Taking into account the situation that has developed in the Russian economy, residents are increasingly asking whether there will be a default in Russia in 2019. It is not only the sanctions imposed by Western countries that push them to such thoughts.
The population is expecting a default for a number of reasons: oil prices continue to decline, rising inflation, as well as the ongoing military conflict near the Russian borders. And no sane person can take this calmly. People are pinning their hopes on the country's leadership, expecting that it will have enough experience to prevent another default.
If you turn to economics textbooks, you can find out from them what factors contributed to the past default. And if you compare them with the current situation in the country, you can understand whether a default is possible in Russia in 2019.
- Significant difference between current and planned income. When calculating the Russian budget for 2019, it included an oil price of $41.6. But after the decline in prices for “black gold”, there was a decrease in income. This led to a budget deficit, forcing the authorities to reduce planned spending. This was the only right decision, since otherwise the country would have been forced to default.
- Reduction in income caused by insufficient tax revenues and falling prices for exported goods.
- Economic crisis.
- Leapfrog in leadership positions, as well as sharp changes in political course.
- Force Majeure.
Taking these factors into account, it is not yet possible to say for sure whether Russia is at risk of default. The authorities are clearly trying to prevent a new default. But if we rely on the opinion of experts, then such an outcome is unlikely.
Will there be a default?
The current situation in the country once again confirms that the level of well-being of the population has decreased. Moreover, as a result of the economic crisis, not only ordinary citizens, but also small businesses suffered. The current situation is such that many people have been laid off, and this happened not only because of sanctions, but also because of difficulties at the enterprises themselves, which were unable to properly manage loans and rebuild in the light of new events.
The situation was aggravated not only by the decrease in incomes of the country's residents, but also by rising inflation.
The position of the ruble, the exchange rate of which may fall against the dollar and euro after the extension and introduction of new economic sanctions, does not inspire hope for an improvement in the situation.
Observing all this, ordinary residents are increasingly thinking that a default in Russia in 2019 is possible.
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But experts disagree with this. They claim that things are not so bad. Even if a default occurs in our country, it will be limited to only a technical one. Experts pin their hopes on the right policy of the authorities, which will be able to prevent bankruptcy.
Preconditions for default
Central Bank specialists, as well as financial experts, do not expect that life in the country will be able to return to normal in the coming year. Until sanctions are lifted and the political situation with neighbors stabilizes, there can be no talk of normalizing life in the country. Therefore, it is impossible to say unequivocally whether Russia will face a default.
As a result of the introduction of sanctions, most domestic banks suffered, which do not receive sufficient financial support from the state. Because of this, they are unable to continue cooperation with European financial institutions.
And finding themselves in such a situation, they have to make a decision to temporarily suspend cooperation with international structures or completely stop them.
According to experts, the solution to such a situation may be to search for new partners in the Asian market. And today there are active attempts to establish relations with Asian banking institutions.
The main consequence of a default for Russia will be a significant decrease in gold and foreign exchange reserves. And this will lead to banks providing loans on more stringent terms. After all, when the Central Bank has large reserves, it has the ability to provide more loans, and this makes it possible to soften the conditions for their issuance.
The positive side of default
Despite the fact that experts do not exclude the possibility of default and call it an extremely negative phenomenon, it also has certain advantages, the essence of which is briefly as follows.
Having the opportunity to completely write off debts or delay their repayment, the country is freed from obligations, which allows it to devote all its efforts to economic recovery. Creditor countries know about this, and therefore, in the hope of getting at least some money, they agree to write off a significant part of the debt to the bankrupt country or exempt them from paying interest.
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When a country declares itself bankrupt, it can begin to restore its own production by increasing competition within the country. As a result, industries that were previously in a “frozen” state due to lack of funding are beginning to develop.
A bankrupt country has the opportunity to reorient the economy towards a new development strategy and organize processes in such a way as to become independent from imports.
The ability to stabilize the national exchange rate through, for example, devaluation.
Naturally, no one argues that a default causes serious damage to the well-being of citizens and negatively affects its position in the international arena. However, in the future, it can improve the health of the country and give it the opportunity to reach a new level of development.
1998 default
The last time our country experienced a default due to lack of money, which was in 1998, was caused by the collapse of the USSR. At that time, the national economy was going through hard times, and the lack of sufficient financial resources forced the leadership of our country to take out large loans year after year. The 1998 default in Russia contributed to an increase in public debt, and in 1998 it already amounted to 50% of GDP.
Emergence
The rapid recovery of the country's economy was hampered by a sharp decline in oil and gas prices, which just happened in 1998. And given that at that time the Russian economy was entirely dependent on these resources, its situation became even more dire.
The last straw that caused the 1998 default in Russia was the wrong policy of the country's leadership and the Central Bank.
After the default, when there was still little money, the economy began to recover, which naturally stimulated the growth of GDP. This made it possible to gradually repay the national debt. And when new people came to the government in 1999, our country was able to strengthen its position on the world stage.
Consequences
Many people remember that the most terrible date of that period was August 17, 1998. Having assessed the situation, the country's leadership, namely the government, announced a default on external debts. Due to the lack of money, it was decided to devalue the national currency and stop servicing some obligations.
The default had an extremely negative impact on the national currency, the exchange rate of which decreased by 4 times. If before the default the exchange rate of the national currency against the dollar was 6 rubles, then subsequently it rose to 24 rubles.
Among the main questions that concern residents of Russia, in addition to questions about the price of oil and the exchange rate of the ruble, the question of the possibility of devaluation of the Russian currency, as well as whether there will be a default in 2017 in Russia, stands out.
Default: what is it?
First of all, it would really be worth understanding what a default is. In economics, a default is when a debtor cannot fulfill its obligations to creditors, that is, a default for states is when there is no money in the country’s budget to fulfill its obligations and repay external debts. In principle, the state, like any other economic entity, constantly borrows money, and the presence of some debt obligations is the absolute norm for almost any country (we will not take into account rogue countries, although they also have debts). It is quite understandable that if the state’s economy is weak, it is forced to take more loans from outside. When the economy of such a country comes to a standstill and it turns out that there is simply nothing to make the next loan payment, the state has no choice but to declare its own default.
The announcement of default is an extremely negative event, and usually everything is done to prevent this from happening. Default is also a blow to the image and prestige of the country; such a state will no longer be willing to give loans, just as investors will not come to invest their money in such a state. Therefore, over the past decades, defaults have been declared only a few times, despite the fact that there are a lot of extremely poor, economically weak states in the world.
One of these declared defaults was our Russian default of 1998, which Russians remember, and based on these memories, we sometimes call some things not quite correctly. The fact is that we rather remember the devaluation of the ruble that hit everyone very hard, which was caused by the default; the devaluation was followed by severe inflation and a drop in living standards. Devaluations also occurred after 1998, and they occur much more often in the world, so whether there will be a default in 2017 in Russia, and in what month, is actually not a primary question. It may be that events will be extremely negative, but no default will happen, but this is unlikely to bring any relief.
Default in Russia in 2017 and expert opinion on its possibility
We have already found out that one of the main conditions for the possibility of default is a large number of external loans. Russia as a state does not have so many of them. The debts that were accumulated during the period of weakness of the Russian economy in the 1990s were repaid a long time ago. After this, there was such an abundance of oil that there was no need to borrow money abroad, especially for long periods of time. In addition, international sanctions have been imposed on Russia, according to which it cannot borrow either as a country or through its business.
Therefore, a default in 2017 in Russia is extremely unlikely, and for it to be declared only a complete collapse of the entire Russian economy must occur. For such a collapse to happen, everything must suddenly work against us: internal reserves must be exhausted, the cost of hydrocarbons must fall sharply, and the ruble must go into a deep dive. At the moment, only national reserves are of concern, and the ruble is quite held at a certain stable level along with oil prices in the world. So talk about default is still premature and too alarmist, but the low probability of default does not negate the seriousness of the economic crisis in the country.
Very often on TV or radio you can hear loud statements that Russia is currently on the verge of default or that in 2017 Russia will certainly have one. In fact, in order to make such conclusions, it is necessary to analyze the economic situation in the state according to certain criteria. Default itself has certain signs and prerequisites, so it is important to strictly follow these markers so as not to confuse default with an ordinary economic crisis.
First of all, in order to evaluate the forecasts and more thoroughly understand the essence of the issue, it is worth understanding what default is in simple language. The word default itself means a fall, but if we talk about the economic component of this term, then even experienced economists disagree.
If we consider as generally as possible what a default is in simple words, then we can say that This is a rapid and significant deterioration in the economic condition of the state. But at the same time, the question immediately arises, what will be the criteria for a rapid decline in the economy.
Here, it is customary to simultaneously identify several signs, which include:
- rapid inflation. This implies total inflation of more than 2000% per year or 100% per month;
- decline of the bulk of economic sectors. This includes businesses closing or becoming unprofitable;
- total cuts. More than 10% of workers across the country are laid off in a year;
- insolvency on debts. The state cannot pay off both external and internal debts. This implies that the state not only cannot repay the debt at the request of the creditor, but even pay current interest on the use of funds.
Many experts debate whether all of these rules should be implemented at the same time or whether just one problem is enough. International practice shows that usually such a high level of inflation or insolvency on debt obligations is quite enough to declare a state bankrupt.
At the moment, it is prohibited to use any forceful methods of collection against a state that refuses to repay an external debt. But at the same time, many other levers of influence are possible. This could be the forced sending of specialists to improve the economy. But most often, creditors limit themselves to writing off part of the debt or restructuring it.
State of affairs in Russia
If we consider the economic situation in Russia today based on the factors listed above, we can conclude that only a fall in the ruble in 2017 can provoke a default. In the Russian Federation, inflation is indeed at a rather dangerous level.
Otherwise, there is hardly anything to be afraid of. Russia has almost completely paid off its external debt, and in addition, it itself is a creditor of several less developed countries.
The same can be said about the decline of economic sectors. Recently, if such trends can be observed, they are only minor. They are not large-scale and therefore do not pose too serious a threat to the country’s economy as a whole. In addition, significant development of petroleum products production makes it possible to compensate for losses from other sectors. But this is only observed now based on the results of past periods.
At the moment, due to an overabundance of oil in the world, as well as due to the opening of 7 additional oil production sites in the United States, oil prices have fallen slightly. It is planned to stabilize the situation in the near future, but in any case this will not lead to a rapid decline in the economy.
The Russian ruble, as recent news shows, causes much more concern. This is the only sign of default, which may well become a reality if the situation does not change in the near future.
If we evaluate past events, when prices for building materials and many other goods increased several times overnight, then the current situation in the financial sector does not raise such obvious concerns.
According to the latest data, the ruble has noticeably strengthened its position, but there is still a certain risk that due to tightening sanctions, the national currency may again begin to lose its position. However, it is still worth noting that most likely inflation will not reach such critical levels as to provoke a real default.
Expert opinion
Recently, very often among world-famous economists one can observe a discussion on the topic of whether there will be a default in Russia in 2017. It is extremely difficult to predict anything accurately, but still some fairly objective arguments are given in favor of the fact that default is a very real prospect this year.
Some economists are inclined to believe that in the near future Russia will not be able to service even its current external debt obligations. The reason is primarily the rapid fall in oil prices. Previously, it was with this resource that the state could fully compensate for all costs. At the moment, the budget does not even have enough money to pay for the indexation of pensions. The government initially provided too significant social guarantees and subsidies for the population, which now the federal budget simply does not have the ability to cover in full.
The Reserve Fund does not have enough funds to cover all budget shortfalls. Current payments significantly exceed budget revenues and very soon the country may completely exhaust all its reserves. It is believed that the situation will only worsen further.
Oil may fall to $30 per barrel as early as mid-2017, and then the solvency of the Russian Federation will deteriorate even more. In addition, the political situation in the country may well play a cruel joke. If many states further tighten sanctions on Russia, then the answer to the question of whether there will be a default in 2017 becomes almost obvious.
Options for resolving the situation
Recently, the country's government has been making strenuous attempts to avoid repeating the 1998 default. It should be understood that attracting alternative sources of funds has a number of significant risks for the country and therefore it is difficult to predict the final result.
To solve financial problems, it is planned in particular:
- Increase domestic debt. By the end of the year it should exceed 10% of GDP. The main problem is the rather small number of potential creditors.
- Privatization. This year it is planned to sell large blocks of shares of state enterprises. But this will only solve current problems. In the future, we should still look for more stable sources of financial income.
- Ruble devaluation. Although this is not considered a very good way out of the situation, it will still significantly reduce the burden on the federal budget.
According to experts, the risk of default in 2017 is quite low, given the low external debt. But everything will finally become clear when the situation on the oil market becomes clearer.
For government bonds, which caused the collapse of the ruble and. The 2008 crisis also occurred in August. It is not surprising that now we are expecting another trick from this month, and we are afraid for our finances.
Today, Russia’s financial position is stable, despite sanctions and low oil prices, says Roman Tkachuk, senior analyst at Alpari. And yet, the prospects for the ruble cannot but worry Russians.
Everyone knows that the exchange rate of the ruble is greatly influenced by the price of oil. Today it is trading in the range of 45-55 dollars per barrel. Experts believe that the Brent price will not go beyond this range until the end of the year. It is not worth expecting it to return to $80-100 due to increased production in the USA, Nigeria, Iran, Libya and other countries. But you also don’t have to worry about a fall to $25-30, because this will make many oil projects unprofitable.
No less than from oil, the ruble depends on the balanced policy of the Central Bank. The inflation rate reached the target level of 4% in August; In the last three weeks, prices have even been fixed and falling. Therefore, there is an opportunity to pay more attention to stimulating economic growth and ensuring the stability of the ruble exchange rate. The Central Bank continues to cut rates; the next meeting is scheduled for September 15. By the end of the year, the Central Bank will meet three more times, and two more rate cuts are planned to 8.5%.
Note that the regulator has great opportunities to influence the financial situation. Instruments for such influence include the key rate, foreign exchange transactions, bond placement and other liquidity management levers. For example, this week, after withdrawing excess ruble liquidity from banks, the Central Bank placed three-month bonds worth 150 billion rubles. The regulator plans to take such steps in the future. By the way, one of the goals of such placement is to maintain the ruble exchange rate.
It is worth saying that in August the ruble looked better than other developing country currencies, even despite volatile oil. According to experts, until the end of August the dollar and euro will remain at round levels of 60 and 70 rubles, respectively.
Judging by how the situation is developing, autumn will bring a slight weakening rather than strengthening to the Russian currency. This forecast is supported by the strengthening of sanctions against Russia by Western countries, as well as a decrease in demand for the ruble as a deposit currency for carry trade.
Western investors will not change their negative attitude towards Russian assets in the near future; rates in the Russian economy will continue to decline, and the monetary policy of the Federal Reserve and the ECB will gradually tighten. All these factors will play against the ruble. One cannot discount the fact that, for the first time since 1998, the current account of the balance of payments in the second quarter became negative. Finally, it is no secret that by the end of the year the issue of the budget deficit will become very acute. And the simplest solution in this situation would be a slight weakening of the ruble.
A very difficult situation is emerging in Russia, forcing many analysts and ordinary people to ask the same burning question: what will happen to the country in 2017? Sanctions have not helped any economy in the world and ours is no exception. Western sanctions for Russia were first introduced in March 2014 and still continue to have a negative effect on the country’s internal and external economies.
Foreign eminent agencies intend to lower Russia's rating in the investment market. Today it is close to a dangerous rating for investment, the so-called “garbage” rating in common parlance.
The word “default” is increasingly heard in the media in relation to Russia, and in an atmosphere of problems with international society and the instability of the Russian economy, this scenario may become a reality.
Default: the essence of the concept
Default (from English default - failure to fulfill obligations) is one of the most terrible words for the country's economy. In essence, this concept means the inability of the payer to repay his loans to the lender. Where do government loans come from? To properly maintain the economy, the country needs certain expenditures from the budget. Unfortunately, the state budget does not always include a sufficient amount of funds to fulfill all social obligations.
Without this, any state will become unreliable and will cease to be listed on the international investment market. This is how both internal and external loans appear. It follows that the weaker the country’s economy, the more loans it has. If debts are not managed correctly, the situation will worsen even more and default will occur.
Russians still have fresh memories of the terrible time of the decline of the nineties: fast pace, empty shelves, kilometer-long queues in stores.
Over the past twenty years, default has manifested itself only four times: in addition to Russia in 1998, this was a default in Mexico in 1994, in Argentina in 2001 and in Uruguay in 2003.
What awaits Russia in the future
In fact, the default forecast given by analysts and economic experts is quite low. Russia has managed to pay off the vast majority of its debts, has accumulated a significant amount of gold and foreign exchange reserves, and is emerging with dignity from the situation that has arisen due to the sanctions imposed.
However, it is worth taking into account Russia's serious problems with the domestic economy. Today there is a jump in prices for literally all goods and services. The economic downturn is visible to the naked eye, and many experts note that such a state of affairs can significantly affect the overall situation in the state.
In Russia, many understand by default the increasingly deteriorating state of the country, both economically and socially: rising unemployment, social tension. Most likely, these phenomena will intensify even more in the coming years. Of course, this cannot please the population of the Russian Federation. But even based on these indicators, it is impossible to say for sure whether the country is expecting a default. For the most part, the future of Russia depends on sanctions: their lifting or tightening.
Sanctions: canceled or extended
Recently, the illusory possibility of lifting sanctions has become increasingly real. Thus, at the Russia-European Union conference, EU Ambassador to Russia Vygaudas Ušackas, in his speech, gave Russians hope that sanctions against Moscow would be revised in the near future. According to him, there are no reasons to tighten sanctions, since there is no deterioration in the situation in eastern Ukraine. The ambassador also said that due to Russia’s participation in the fight against IS in Syria, Brussels will not lift restrictive measures.
At the next EU summit, which will be held on December 14, 2015, the topic of extending sanctions against Russia will be raised. In the meantime, the sanctions are in effect until the end of January 2016.
It should be understood that both the Russian Federation and the countries of the European Union are suffering from the imposed economic restrictions. According to foreign experts and analysts, EU countries are losing 2 million jobs and $100 billion due to sanctions against Russia.
These infringements cost Germany the most. The country has already lost 27 billion euros and 500 thousand jobs. Italy became poorer by 0.9% of its total economic power and lost 200 thousand jobs.
The Russian Federation has lost over $150 billion from Western sanctions.
Is the situation repeating itself?
It is clear that experts are drawing an analogy with the crises that Russia has already had to go through. The most serious of them is the 1998 crisis with the devaluation of the ruble and default. It is also worth remembering the crisis of 2009, when oil prices fell so much as to lead to a deterioration in the lives of Russians.
All crises have certain common features. For example, the crisis in Russia is characterized by a significant rise in the price of black gold and predictions of an even greater drop in the cost of oil, a bloated state apparatus, and the not very competent policy of the Central Bank to preserve and maintain the exchange rate of the national currency.
The impending default is supported by the rapidly falling ruble and the equally confidently falling price of oil. However, a default threatens the country only if such a situation drags on and the government does not take any measures.
According to forecasts, the dollar and euro will rise. Of course, not as quickly and sharply as it was recently, but this will be quite enough to significantly reduce the incomes of Russian citizens. Therefore, the question “will there be a default in Russia in 2017?” concerns many Russians. This is not surprising, because you always want to be prepared for any development of events.
