A spirit of terror has been rising over Putin’s Kremlin in recent days. Of all the possible scenarios drawn up by his immediate entourage and of all the plans Putin himself embroidered on Russia’s great Sabbath, the one and only script, the fictional one, so deeply buried in one of the most dusty drawers in the Kremlin, is now coming true. 105 years after Lenin’s Bolshevik revolution in 1917, which led to the overthrow of Tsar Nicholas II and the establishment of the Soviet Union, Russia is once again marching, for the second time in its history, towards the insolvency of a foreign debt.
When tens of thousands of Russian troops crossed the border in their black boots in February, no one in the world seemed to believe that three months later Russia would still be defeated in the Ukrainian mud and economic sanctions would continue to weigh heavily on its neck. After all, the dry data – the number of soldiers, planes and tanks, the economic backbone, the international influence, the military background, the energy dependence – indicated a Time.news of a pre-determined end. It is likely that US President Joe Biden, who put all his weight into persuading Western leaders to support the imposition of diplomatic and economic sanctions on Russia, also did not believe him.
Russian tanks. Russia pays $ 15.5 million for hour of war / Photo: Reuters, CHINGIS KONDAROV
Still, 93 days after the invasion of Ukraine, the Russian economy is moving on a completely different trajectory from that which preceded February 24th.
The boycotts of private companies and the complete abandonment of some of them, which may at first have seemed like a fashion that would soon pass after the Russian victory, “when there would be no point in continuing to boycott the Russian public,” only gained momentum and intensified. On Wednesday this week, Mark & Spencer, which has about 50 stores and 1,200 employees in the country, announced that it was leaving the Russian market. At the same time, it was learned that Nike had decided not to renew the agreements with the local franchisee, which operates dozens of stores, and to leave the country. Earlier this week it was the Starbucks chain that announced its exit from Russia after 15 years of operation, 130 stores and 2,000 employees.
But the most symbolic departure of all is that of fast food giant McDonald’s, whose first branch in Moscow in January 1990, even before the final collapse of the Soviet Union, was marked around the world as a historic event. And not in vain. The fast food chain is one of the symbols of capitalism in general and of America in particular. None and one of the 30,000 shoppers who stood in a long line in Pushkin Square on the first day of its operation bought only a “patty in a bun” with ketchup, tomato and pickle. They bought a piece from America.
Fast forward 32 years ahead: Despite annual profits of about $ 1.2-1.4 billion, 850 branches and 62,000 employees – McDonald’s has decided to fold and leave. These days she is removing her “golden bows” from chain stores. Coca-Cola and Pepsi, two other significant signs of capitalism, also announced their departure from the country last week.
Billions of dollars in debt to Americans
But as mentioned, the very big event of the last few days is Russia’s meteoric approach towards insolvency on the external debt of the Russian government. Or in the vernacular, Russia is approaching bankruptcy. This is after the US Treasury Department (OFAC), which is the arm of enforcing sanctions by the US Treasury, announced on Tuesday night that it does not intend to renew the temporary exemption from sanctions imposed on the Central Bank of Russia. This is a critical exemption because it has allowed the country’s central bank to repay debts to U.S. creditors through U.S. and international banks “on a case-by-case basis,” as defined by the Treasury Department. This allowed Russia to meet the billions of dollars worth of its debts to American creditors through its foreign exchange reserves.
Now, since the Treasury Department did not extend the validity, on Wednesday at 12:01 (on the East Coast), the temporary exemption expired and US banks and individuals were barred from receiving interest payments from the Russian government. , But after concluding that Russia’s insolvency would not endanger the world economy, it was decided not to extend it.
The U.S. has gradually restricted Russia’s access to foreign credit since the invasion; it has barred it from raising additional debt from U.S. investors;
So far Russia has managed to persevere with $ 2.5 billion in foreign debt payments since the conflict began in Ukraine, mainly by relying on this exemption and using Russian banks that have not been sanctioned to pay its bond debts. According to a Wall Street Journal publication In April, Russia handed over nearly $ 650 million to creditors just days before the country risked being declared bankrupt.These payments were made in dollars at a London branch of Citigroup, which processes payments on behalf of bondholders.
This payment was a turnaround, as in an attempt to maintain economic sovereignty and in an attempt not to “surrender” to Western sanctions, Russia’s Ministry of Finance had earlier insisted on repaying the bonds only in local currency, the ruble.
The economic crisis in Russia in the 1990s / Photo: Reuters, CHINGIS KONDAROV
A 50% decrease in the volume of imports to the country
Insolvency will have an immediate impact on Russia’s economy as the country is already cut off from international markets by sanctions. The war with Ukraine this year has dramatically affected Russia’s credit rating.
Credit rating agencies assess the willingness and ability of governments to repay their obligations on time and in full. Prior to the invasion, Russia had an investment-grade credit rating from all three major rating agencies. In March after the invasion of Ukraine & P Global, Moody’s and Fitch all lowered it to junk status (JUNK), warning that there was a very high risk that investors would not eventually get a refund. They then withdrew their rankings, as part of the companies’ exit from Russia.
If Russia fails to repay its dollar-denominated bonds, investors are likely to declare it insolvent once the grace period ends, and they will start demanding their money back in English courts. Between the parties.
In such a situation, where Russia will not be able to raise external money, it will become largely dependent on itself. The central bank will become responsible for providing the money to citizens. Not a simple story in the world of a global economy – usually insolvency of countries is accompanied by increased poverty, unemployment and reduced welfare services.
If Russia is indeed finally pushed into insolvency, it will also severely damage the Kremlin’s reputation in the financial markets. Experts estimate that the losses associated with insolvency are worth about 3% of the size of the country’s economy, as well as damage to long-term growth. Not only does an insolvency situation increase the costs of taking out the state’s loans, which allow it to invest on its own, it also creates pressure on the state’s banking system, which often holds large amounts of debt.
Meanwhile, Western sanctions and the shutdown of some 900 Western companies and businesses in Russia have led to a drop in Russia’s imports to levels not seen in 20 years. According to Otkritie Bank’s research, Russia imported goods worth $ 5 billion to $ 10 billion last month. According to the Central Bank of Russia, the last time Russia imported such sums was between 2001 and 2003. Official data from the Russian government before the war show that the volume of imports into Russia in February was $ 27.5 billion.
Queue for milk in Russia during the collapse of the 90s / Photo: Reuters, CHINGIS KONDAROV
The decline in imports led to Russia’s trade surplus growth from $ 20 billion in January to $ 45 billion in April, says Robin Brooks, IIF’s chief economist. He said that in the absence of official import data of the country since the start of the war, the best way to obtain them is through tracking the data of countries exporting to Russia. From an examination of the export data of Russia’s 20 largest trading partners, it is possible to learn about a 50% decrease in the volume of imports to Russia in April compared to the corresponding month in 2021. “We anticipate a 30% GDP collapse by the end of 2022,” Brooks tweeted Wednesday.
The lifeline: gas and oil exports
About two weeks ago, a copy of the Kremlin’s economic forecast was leaked to Bloomberg. In the internal document, the government admits that as a result of Western sanctions, it is facing its biggest economic collapse in three decades since 1994.
Although the Kremlin has not issued a public forecast since the invasion of Ukraine, according to a Finance Ministry document, it is estimated that GDP will shrink by 12% this year. This is a more pessimistic forecast than the Ministry of Economy, which estimated earlier More this year that the economy will shrink by 8%, and even more pessimistic than the forecast of the Central Bank of Russia that on April 29 estimated a contraction of about 8% -10% this year.
The World Bank puts GDP shrinking at 11.2%. Real revenues eroded by inflation, wage arrears, layoffs and the shift of many workers to part-time work (Russia does not allow employers to lay off workers), could shrink by 9%, according to a recent report in the Business Daily Russian “Kommersant”.
While Western sanctions are hitting Russia hard, the country’s economy still relies heavily on gas and oil revenues. The Western embargo has not yet completely blocked the country from the international energy market. While the U.S. and NATO allies are working to increase Moscow’s energy isolation, countries like China and India continue to purchase their supplies from Russia, which now sells a barrel of oil for $ 10 less than the market price.
In April, Chinese purchases of Russian goods, mainly oil and natural gas, rose to $ 8.89 billion, an increase of 56.5% compared to the previous year. Before the war, Russian energy, gas and oil, accounted for about 36% of Russia’s budget in 2021. Now that many economic channels have closed and many countries have closed their doors to it, Russia’s economy has become much more dependent on the energy industry. Revenues from the sale of oil and gas, which rose from 1.2 trillion rubles in March 2022 to 1.8 trillion rubles in April 2022, accounted for 63% of Russia’s budget in April. As of the first four months of the year, they account for 48% – 12% more than in 2021.
But even though Moscow is earning more as a result of the surge in oil prices, Russian barrels of oil have actually declined. As of mid-May, daily oil production was 830,000 barrels lower than in February. The reason is that there are not enough buyers to make up for the lost markets and significant logistical challenges have been added in transporting the goods to new places.
The bad news of the strengthening of the ruble
Russia continues to face ongoing economic troubles, despite the fact that the country’s currency has apparently recovered following massive intervention by Russia’s central bank, which has been working to stabilize it after it began diving as the war continued. As of Thursday this week the ruble is trading at about 59.5 rubles to one dollar – a slump increase of 121.53 rubles to the dollar, after the invasion of Ukraine.
The strong ruble, now worth more than it has been for the past four years, threatens exports in the country because it micromanages the purchase of Russian goods outside Russia. In addition, it also increases the federal budget deficit that is growing anyway, also thanks to defense and military spending that has risen significantly since the war began. Russian Finance Minister Anton Silwanov has estimated that by the end of this year there will be a hole of 1.6 trillion rubles in the Russian budget.
The Moscow Times news site reported that according to data from the Ministry of Finance from last week, since the start of the war Russia has spent an average of $ 15.5 million per hour on the war. In total, Russia has spent about 1.7 trillion rubles since the beginning of the war on the defense budget. And it rises exponentially each month.