Russian government officials and Duma members have threatened that if the US and/or EU impose financial sanctions in response to Crimea/Ukraine, Russian corporates will just default on their debt:
A Kremlin aide warned last week that Moscow might refuse to pay off loans to U.S. banks as a retaliation measure against sanctions.
Mikhail Yemelianov from pro-Kremlin party A Just Russia went even further: “If they (the West) freeze our assets, then our companies could stop paying foreign debts. The Russian corporate debt exceeds $700 billion”.
Banks don’t lend to Russia in large sums on an unsecured basis. One of the things that caused Putin to freak out in 2008-2009 was that Russian companies (notably Deripaska’s Rusal) had pledged stock as collateral against loans. Putin got Russian government banks (Sberbank, VTB) to extend credit to these companies so they could pay off the loans to western banks, thereby preventing them from defaulting and having large blocks of shares pass out of Russian hands.
I don’t know about all $700 billion of Russian debt, but I do know a bit about loans to one company mentioned in the linked article: Rosneft.
Rosneft borrowed upwards of $10 billion to finance the TNK-BP acquisition. The structure of the borrowing shows just how dodgy even the biggest, most politically connected, state enterprises are viewed by western banks.
The loans were structured as prepays, and included trading firms Glencore, Vitol, and Trafigura as part of the structures. Rosneft entered into off-take agreements with the trading firms that obligate the Russian company to deliver oil to them over the next several years. The trading firms will then sell the oil, and send the receipts from the sales to the lending banks, thereby paying off the loans. That is, the banks do not trust Rosneft to pay. Rosneft never touches the money from the oil sales. It goes from the trading companies directly to the banks.
In other words, Rosneft’s oil is security for the loans. And as I noted when the deals were done, real supermajors (as opposed to pretend ones) don’t have to pledge such security in order to borrow.
So what would happen if Rosneft carries through on Yemelianov’s threat?
The only way to do that would be to default on the off-take agreements, i.e., to fail to deliver the contracted volumes to Vitol et al.
Good luck with that. The second Rosneft fails to deliver on the off-takes, and tries to sell cargoes pledged to the trading companies on the open market, the trading companies will take legal measures to seize those cargoes to enforce their legal rights. Knowing that, no buyer in his right mind will contract with Rosneft once it has stiffed Vitol, Glencore, and Traf. Meaning that Rosneft cannot just walk away from its debt, if it ever wants to export a barrel of oil ever again.
In Rosneft’s case, therefore, the threat to walk away is an empty one. The banks and trading companies have seen to that in the way the deals are structured. Precisely because they don’t trust Russian companies enough to lend on an unsecured basis.
I don’t know the structure of every loan provided by western banks to Russian corporates. But the structure of the Rosneft loans tells you that the banks have zero trust with Russian companies, and demand some form of security against the credit extended: the form of security will vary by the borrower and type of loan. Meaning that Russian corporates that attempt to retaliate against sanctions by defaulting on obligations to western creditors will suffer major, major pain.
So I say: call the Russians’ bluff. Impose sanctions. If Putin forces Russian companies to default in response, they-and he-will pay a far higher cost than anything inflicted on the nations sanctioning Russia.