{"id":28759,"date":"2022-03-29T21:00:00","date_gmt":"2022-03-29T19:00:00","guid":{"rendered":"https:\/\/www.11onze.cat\/?p=28759"},"modified":"2022-03-30T15:58:12","modified_gmt":"2022-03-30T13:58:12","slug":"risks-russian-default","status":"publish","type":"post","link":"https:\/\/www.11onze.cat\/en\/magazine\/risks-russian-default\/","title":{"rendered":"What are the risks of a Russian default?"},"content":{"rendered":"<div class=\"component text\">\n  <div class=\"container\">\n\n\n    <div class=\"row\">\n      <div class=\"col  col-lg-8  offset-lg-2\">\n        <h3><b>In recent weeks, there has been speculation that Russia could be forced into default due to its inability to meet its debt payments in dollars. Cases such as Argentina&#8217;s give clues as to what the consequences of such a move might be.<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<p><b>Rumours in financial circles had Russia on the brink of default in mid-March.<\/b><span style=\"font-weight: 400;\"> The reason for this was difficulties in meeting its US dollar debt repayment commitments on schedule.<\/span><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<p><b>The fact is that so far the country has managed to meet its scheduled payments.<\/b><span style=\"font-weight: 400;\"> However, doubts remain, as the amount that Russia must repay in April, more than 2 billion dollars, is much higher than in March. The blocking of Russian assets by the EU and the US is a serious obstacle to making payments in dollars.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">International debt rating agencies have downgraded Russia&#8217;s debt to pre-default levels. And <\/span><b>Kristalina Georgieva, managing director of the International Monetary Fund (IMF), <\/b><a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-03-13\/imf-head-says-russian-default-no-longer-an-improbable-event\" target=\"_blank\" rel=\"noopener\"><b>acknowledged<\/b><\/a><b> a few weeks ago that a Russian default &#8220;is no longer an unlikely event<\/b><span style=\"font-weight: 400;\">&#8220;.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Russia would not be the first country to declare a default. Indeed, <\/span><b>the Spanish state did so seven times in the 19th century<\/b><span style=\"font-weight: 400;\">. And the case of Argentina in this century offers many lessons on the consequences of such a move.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<h3><b>One month grace period<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">When such a situation arises, <\/span><b>countries have a period of 30 days to renegotiate the debt<\/b><span style=\"font-weight: 400;\"> with creditors, which are mostly banks. The aim may be to refinance the debt, have a part of it written off, or agree on a temporary moratorium on payments.<\/span><\/p>\n<p><b>Another option is to seek alternative financing<\/b><span style=\"font-weight: 400;\">, either by raising interest rates on the debt to attract new investors, as Iceland did in 2008, or by resorting to international organisations such as the IMF, the solution applied by Greece in the past decade. In any case, Russia would find the latter route complicated by the majority of nations&#8217; rejection of the invasion of Ukraine.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If after 30 days, the country does not achieve any of the above, the only option is to declare insolvency or default. This is what Argentina did between late 2001 and early 2002, in what was the largest state default in history. <\/span><b>The state owed almost $200 billion<\/b><span style=\"font-weight: 400;\"> and had only $10 billion in foreign exchange reserves.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<h3><b>Cascading consequences<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Obviously, the suspension of a country&#8217;s payments implies the loss of investor confidence in that economy. <\/span><b>This translates into the impossibility for the state to continue borrowing <\/b><span style=\"font-weight: 400;\">to finance itself and a massive exodus of capital, especially foreign investment.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The <\/span><b>drastic contraction of private investment <\/b><span style=\"font-weight: 400;\">leads to a recession in the economy, which leads to a vicious circle of more unemployment and shrinking state revenues. It should be borne in mind that in the case of Argentina, unemployment doubled in five years and <\/span><b>the need to cut public spending hit pensioners and civil servants particularly hard<\/b><span style=\"font-weight: 400;\">, as their incomes were considerably reduced.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Moreover, following a default,<\/span><b> a devaluation of the local currency is common in the face of a loss of external confidence<\/b><span style=\"font-weight: 400;\">, which leads to higher prices.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The population&#8217;s fear of devaluation and hyperinflation often leads to a <\/span><b>massive withdrawal of funds from banks<\/b><span style=\"font-weight: 400;\"> in order to move them abroad. This phenomenon forced the Argentine government to freeze bank accounts and limit the amount of money that could be withdrawn daily, which became known as the &#8220;corralito&#8221;.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<h3><b>The perfect storm<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">This inflationary environment, coupled with a sharp decline in incomes and limited access to savings, is the ideal breeding ground for social unrest, <\/span><b>rising crime, and the flight of human capital<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Six months after the default, almost a quarter of Argentines were considered destitute and another quarter below the poverty line. These are hard figures to swallow considering that this is a country rich in natural resources and with one of the largest livestock herds in the world.<\/span><\/p>\n<p><b>The loss of confidence in paper money <\/b><span style=\"font-weight: 400;\">even led to the proliferation of up to 8,000 barter clubs in Argentina, some of which went so far as to issue their own &#8220;coins&#8221;.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><b>Risk of international contagion<\/b><\/h3>\n<p><b>A country&#8217;s suspension of payments can also have negative consequences beyond its borders. <\/b><span style=\"font-weight: 400;\">It should be borne in mind that the first effect of this measure is that creditors cease to be paid. This can put a strain on international creditors who are heavily exposed to that debt or on insurers who have decided to hedge those investments. In certain cases, the banking and insurance system may be affected by the domino effect.<\/span><\/p>\n<p><b>It now remains to be seen what Russia&#8217;s ability to meet its commitments will be in the coming weeks<\/b><span style=\"font-weight: 400;\">, and whether the IMF managing director&#8217;s warning takes shape as the cost of the war in Ukraine and international sanctions put the Russian economy on the ropes.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>If you want to discover the best option to protect your savings, enter <\/b><a href=\"https:\/\/serveis.11onze.cat\/en\/preciosos-11onze\" target=\"_blank\" rel=\"noopener\"><b>Preciosos 11Onze<\/b><\/a><b>. 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