Reimbursement of the debt in rubles, a possible economic counter-attack for Russia?

The Russian response to Western sanctions took a rather original form on Monday, March 7: developing a list of “hostile” countries and to allow Russian individuals and businesses to repay their debts in roubles, although the credit was taken out in another currency.

On this list, we find not only the countries of the European Union, the United States, the United Kingdom, Japan, but also Canada, Switzerland, Monaco and Korea.

The Kremlin’s decision indeed seems quite judicious and aims to indirectly obtain the support of foreign banks.

Double trouble?

Most economic sanctions against Russia aim to financially isolate the country. The logic is simple: money is the backbone of war. Without money, it seems extremely complicated for Russia to be able to continue its action in a sustainable way.

This strategy of undermining the Russian economy partly works. On February 24, the day of the invasion, the euro/ruble parity rate was 95 (that is, 1 euro equaled 95 rubles). On Monday March 7, it had risen to 148.38. This means that a Russian who wanted to buy a 300 euro product in France had to pay 28,423 rubles on February 24, and 44,366 rubles on March 7.

The ability of Russians to trade internationally is therefore greatly reduced. When we know that the Russians have imported almost $240 billion in 2020 (about 197 billion euros), the bill will increase significantly.

One would think that this devaluation of the ruble would reduce Russia’s export costs to foreign countries, favoring Russian producers on the international scene. However, to counter this potential positive effect, most European countries have decided to boycott russian exports. For example, they refuse to issue export licenses for certain goods. As a result, the sanction is twofold: imports decrease and exports are blocked.

What are the traditional solutions to this currency depreciation for Russia? The exchange rate regime of the ruble against other currencies is a so-called floating regime, that is, it is fixed by the laws of supply and demand in the market. To strengthen the ruble, it would be necessary to increase the demand for it, and therefore increase the number of international financial transactions in the ruble… which is deliberately prevented by the sanctions that have been imposed.

What card remains in the hands of the Kremlin? The answer given is imaginative to say the least: to authorize the payment of Russian credits abroad in roubles.

International banks at an impasse

In addition to players in international trade, people with loans from foreign institutions are directly affected by international sanctions. Let’s say you are Russian, you borrowed 100,000 euros from a French bank and you repay 500 euros every month. As of February 24, it amounted to 47,530 rubles, while the same amount is 74,190 rubles as of March 7. Credit is becoming more and more difficult to repay.

There is therefore a risk of a massive increase in defaults, causing difficulties for foreign banks. This is precisely the lever that Moscow intends to use. By allowing Russian debtors to pay their foreign loans not in local currency but in rubles, the country’s authorities delegate the maintenance and management of their currency from Russia’s central bank to foreign banks.

Let’s take our example from another point of view: you are a French bank, you hold 100,000 euros in debt issued by Russian customers, with a monthly repayment of 500 euros per month. As noted above, the redemption value of this loan between February 24 and March 7 is not the same amount in rubles, respectively 47,530 rubles and 74,190 rubles.

In itself, this may not seem problematic for the French bank, since in both cases it recovers the equivalent in value, namely 500 euros. However, the problem is not the value, but the currency. Once in possession of this amount, the bank has two options. He can decide to keep this money in roubles, but with the significant risk at present that it will devalue again, and therefore that the reimbursements will no longer be worth 500 euros. Alternatively, he can decide to go to the financial markets to exchange these rubles for euros.

But if everyone tries to convert their ruble at once, this will lead to an even greater decline in the value of this currency and therefore to a direct devaluation of the value of the refund. In both cases, the French bank risks a significant loss of value on its repayments.

The French bank therefore has every interest in ensuring that the rouble/euro parity does not lose more value than it already has. Thus, by taking this decision, Russia ensured that international banks would seek to indirectly support the Russian economy, in order to avoid having their credit devalued.

Some will say that another possibility for these foreign banks would be to simply refuse payment in rubles. However, this is extremely complicated from a legal point of view because the question arises as to which authority is competent to judge this case and whether the other party to the contract will recognize the court decision rendered, which is not certain. . From an economic point of view, it also means increasing the probability of never being reimbursed in the event of an escalation of the conflict…

Tana T. Thorsen