Russia to Pay Sovereign Debt in Rubles? That’s a Dirty Trick!
The head of the IMF thinks Russian will default on its international debts, which are supposed to be paid in dollars or some other hard currency. The Russian ruble has lost a great deal of its value over the last couple of weeks. And moreover, with the international sanctions being levied, it may be difficult or impossible to convert.
Russian Finance Minister Anton Siluanov says that is not true, the Russian government has no problem paying its debts. Russian owes $117 million in interest payments this month.
There is talk of paying in rubles.
Hmmm, this leads to a number of interesting issues. Nobody wants rubles right now. in fact, the debt instruments specify hard currency. Rubles are apparently not a good bet in any environment, who the heck wants a currency from a country that is at war and under crippling sanctions.
But yet there are debts to settle, the government of Russia owes money, it acknowledges the debt and is willing to pay. This will likely not work out well for Putin and Russia, but they can plausibly deny any talk of bankruptcy or default.
Here are some points:
1. Since Russia is paying debts and not trying to borrow at this time, they have a certain amount of leverage.
2. Russia has been known to fix its exchange rate to whatever is advantageous. They can do it again.
3. If they pay in rubles, then people outside of the sanctions block will be holding Rubles and will have an incentive to relieve sanctions so that they can convert to hard currency.
4. If the sanctions are not relieved, then holders of Rubles may only be able to buy inside of Russia (or through China if that is indeed a corridor for trade), otherwise the rubles are worthless.
5. Russia cannot be accused of not paying its debt, since international sanctions are not their doing. They are making “good faith” efforts.
6. It times start to become difficult, they can print more rubles, since it is their sovereign currency. Modern Monetary Theory says that while inflation can go through the roof, a sovereign government can never really run out of money.
The debt holders may not like this, but they are pretty much stuck. Russia would have a legitimate claim that they made good faith efforts to pay, and if the banks refuse payment it is on them.
But holding a currency that you cannot convert, trade or use to purchase something, that is on a downward exchange rate path is not something that banks like to do.
So imagine you have just received $117 Million in rubles on the official exchange rate, but with the market exchange rate, it is really only about $50 million. And since you can’t converted it because of the sanctions, either you hold it, and hope its doesn’t devalue to $10 million, or maybe you find a speculator somewhere willing to give you $20 million. But yet, Russia has paid.
That is the dirty trick.