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Russia is now exposed to a historic debt default: Here’s what happens next

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Russian President Vladimir Putin is seen at the Collective Security Treaty Organization Summit (CSTO) in Moscow, Russia. May 16, 20,22

Sergei Guneev | Sputnik | via Reuters

U.S. announced it would not grant Moscow an exemption to allow them to pay their foreign debt to American investors. It could force Russia to default.

The U.S. Treasury Department granted an exemption from sanctions to Russia’s central banks up until Wednesday. allowed it to process payments to bondholdersOn a case-by–case basis, in dollars by U.S. banks and international bank.

You can see the difference. enabled Russia to meet its previous debt payment deadlinesHowever, it was forced to draw on its foreign currency war chest to pay the bills.

The exemption was allowed to expire by the Office of Foreign Assets Control, Treasury Department. ET Wednesday: announced in a bulletin Tuesday.

Russia has built substantial foreign currency reserves over the past years. It has sufficient funds to pay. Russia will contest any default declaration on the ground that it tried payment, but was stopped by tightened sanctions.

Moscow faces a flood of deadlines for debt service this year. The first is Friday. 100 million euro in interest on two bonds due in Moscow. One bond requires payment in dollar, euro or pound, while the other can only be paid in rubles.

Reuters reported and Wall Street Journal published Friday that Russian Finance Ministry had transferred funds to facilitate these payments. But, a further $400 Million in interest was due in the latter part of June.

Russia may be declared in default if it misses a payment after a period of grace.

Since 1917’s Bolshevik Revolution, Russia has never defaulted on foreign currency debt.

‘Unknown territory’

What will Russia think of itself as in default? This is the central question that has emerged from OFAC’s refusal to extend the waiver.

CNBC was informed Friday by Adam Solowsky (partner in the Financial Industry Group of Reed Smith’s global law firm) that Moscow is likely to argue it isn’t in default because payment was not made possible despite the fact that the money were available.

“We’ve heard this argument before, where OFAC sanctions have stopped payments from flowing through, and the sovereign issuer claims that they aren’t in default because the tried to make payment but were blocked,” stated Solowsky who is a specialist in representing trustees regarding sovereign bond defaults, restructuring, and other issues.

They could be looking into a situation of long litigation once the matter has been resolved.

Solowsky pointed out that Russia is not in the typical process of sovereign default. In this case, a country closes to default and restructures its bonds for international investors.

Solowsky stated that Russia cannot do business with Russia right now because of the sanctions. So the scenario we might expect to see isn’t what Solowsky expected.

He said that Russia will be unable to access global markets, and this could result in asset seizures at home and abroad.

We’re entering uncharted territory. This is a significant world economy. Solowsky stated that he believes we will see the effects of the recession in the coming days and for many more years.

“For years to follow”

BlueBay Asset Management senior emerging market sovereign strategist Timothy Ash stated via email that Moscow’s default is just a matter time.

The right move of OFAC, this move will keep Russia defaulted for years. As long as Putin is president/or leaves Ukraine. Russia cannot come out from default until OFAC grants it permission. OFAC hence retains leverage,” Ash said.

Putin, who did a lot with this big deal, will find it humiliating. [Former Chancellor of Germany]Schroeder said that Russia was nearing a Paris Club default, in which great power like Russia would have to repay its debts. Russia is unable to pay its debts due to its invasion in Ukraine.

Ash forecast that Russia would lose its most market access to China and even China due to the default. Moscow’s only funding will be at “exorbitantly high” interest rates.

“It is not about capital, investment or growth. Living standards will be lower due to capital and brain loss. Putin will make Russians poorer over time.

Ash suggested that Russia would be further isolated from the global economic system and its superpower status will decline to an equivalent level with “North Korea.”

‘Burning bridges’

CNBC’s Agathe Demarais told CNBC that Russia may be able to enter what The Economist Intelligence Unit considers an inevitable default, as Russia’s sovereign debt was low prior to the invasion.

To me it is a signal that Russia feels all bridges with Western financial investors have been crossed. Demarais explained that default is something you should avoid when you are a sovereign nation.

“All the moves that we are seeing at the moment – at least to me – suggest that Russia isn’t really concerned about a default, and I think that is because Russia really expects that there isn’t going to be any improvement on the front of relationships with western countries any time soon.”

Additionally, she said that punitive sanctions against Russia by the U.S. along with Western allies are likely to remain in force “indefinitely” since the Kremlin’s misleading description of the invasion being a “denazifying” effort does not allow it to easily U-turn.

EIU predicts that there will be a heated war in the coming year, and a prolonged conflict afterwards. Russia and West try to reconfigure their supply chains to adjust to new sanctions.

Russia still attracts substantial sums of money from its energy exports. It is also trying to get European importers to buy oil and gas. rublesTo evade sanctions.

Demarais said, “What it really shows is that Putin’s burning bridges strategy feels he doesn’t have anything to lose.”

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