros ($2.4 million) payment to the International Monetary Fund.
Unlike Russia, Greece was not a major commodity exporter, nor a global military superpower. But fearing a re-run of the global financial crisis, the Greek episode rattled global markets and shook the European Union to the core.
This time around, most pundits are fairly sanguine about the potential fallout. All agree a default will inflict pain on some Western institutions. But, ultimately, it will more likely come back to haunt Russia and its citizens.
Given it has been shut out of the global financial system with a major slice of its foreign reserves frozen, the prospect of default has escalated. The US, for its part, is allowing Russian money to come out of the country to allow it to meet its debts. But America is putting the squeeze on hard currency going in.
That’s making life extremely difficult for Mr Putin.
Yeltsin’s default propelled Putin’s rise
The last time Russia defaulted on its international debts — in 1998 — it sparked a round of internal political upheaval and immense pain within the country.
Reeling from the cost of the Chechen war and hit by a sudden drop in oil revenues, the economy was plunged into chaos. Inflation hit 84 per cent, fuelling widespread dissent and a series of crippling strikes, compounded by a poor wheat harvest that led to widespread food shortages.
Russia defaulted on around $US40 billion of internal debt, called for a moratorium on international debt repayments and abandoned its futile efforts to support the rouble. The currency plunged, sending inflation soaring.
It signalled the end of Mr Yeltsin’s grip on power and paved the way for the rise of Mr Putin. He was determined the country would never again be forced to go to the international community, cap in hand and begging for food.
It also created havoc within global finance. A series of local Russian bank collapses caused enormous internal pain while the collapse of the rouble — which lost more than 60 per cent of its value — almost sent US-based financier Bankers Trust to the wall.
It had been left holding a large slab of Russian government debt, the value of which was decimated by international traders who abandoned Russian bonds as the government default unfolded.
Luckily, a full-blown international financial crisis was averted when Deutsche Bank snapped up the beleaguered Bankers Trust for $US10 billion.
What are chances of another Russian default?
Cut off from around half its $US640 billion war chest of gold and foreign reserves — which are held in foreign jurisdictions – Moscow has suddenly found hard currency in short supply.
Last week, Russia insisted it would meet all debt obligations. But Mr Putin said any country engaging in “hostile activities” would be paid only in roubles. Given the United Nations resolution a fortnight ago — demanding Russia withdraw from Ukraine — was supported by 143 countries, the Kremlin’s edict may well apply to almost every country.
That, technically, is a default. Those who have leant cash in US dollars or euros, want to be repaid as such. There’s no appetite for worthless roubles. And right now, there’s barely any appetite for Russian US dollar-denominated debt, the price of which has plunged on global money markets as risks have escalated.
When Moscow missed the deadline last Wednesday, it automatically was given a 30-day grace period to make good on the payment, which it promptly did. But another $US650 million is due within the next fortnight which likely will bring the issue to a head.
One complicating factor is that some of the government bonds have a “get out of jail” clause, allowing Russia to repay creditors in roubles. But the interest payments are not included in those clauses. In any case, settling in roubles, given it now has plunged to less than a cent, will be no easy task.
How bad would a default be?
Having spent years trying to disconnect itself from the West, Russia’s overall debt position is relatively conservative. All up, the country owes more than $US100 billion to foreign creditors.
Of that, however, only around $US40 billion is government debt. The rest is owed by big Russian corporations like energy giants Gasprom and Rosneft, Russian Railways, and a host of local banks.
The oil giants have pledged to maintain payments and, given they deal in foreign currency and have offshore subsidiaries, it is possible they will be able to service debts even if the government defaults. According to some reports, these corporations have been given approval to repay debt in hard currency.
Many major corporations, however, have been hit by a cash-flow crisis as Russian oil and minerals largely have been boycotted while alienation from the Western banking system has made transfers difficult.
For Russia, a default is likely to further damage the rouble, making life even more difficult for Russian citizens. A chronically weak currency erodes purchasing power. That results in massive price hikes at home which will put pressure on the cost of living and potentially create shortfalls of some basic consumer goods.
Already, there’s been an exodus of foreign companies from the country, with more than 400 exiting operations. If that wasn’t bad enough, a default would almost certainly deter most investors from any kind of involvement in the country.
Bear in mind too, Russia still holds the record when it comes to making good on debt defaults. After the Bolsheviks seized power, it refused to settle or service the tsar’s debts. It wasn’t until 1986 that the Soviet Union reached an agreement with creditors.
Who is owed money?
Banks and big institutional investors are most exposed. But, given the relatively small exposure, the global repercussions are likely to be contained.
European banks, particularly those in Austria, France and Italy, could incur some heavy losses. The Bank For International Settlements estimates French and Italian banks each have lent around $US25 billion while Austrian banks are nervously eyeing the $US17.5 billion they extended.
Some of those banks are among the few Western businesses to maintain links. Societe Generale, with $20 billion net exposure, BNP Paribus and Credit Suisse with considerably less.
On the investment side, a handful of global funds have invested in Russian government debt. PIMCO, a major bond market investor, held around 8 per cent of Russian bonds in its emerging markets fund. That’s enough to make a dent but not enough to do any real damage unless the crisis spreads to other emerging markets.
They have the option of selling those bonds to other investors although prices have collapsed to the point they may only achieve about 20 cents in the dollar. Some Russian government bonds are almost being given away at just 12 cents in the dollar.
Sovereign debt defaults are never pretty. At their worst, they can cause a global crisis, where banks refuse to deal with one another for fear of being caught up in the mess.
But in almost every case, it turns ugly for those at the pointy end, those at home. In Greece, Argentina, Venezuela and Lebanon in recent years, it is ordinary citizens who have borne the brunt.
That in turn breeds discontent, which may well be a whole new war that Mr Putin will be forced to fight.