Russian Debt Default

Recently, the Chief Economist of the World Bank warned that Russia and Belarus are close to being unable to pay their debts.

About the default

Debt default is a failure by a borrower to repay the debts in due time. Recently, Argentina, Belize, Ecuador, and Suriname, defaulted on their debts.

Reasons for Russian Debt Default

Sanctions were imposed by Western countries on Russia for invading Ukraine, which disrupted financial transactions. In response to western sanctions, Russia imposed capital controls. Russia has around $630bn of foreign currency reserves, which can help in paying debts. However, countries like the U.S., the UK, etc froze assets of the Russian central bank, making the foreign currency reserves inaccessible to Russia.

Impact on Russia

Debt defaults will lead to damage of reputation and international credit rating agencies will give poor ratings. Already, a credit rating agency called Fitch downgraded Russia’s sovereign debt to its second-lowest level. This poor rating makes it difficult for Russia to borrow from international markets, as investors feel that it’s risky to invest in Russia.  According to the Institute of International Finance (IIF), as the cost of funding increases, Russia may cut welfare spending or increase taxes.

Impact on the international financial system

Russia’s financial system is relatively less integrated with the world compared to other countries’ financial systems and it has low debts. Even then experts believe that Russian debt default will have unforeseen consequences on the international financial system.

Steps taken by Russia

In 2014 western nations imposed sanctions on Russia for the annexation of Crimea. Since then Russia took many steps to strengthen its financial system. These steps include reducing dependence on the US dollar and maintaining a budget surplus.

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