Issue of the week: Russia’s default?
What impact will debt default, and a possible oil price cap, have on the Putin regime?
For months, Russia has found paths around “ever tougher Western sanctions that shut down payment routes to overseas creditors”, said Bloomberg. It has finally run out of road. Last Sunday, the grace period on about $100m of eurobond interest payments, due on 27 May, expired – pushing the country into official default. This has only happened twice before: under the Bolsheviks in 1918, and during the financial chaos of the Yeltsin era in 1998. The default is therefore “historic”. It is also highly unusual, since Russia is both willing and financially able to make the payments, but is effectively prevented from doing so by the US Treasury. The country’s finance minister, Anton Siluanov, has dismissed the situation as a “farce”. But, even if “mostly symbolic for now”, the default is still “a grim marker in the country’s rapid transformation into an economic, financial and political outcast”.
The more pressing point for Vladimir Putin’s opponents, said Lex in the FT, is that “Moscow has so far circumvented the West’s efforts to drain its coffers”. Russia earned nearly $100bn from oil and gas exports during the first 100 days of the war with Ukraine – largely thanks to Europe’s continued reliance on Russian gas, and its ability to find new buyers for its oil in India and China. The solution proposed at this week’s G7 meeting is “a price cap for Russian oil sales”, which theoretically would be a win-win for the West, since it would keep Russian oil flowing into the world economy, while reducing “the country’s ability to pay for its war in Ukraine”. In practice, though, the difficulties inherent in tracking the “provenance” of fuel exports would make any cap “devilishly hard” to enforce. Meanwhile, a retaliatory cut-off in natural gas supplies to Europe would cause havoc. All the more so, said The Economist, since “the threat of gas rationing” is already “looming” in the EU’s economic powerhouse, Germany.
Emboldened by the recovery of the rouble, and strong oil and gas revenues, Putin has claimed that sanctions are “a double-edged sword” that will prove more painful for the West than for Russia, said Ben Marlow in The Daily Telegraph. But even this supposedly “symbolic” debt default could deal “a heavy blow” to his plans. “A regime that thrives off propaganda” will be desperate to avoid any scenario that adds to the impression that Russia “has been weakened by sanctions”. The default could also have wider ramifications, since it could affect the country’s debt ratings for years – making it difficult to access financing and more costly to borrow, even when hostilities end. Ultimately, “Moscow could effectively be shut out of the global financial system for years”.