Monday, August 17, 2015

Seventeen Years On, ‘Shadow of Default’ Still Hangs over Russia

Paul Goble

            Staunton, August 17 – Seventeen years ago today, on August 17, 1998, Russia defaulted on its international payment obligations, an event many Russians view as emblematic of what many of them see as the disasters of the 1990s and one that each year, despite the successes of the first decade of this century, prompts them to ask whether a default will happen again.

            This year, as Russia’s economic situation has so obviously deteriorated, ever more Russians feel they are living under “the shadow of default,” Dmitry Dokuchayev writes in “Novyye izvestiya;” and they are asking whether “a new collapse threatens the Russian economy?” (

            Superficially, he writes today, “there are no parallels between the economic situation of august 1998 and August 2015.” Then, Russia was suffering under the burden of crippling foreign debt and lacked reserves. Now, its debt is relatively less; and its reserves rank it among the top five countries in the world.

            But “in place of the financial problems of 17 years ago have come others today.” And these have prompted international rating agencies like Standard & Poor’s to warn that Russia might default in a massive way sometime in the next two or three years. They suggest that Russia’s regions won’t be able to pay their debts, and Moscow will have trouble covering them.

            Moreover, these experts note, the Russian economy is now in recession, an economic downturn deepened by international sanctions, a decline in the price of oil and the devaluation of the ruble which makes repaying any foreign debt all the more expensive. “From this,” Dokuchayev writes, “extends a direct path to sovereign default.”

            By the end of this year, Russian companies and banks must repay 134 billion US dollars in foreign obligations. That is no small sum, but it would seem bearable given that the country’s reserves are about 400 billion US dollars.  But if Moscow has to cover other losses, seeks to support the ruble, and faces a new drop in oil prices, that may not be enough.

            Many of those suggesting that Russia is at risk of another default focus on the last factor and suggest that as Iran comes back on stream and the war in Libya ebbs, the supply of oil relative to demand will grow and prices will fall to 20 US dollars a barrel or even lower in the coming months.

            If that happens, the “Novyye izvestiya” writer says, a dollar will be equal to 120-130 rubles and a euro to “about 150.”  That could lead Russia to default by itself.

            Igor Nikolayev, the director of Moscow’s RBK Institute for Strategic Analysis, is convinced that a default like that in 1998 won’t happen, but he points out that the situation is approaching that of 2008.  And he suggests there are a number of new challenges emerging ahead.

            Among them, he says, are the likelihood that the Federal Reserve will raise interest rates in the fall, thus strengthening the dollar and weakening the ruble; another significant decline in oil prices; a further worsening of the international system; and new Western moves to seize the assets in the YUKOS case.

            “Each of these factors by itself,” he suggests, “is capable of inflicting serious harm on the Russian economy.” If they occur at one and the same time, that could be completely sufficient to open the way to default.

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