The Russian government has announced it will default on its international debts. The financial crisis the country finds itself in has forced it to take such a drastic measure.
A default is when someone cannot pay their debts and does not have the money to repay them, so they fail to do so.
This can happen when someone cannot meet their loan payments or if their assets are depleted and they no longer have anything of value that they could sell to raise the funds needed.
In this article, we will explore what a Russian default means for us, as well as how and why this has happened…
What Happened?
Russia’s economy has been suffering since 2014. In that year, the price of oil, one of the country’s main exports, fell dramatically, causing the Russian ruble to lose around half its value.
This situation was made worse by Western sanctions imposed on the country in response to Russia’s actions in Ukraine and its annexation of Crimea.
These sanctions, designed to cause economic damage to Russia, have been applied to Russian banks, energy companies and other business interests as well as to government officials.
Since 2014, the Russian economy has contracted every year. The government has continually run a deficit and has only been able to maintain its spending levels by using its reserves of foreign currency.
In 2018, the central bank’s reserves fell to $50 billion and the government ran out of money to pay for its subsidies, wages and pensions.
Why Did Russia Decide to Default on Its Debts?
The Russian government has decided to default on its debts. If it had continued to repay the money it owes, it would have had to make cuts in its spending to do so.
The government has already made drastic cuts in its expenditure and has borrowed money from the central bank to make up the shortfall. It has also raised taxes and taken other actions to increase state earnings.
It has also attempted to borrow money from other countries and financial organizations to repay its loans, but it has failed to acquire new loans.
Defaulting on its debts would allow Russia to avoid making cuts that would affect its people. In addition, it would avoid having to request more money from other countries, and it would still have some money left to pay its bills.
Russian officials have said they will default on some of their loans, but not all. This is because it is impossible to repay all the money owed at one time.
The Effects of a Russian Default on the Global Economy
A Russian default will affect the global economy in several ways. It will reduce the amount of money available in the world, as a portion of the money Russians owe will never be repaid.
When a government defaults, investors lose their money, which affects the confidence they have in the economy and may drive down the value of the country’s currency.
This makes imports more expensive and exports less competitive in the global marketplace. It also means that foreign investors are less likely to invest in the country and domestic investors are less likely to make new investments.
When a country’s currency declines in value, it makes its goods and services less competitive in international markets and less attractive to investors.
If the Russian government defaults on its debts, investors in the country’s government bonds are likely to lose money. This will make them less willing to invest in government bonds in other countries.
How Will a Russian Default Affect Us?
A Russian default will affect the United States in a number of ways, but only if it is more severe than a simple default. It is not uncommon for countries to default on their loans from time to time.
If a default is only partial, it will affect the U.S. economy in ways similar to a global economic slowdown. This would result in lower stock prices, slower growth in the gross domestic product, and less investment in the economy, which would make it harder for many people to find a job.
If a default is total, however, it would cause a global financial crisis. This would happen because many of the loans currently held by American banks and other financial institutions were originally made to Russian banks and companies.
If Russian businesses fail to repay their debts, American banks, investors and other financial institutions will lose money, which will hurt the U.S. economy.
Other Options for Resolving the Debt Problem
If Russia defaults on its international debts, it will have to work with its creditors to find a way to repay what it owes. For example, it could offer to repay the debt over a longer period of time.
This is known as rescheduling the debt. It could also offer to pay a higher interest rate on the debt. If the country can’t find a solution to the debt problem, it could declare bankruptcy.
This would allow the government to repay only some of the debt. It would be forced to repay all of the debt if it didn’t declare bankruptcy.
Will a Russian sovereign debt default be just like 2008?
A Russian default is likely to be different from the one that took place in 2008, when the United States and a number of other countries also defaulted.
At that time, many countries in the West had invested money in American assets, including loans to American banks, companies and the government.
When American banks and the government went bankrupt and couldn’t repay the money they owed, many foreign countries and investors were adversely affected.
When a government defaults on its debt, creditors lose the money they invested in that government. In a Russian default, creditors will lose some of the money they lent to Russian banks and companies that are no longer able to repay their debts.
This is different from 2008 because many economies have since become less dependent on American businesses.
This means that if Russia defaults, the damage caused to creditors will be less than in 2008, as creditors will not be as dependent on Russian businesses for their income.
Where does Russia get its cash from?
The Russian government has a number of sources of income, but most of them are limited in one way or another.
These funds are collected by the government through taxes, government bonds and oil and gas exports. The government also receives income from the sale of state-owned assets and other sources.
The Russian government has a number of expenses. It has to pay for pensions, salaries and social welfare benefits, as well as debt repayments, government investment and other items.
It must also have cash on hand in case economic conditions worsen and it needs to make adjustments to stimulate the economy.
Conclusion
The Russian government has defaulted on its international debt. This is an extreme measure, taken only after years of failed attempts to resolve its debt problem.
A default will affect the global economy in several ways, but it is not likely to be as devastating as the 2008 default. This is because the Russian economy is smaller and less important to the world economy than the American economy was back then.
