International credit rating agencies say President Vladimir Putin’s decree on foreign debt repayment means a default is almost inevitable. The decree states that creditors of countries that have committed “hostile actions” against Russia can now be paid in rubles (increasingly worthless) via special accounts in Russian banks – and the Ministry of Finance is not no longer obliged to pay debts in foreign currency.

By definition, a default occurs when a borrower fails to fulfill its obligations to the creditor. This may mean not paying interest and principal on debt on time or in full, or not meeting the terms of loan agreements (including changing the specified currency).

Converting foreign-currency-denominated debt securities into rubles would mean default, the chief economist at one of Russia’s leading think tanks told The Bell.

The markets are almost certain that Russia will default. Government bonds maturing in 2023 fell to historic lows at the start of the week, at just 29% of their face value. And US investment bank Morgan Stanley predicted they could even fall below 10% – a level seen only for government bonds issued by Venezuela and Lebanon. The Bloomberg index of Russian sovereign bonds has fallen 81% since the start of the year. Only Belarus – down 93% – shows worse results.

For Russians, the word “default” immediately evokes memories of the traumatic economic crisis of 1998 and the huge devaluation of the rouble. At the time, the default was due to a sharp decline in the value of the ruble, runaway inflation, the failure of several large private banks, and the forced conversion of foreign currency deposits into rubles. But things are different this time. “A rapid increase in prices, the devaluation of the ruble, the fall in income and the fall in the standard of living of Russians in 2022 will not be the result of any default,” said the chief economist of one of the most major Russian think tanks. He added that ruble debt repayment is peripheral to what is currently happening in the broader economy.