Had Russia not made a US$117-million interest payment on Wednesday, March 16, it would have defaulted on its debts. But under sanctions imposed by other countries, Russia could yet default, which wouldn’t be all that surprising, says a U of G-Humber financial markets author. 

Dr. George Bragues is the interim vice-provost at the University of Guelph-Humber who studies bond, currency and stock markets, and the politics of financial markets. He is also an adjunct professor in the Department of Management at the Gordon S. Lang School of Business and Economics.  

What is a debt and why does Russia have one? 

Dr. George Bragues headshot.
Dr. George Bragues

Bragues says for many countries, the national debt is equivalent to the government’s bond obligations. 

A bond obligation is essentially a loan made by investors to entities such as governments and corporations that can later be traded among investors, he said. Bond prices fluctuate with general economic conditions and interest rates and with the perceived ability of the bond issuer to repay the loan principal and to make regular payments at stipulated times. 

Bonds are one of the main ways governments can finance their activities, he said. They enable governments to access additional funds beyond tax revenue, allowing them to finance long-term public investments and to run budget deficits when necessary to manage the economy. 

More payments to come 

Russia has debt payments due on March 21 and 28 amounting to US$168 million. On March 31, it must pay US$359 million, and on April 4, another US$2 billion. 

Sanctions imposed on Russia following its invasion of Ukraine on Feb. 24 “have significantly impaired the ability of both the government and large companies to make their scheduled bond payments,” Bragues said.  

Those sanctions, he said, are slowing Russia’s economy and reducing tax revenues collected by the government. Companies under sanctions experience similar fates, as their buyers are limited in purchasing their goods and services.  

“Without revenues, it is hard to pay one’s debt,” he said. 

If those obligations go unmet, it will be much more challenging for Russia to issue bonds and obtain financing. If a Russian company fails to make its payment, assets outside of the country could be seized by bondholders. Globally, that impact would be felt by banks, investment and hedge funds, and industries that buy from and supply Russian companies and that hold Russian debt in their portfolios.  

“A Russian debt default would reverberate throughout the financial system among banks and financial markets, but the amounts at issue do not appear big enough to create a systemic problem,” said Bragues.  

Solutions depend on agreements 

When a country defaults on its debts, the creditors (or bondholders) and the debtors (government and companies) attempt to come up with an agreement to address the problem. Often under such agreements, said Bragues, the loan period is lengthened, and creditors accept a lower amount.   

However, these talks may not immediately take place given the current political situation, he said.   

“Unless there is a peace agreement in the near term, I would be surprised if the Russian government doesn’t default on its debt.” 

He is available for interviews. 

Dr. George Bragues