Dividends and How Russia has avoided defaulting on its debt

The war between Russia and Ukraine has immense human upheaval, but it also has economic consequences. When one country invades another, every other country has to decide what to do about it or even if they want to do something. A number of years before, Russia was essentially given the keys to the barn door when it invaded a part of Ukraine. This was different, perhaps the world had changed, perhaps Ukraine was seen as mort important, but this time the western countries said we will not allow it to happen, but they could not send their troops because that would mean an escalation of fighting. The route imposed was sanctions. Russia similar to every country in the world imports and exports goods and services which run the economy. In Russia’s case they are a major oil and gas producer and through pipelines send the commodity to China, India and Europe. Both China and India have not stopped exports, Europe wishes it can but Russia is a major supplier. The west imposed financial restrictions on money held outside of Russia.

In an article by Eshe Nelson of the New York Times News Service the issue is how did Russia pay its debts. Russia similar to many countries around the world issues bonds and buyers come from around the globe because Russia has oil and gas to pay for the interest and principal payments. When the western world imposed sanctions, they froze the assets of the Russian Central Bank or about $500 billion in gold and cash held in banks around the world.

The Russian Central Bank increased interest rates to 20%. Then it ordered all companies in Russia to convert dollars and euros to Russia rubles. This demand has increased the value of the ruble which had fallen to cents on the US dollar. This was a short term solution lead by the government and now the President has ordered Russian gas customers to pay in Russian rubles rather than Euros or US Dollars. Russia supplies 40% of the gas used in Europe and gas sales bring in $850 million a day.

In early April, there was a $2 billion bond due for payment in US dollars. The week before, the Russian government went in to the bond market and bought 3/4s of the issue in exchange for rubles. That left $554 million to be paid.

A month ago, shortly after the war started, Russia owed $117 million and JPMorgan in New York and Citibank in London sought approvals to handle the transactions. The payment was made, however the end of the timeline is May 25. On May 27, about $100 million in interest payments are due.

There are corporations in Russia and they have bond issues and one example is Severstal, the steel giant it ran out of time to pay a $12.6 million interest payment and defaulted.

Credit ratings around the world have withdrawn their ratings for entities in Russia. Without access to credit, the world is a smaller place.

Linking to dividend paying stocks, access to and using credit is a foundation for an economic society to function. The longer the war, the less credit Russia has and the more expensive it is which means people and companies do less. When they do less, individuals consume less and the cycle continues. Shortly an official recession will be called because the economy is half functioning. When you examine what is happening in Russia, you can see it happening in many companies around the world, they can not pay debts and go bankrupt or do Chapter 11. When you are investing, the ideal is to stay away from companies doing Chapter 11 because you will own less, the restructuring will mean the bonds holders own more. The world is not perfect, but if you have set guidelines when to look for alternatives, hopefully you can find alternatives and try not to loose money.

There are more questions than answers, till the next time – to raising questions.

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