Russia may not be able to pay its debts after western sanctions.

With the effects of the sanctions getting more severe, every day, the Russian central bank has gotten into deep trouble and from the looks of things, it seems that Russia, will be going bankrupt in a couple of months. Now in a normal bankruptcy, the debtor, does not have the funds to pay, the outstanding debt, however that’s not the case here, since Russia has two main things going for her.

One, Russia is one of the largest exporters of oil and gas and still has enough reserves to pull from, so in theory it still has hundreds of billions of dollars, sitting the ground and second, it actually has more than enough funds already available, sitting in various bank accounts, worth over 600 billion dollars. So clearly, money is not the issue here, what is the issue, are three main barriers.

where does russia hold it's reserves, Anadolu agency

The first is that about half of that $600 billion, is frozen by the international community, which means, that the Russian central bank, can’t use it, to make the required payments, the second is that the bonds that Russia issued, have written into the contracts, that Russia can not make the interest payments, in Rubles and that they must be made in dollars and the third major barrier, is president Putin himself. It’s believed that he might not even want to pay the interest, since the financial sanctions are destroying the economy and in order strike back, Putin is contemplating not paying the bond holders.

Now obviously, this would be a huge mistake, since this would make it near impossible for Russia to get funding in the future and even China would be sceptical, on lending Russia the money. Even if China, were to do so, those loans would come with some serious strings attached. It’s why people in politics say, if China is your only friend, you have no friends. So all of this, puts Russia in an almost impossible situation, to pay it’s bills, since they can’t use the money they have and the money they can use, nobody wants, which from looking at the disastrous trajectory of the Ruble, was an excellent call by the investors, to put in those contracts.

Putin and Xi Jinping

However, it’s not fail safe mechanism, since currently the Russian president has ordered the central bank, to allow payments to bond holders in Rubles regardless of what the contracts say. Now this would trigger an automatic default, since in the world of bonds and credit default swaps, if you don’t honour the terms of the contract to the letter, it does not matter if you still make the payment.

Now at the time of writing this article the Russian central bank claimed, that they actually made the first payment of $117 million dollars and even though no official confirmation has yet been given, it does seem that the payment went through, since some bond holders have received their payment. So with that said, even though this initial payment, seems to have gone through, this is no guarantee that future payments will as well and this problem, will keep occurring, every single week.In the coming months, Russia still has a lot of payments to make, one of which is a huge $2 billion dollar payment, coming up in April and if just one of these payments does not to go through, Russia triggers an automatic default.

Russian foreign debt amount by billions, tradingeconomics

During this default, Russia will still have 30 days to mediate the situation, however the damage will have already been done and the country will face a whole host of new problems. Now, despite all these problems, Russia will not run out of money anytime soon, since they are still receiving well over $60 billion dollars each quarter from their oil and gas exports and Europe is unable to completely, stop buying these overnight.However, we are seeing is that instead of being part of a fully integrated global economy, the Russians are going to be, fully beholden to China, which will give Beijing tremendous amount of power over Russia, since they can change their minds at anytime. So if Putin is going to burn the west and fully commit to China, he should at least learn some Chinese wisdom. Confucius say, “Before you embark on a journey of revenge, dig two graves. This is why ”Russia may not be able to pay its debts after western sanctions.”,