- Why Russia may Default on its Foreign Debt
Everyone understands it pretty well when it comes to their personal finances. You borrow money, you have to pay it back. If you can’t, your creditor hounds you until you either come up with the cash or restructure your repayment schedule. Or, worst case, you eventually file for bankruptcy, thereby defaulting on your debt. Simple.
Yet people, especially in the West, seem blithely unaware that the same basic principles apply to countries, as well. Most of us tend to think that nations can’t or won’t default on their debt. Well … maybe Greece will. But surely not a big country.
Why we believe this is partly due to an ignorance of history, which features literally countless defaults, among nations great and small. Even the US has done it. More than once. It happened right at the beginning, in 1779, when the fledgling US nation defaulted on its first currency, the Continental (which led to widespread use of an early American pejorative phrase: “not worth a Continental.”) And a very recent example was when Nixon severed the tie between gold and the dollar in 1971; that was a default on the precious metal debt the country owed to France and others.
It’s also partly due to the current financial behavior of the American government, which acts as if the cure for a debt problem is more debt (do not try this at home, by the way). As Congress raises the federal debt ceiling, and the Federal Reserve creates ever more currency units out of thin air, it creates the illusion of stability. All it’s really doing, though, is just kicking the can down the road. The US has placed itself firmly on this path. But that doesn’t ensure that the rest of the world’s nations can or will follow the same one.
Here’s one of the things I learned: Russia is completely unafraid of a default on its debt.
Today, Russia is in crisis again, having been hit with the double whammy of plummeting energy prices and heavy sanctions laid on by the West over Putin’s foreign policy. Given the country’s struggling economy, it’s puzzling why the world is ignoring the risk of Russia defaulting on its debt. Again. And why it may be underestimating Putin. Again.
Why a Russian Default is a very real scenario in 2016
… To understand how misguided this is, you just have to ask one question: Who holds the majority of the debt that would be at risk in a Russian default? Not China. Not Iran. Not Syria. No, it’s the exact same nations, and banks and funds within those nations, that are applying the sanctions against Russia.
So, if Russia does default, what does it mean in terms of its political relationship with the West? Nothing. But what does it mean to its creditors? Everything.
They’re the ones who will take the hit. And by the way, to anyone who thinks they will be able to enforce their nation’s debt laws on the Russian government or any Russian companies, I have this to say: I wish you the best of luck.