How Russia Facing Foreign Default Could Complicate Putin’s Ability to Wage War
As a country defaults on foreign loan, international investors become unwilling or unable to lend more money to it.
Russia may be on the cusp of since the Bolsheviks ousted Czar Nicholas II a century ago.
On 14 April, Moody’s Investors Service warned the country’s decision to make payments on dollar-issued debt in rubles because it violates the terms of the contract. A 30-day grace period allows Russia until 4 May to convert the payments to dollars to avoid default.
A default is one of the clearest signals that the sanctions imposed by the US and other countries are having their intended effect on the Russian economy. But will it have any impact on Russia’s ability to wage war in Ukraine?
We asked and , both experts on political economy and conflict, to explain the consequences of default and what it would mean for Russian President Vladimir Putin’s war.
Why Did Russia Default on Its Debt?
The Russian government has a total of in dollars and euros, half of which is owned by foreign investors. Russia had an about $650 million in interest and principle to the holders of two bonds issued in dollars.
Russia has plenty of cash – from its oil and gas deliveries alone – but has limited access to dollars because of sanctions imposed by the US The Biden administration had been allowing Russia to use some of the foreign reserves to make debt payments.
The US changed course on 5 April, when held at American banks to make the debt payments.
That gave Russia little choice but to try to make the payments in rubles, whose value since the invasion. If Russia doesn’t switch the payments to dollars by May 4, the government will be in default on its foreign obligations for the , when the Bolshevik revolutionaries took over Russia and refused to pay the country’s international creditors. Russia also defaulted in 1998 but only on its domestic debt.
What Are the Consequences of Default?
When a country defaults on a foreign loan, international investors typically become unwilling or unable to lend more money to it. Or they demand much higher interest rates.
Whether because of higher interest costs or an inability to borrow, this forces a country to cut spending. Less government spending , and . While some of these effects, like weaker economic growth, are often short-lived, other consequences can haunt a country for years. Trade with other countries after a default, while full exclusion from capital markets typically lasts just over eight years.
For example, when Argentina defaulted in 2001, the , the . all over the country, leading to the . Although Argentina’s , the country from foreign investors, which led to default again in 2014.
What does this mean for Russia? The country was already because of sanctions. A government official recently said Russia , because a default would lead to “cosmic” interest rates.
But its from sometimes-discounted sales of oil and gas may help offset the need for borrowing in the short term, especially if it can continue to find willing buyers like India and China.
On 14 April, Putin acknowledged sanctions and raising costs.
Does Russia Care If It Defaults?
The Russian government has been trying hard to avoid default.
Until 5 April, it was using its precious dollars to stay current on its bond payments. And before its invasion it had built up a , in large part to allow it to continue to pay back debt borrowed in dollars and euros even amid sanctions. Russia has even threatened to if sanctions force it into default.
As odd as it may sound, Russia is likely worried about its reputation – at least among bond investors.
A default by a sovereign borrower that can take years to rehabilitate, as Argentina’s experience shows.
And the long-term impact could be worse for Russia. The reason Russia is in this bind is because it chose to invade Ukraine, that doing so economic and financial sanctions.
So creditors might wonder if Russia will always prioritise its foreign policy interests over the interests of creditors and raise borrowing costs permanently. If so, they may find it difficult to borrow for years to come.
Another risk is that a default may enable creditors to seize Russia’s overseas assets as a form of repayment. International sanctions have already , which could be used to pay off outstanding debts.
One count suggests that have attempted to .
What Does This Mean for Russia’s War in Ukraine?
As long as there has been debt, governments have waged wars with other people’s money. In fact, debt has become so vital as a source of power that countries rarely fight without it.
Around 88 percent of wars from 1823 through 2003 have been at least partly financed with . This reality even bleeds into fantasy worlds, like Game of Thrones, in which financing from the Iron Bank of Braavos .
Our own research has shown that countries that have defaulted on their debts or have poor credit ratings find it and, consequently, are more reluctant to against other nations. Related work has found that countries with lower borrowing costs – though this effect is stronger for democracies.
One reason is that borrowing allows countries to overcome the guns-versus-butter trade-off: More money spent on the military means less for its citizens’ welfare, which can hurt a government’s ability to stay in power.
Foreign loans can help overcome this problem, but losing access to credit forces a government to choose.
In the short term, however, a default is not likely to alter the outcome of Russia’s war – or force Putin to make any unpopular trade-offs – especially if its in the eastern Donbas region quickly.
This will change the longer the war goes on. The war was expected to last only a few days, but a has pushed the conflict into its eighth week. Early estimates found that a prolonged war over $20 billion a day, including both direct and indirect expenses, like loss of economic output.
If Ukraine becomes a , , then Russia’s inability to borrow money will weaken its ability to sustain, supply and reinforce its position in Ukraine – especially if or the or reduces its dependence on Russian fuel.
: “Nervos belli, infinitam pecuniam,” which loosely translates as “Successful war-waging capacity requires unlimited cash.”
And that means borrowed money. Wars usually end quickly without it.
(This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same. This article was originally published on The Conversation. Read the original article here.)
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