May 2, 2022
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Professor Katasanov: The Russian Ministry of Finance is playing strange games

Professor Katasanov: The Russian Ministry of Finance is playing strange games

Photo: Sergey Bobylev / TASS

The sanctions battle of the collective West against Russia has made the task of de-dollarization of the Russian economy more urgent than ever. The freezing of foreign exchange reserves of the Russian Federation in the amount of over $300 billion has turned US dollars, euros, British pounds, Japanese yens, Canadian and Australian dollars, and Swiss francs into “toxic” currencies. Hence the quite natural statement of the President V. Putin dated March 23, that Russia will sell natural gas to Europe only for rubles. And in the future, as the president hinted, Russia can carry out all exports of goods for rubles.

Even earlier, on March 5, the President signed Decree No. 95 “On the temporary procedure for fulfilling obligations to certain foreign creditors.” According to the decree, the Ministry of Finance of Russia will fulfill its obligations to non-residents on loans placed on international markets not in foreign currencies, but with the help of Russian rubles. They will be transferred to special accounts.

True, paragraph 10 of the decree turned out to be a little embarrassing, which states: “Give the Central Bank of the Russian Federation (in relation to the fulfillment of obligations by credit organizations and non-credit financial organizations) and the Ministry of Finance of the Russian Federation (in relation to the fulfillment of obligations by other debtors) the authority to determine a different procedure for the fulfillment by debtors obligations … “. To put it mildly, the decree turned out to be a little “leaky”. Monetary authorities received the right to make exceptions to the “ruble imperative” of the president.

As commented on this decree on Ilyinka (the address of the main office of the Russian Ministry of Finance), sooner or later Russia’s foreign exchange reserves will be unfrozen. After that, if necessary, foreign investors will be able to exchange their rubles from special accounts for currency from reserves. True, today the biggest optimists no longer believe in such a beautiful version. A bill is currently being prepared in the US Congress to allow and even encourage Russia’s frozen reserves to be confiscated. Those. Russia’s foreign exchange reserves on a completely “legitimate basis” will be expropriated.

The issue of ruble payments is especially acute in relation to securities issued by the Ministry of Finance before 2018. The issuance documents of Russian Eurobond issues, starting from the specified year, include the possibility of redemption in rubles at the Central Bank rate on the date of payment. But the payments that were scheduled for March-April of this year concerned securities issued before 2018.

On March 16, Russia was due to pay coupons on two issues of its sovereign Eurobonds totaling $117.2 million, the first payment on its external debt after freezing part of the country’s foreign exchange reserves. The Ministry of Finance was ready to transfer the ruble equivalent of the specified amount to a special account, closing its obligations to foreign investors.

Of course, there was a risk that the West would not agree with such a scheme and declare a sovereign default on Russia. But the situation unexpectedly resolved in favor of Russia and investors, as the collective West agreed that payment would be made in foreign currency from Russia’s frozen reserves. And it, as reported by the media, was successfully held on March 17.

And it seems that this compromise scheme made it possible to continue to do without rubles, using the foreign exchange funds of the frozen reserves. In early April, the next payment of the Russian Ministry of Finance on Eurobonds was scheduled for a total of $649.2 million in favor of foreign investors. We are talking about coupon payments and partial repayment of debt on Russia-2022 bonds ($564.8 million) and coupon payments on Russia-2042 bonds ($84.4 million).

But unexpectedly, the US Treasury announced that no more frozen reserves would be used to pay for Russian debt. Like, Russia should pay from its currency pocket. It seems that foreign exchange reserves in excess of $300 billion are Russia’s main pocket. But Moscow is denied access there; this pocket is now controlled by US financial institutions. Let Moscow pay from another pocket – current foreign exchange earnings from exports.

On April 5, Reuters reported: “Starting today, the US Treasury will not allow any dollar payments on debt from Russian government accounts in US financial institutions.”

Taking into account the current situation, the Ministry of Finance of Russia for the first time transferred payment for Eurobonds in the national currency. As the press service of the department reported on April 6, the Ministry of Finance fulfilled its obligations to foreign holders in the amount of $649.2 million. “April 4, 2022

The Ministry of Finance of Russia transferred funds to NBCO JSC National Settlement Depository to make the said payments in the currency of the Russian Federation at the official exchange rate of the Bank of Russia as of April 4, 2022 in accordance with Decree of the President of the Russian Federation No. 95 dated March 5, 2022 to the accounts of its clients -depositories for settlements with all holders of these debt instruments,” the Finance Ministry said.

In the collective West, about the ruble transaction of the Russian Ministry of Finance, screams began that, they say, Russia is heading towards a sovereign default. Like, if Russia does not change its mind and does not replace rubles with dollars, then a default is inevitable. Permitted delays are 30 days. Therefore, the question of whether there will be or will not be a default will become clear no later than May 4th.

As early as April 6, the leading rating agencies sharply lowered Russia’s already low rating. In particular, the rating agency S&P Global Ratings, after reports of ruble payments, downgraded the long-term and short-term foreign currency ratings of the Russian Federation to SD (selective default).

White House Representative Jen Psaki At a briefing on April 6, she announced the currency ultimatum of the US presidential administration to Moscow: either Russia spends the dollars it has at its disposal, or it finds itself in a state of default.

And now, it seems, at the very end of April, the situation cleared up. The Russian Ministry of Finance, under the pressure of the hysterical cries of the West, changed its course on the chessboard of the sanctions war.

On April 29, the Russian Ministry of Finance announced that it had made payments on Eurobonds “Russia-2022” and “Russia-2042” in the issue currency – dollars. And that the required amount was already sent through the American correspondent bank JP Morgan to the address of the paying agent – the London office of Citibank. And on its website, for greater persuasiveness, the Russian Ministry of Finance commented on this operation: “Payments were made in the currency of the issue of the relevant Eurobonds – in US dollars. Thus, the obligations to service sovereign Eurobonds are fulfilled in compliance with the conditions established by the issuance documentation.”

Experts are not 100% sure that the British office of Citibank will automatically execute the payment order of the Russian Ministry of Finance. As practice shows, it is in London that all foreign currency payments from Russia hang. Even if Citibank does not delay the operation too much, it is not certain that the currency will have time to reach the final recipients before May 4th. And if someone complains that they did not receive the expected money on May 4, then this may become the basis for declaring Russia’s default.

Whether or not Russia will default on its sovereign debt is not the most important question. Not even the tenth. For us, in the conditions of the sanctions war, all the estimates of the world rating agencies are like the fifth wheel in a cart. We don’t need them at all. Moreover, even harmful. For if you remember them, it means that you will involuntarily dance to their tune.

A more serious moment in this story turned out to be that, it seems, the Russian Ministry of Finance is dancing not to ours, but to their tune. As you can see, it took a little more than three weeks for the Russian Ministry of Finance to change its position on the issue of payment currency by 180 degrees. In early April, he was guided by Presidential Decree No. 95 establishing payments in rubles. And at the end of the month, it is already guided by the instructions of the US Treasury and the White House ultimatum to pay the debt in US dollars. With such a “volatility” in the course of the Russian Ministry of Finance, we cannot win the sanctions war with the collective West.

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