The decision of the Belarusian authorities to fulfill external financial obligations in Belarusian rubles is already a default or not?

If the default of Belarus is officially announced, what consequences will it have for the country's financial system?

How long is the "echo" generated by the default, how long does the world market remember it?

Economist, senior researcher of the BEROC research center Zmytser

Kruk

answers these questions of

Yury Drakakhrust on the Svaboda Premium channel.

Briefly:

  • There is no default yet

  • It may happen in two weeks, when international rating agencies record Belarus' non-fulfillment of its international obligations.

  • Following the Russian authorities, the Belarusian authorities may try to have the default declared invalid

  • Default is more dangerous for Belarus than for Russia.

  • As a result of default, even banks of such countries as Turkey, Kazakhstan, Georgia may refuse to cooperate with the Belarusian banking system.

  • Asian lenders in case of default may demand early repayment of loans.

  • Earlier, Belarusian government securities were quoted at 95-105% of the nominal value, now at 10-15%.

  • Default leaves behind a long memory, not for years, but even for decades.

  • For investors, the default line in the credit file of Belarus will be very important.

  • As one of my colleagues jokes, there is a strong "return to 2019" party in the government.

  • The decree on the fulfillment of obligations in Belarusian rubles burns, if not all, then many of the few remaining bridges.

  • I do not rule out that it could have been a Russian proposal and it could have been a decisive factor.

— The Belarusian authorities have announced that they will fulfill their international financial obligations in the national currency.

"Execution of debt obligations on state securities placed on foreign financial markets will be carried out in Belarusian rubles at the rate of the National Bank on the date of payment," the press service of the government informed.

Is it already defaulted or not yet?

Zmytser Kruk

- The short answer is no, as long as there is no default.

But the probability that this will happen in the next two weeks is very high.

The very fact of default is usually recorded by rating agencies based on the issue of securities, if there is reason to believe that the money did not reach the creditors.

This is recorded after the so-called grace period — a favorable period, which in our case will be 15 days.

We have the declaration of the Belarusian government.

If everything goes according to this declaration, rating agencies can assign Belarus a default rating.

But it is possible that Belarus, like Russia, will dispute the very fact of default.

In the decree of the Belarusian government, there is a stipulation that some investors may not be paid in Belarusian rubles, but in other ways.

Hypothetically, it can be assumed that the Belarusian authorities keep for themselves the possibility of paying in dollars.

I do not rule out that the Belarusian authorities want to segregate "friendly" and "non-friendly" investors.

It is possible that Belarus will continue to pay "unfriendly" investors in dollars in order to avoid default.

- Did I understand correctly that "non-friends" will still be paid in dollars?

Like, let's deal with our friends amicably?

- Yes.

There is a high probability that "friendly" investors will agree to receive their payments in Belarusian rubles.

Finance Minister

Yury Seliverstau

said that the government would like to pay even some "friendly" investors in dollars.

to Russian investment funds, but it is impossible to pay them in dollars, because sanctions apply to these Russian funds.

And I do not rule out that this declaration to the government was due to this very factor.

If after 15 days the rating agencies announce that Belarus is in default, then the dispute that has already started with Russia will begin - is this a real default or not.

This discussion takes place in financial circles, the concept of "semi-default" appeared.

Legally, the default will be recorded, but for it to be complete, the government must not be able to fulfill its obligations.

The Russian authorities say that it is not that they do not have the ability to fulfill their obligations, it is that they were forced not to fulfill them.

I think that if the rating agencies make the appropriate verdict regarding Belarus, the Belarusian side will declare the same as the Russian side - the default is invalid, there is no default.

— If the Belarusian government starts paying investors in Belarusian rubles, then for the rating agencies to make a decision, it is necessary for the investors to start getting indignant, making scandals?

Theoretically, they can remain silent, considering that it is better to get theirs at least in Belarusian rubles than not to get anything at all?

- Yes, there is a theoretical chance for that.

If all creditors do not publicly express their disagreement with the fact that they were not paid in the currency specified in the contract, then the rating agencies will have no reason to announce the default of Belarus.

But Belarusian bonds are also held by Western investment funds, so it seems unlikely that at least they will agree to the new order of payments proposed by the Belarusian government.

- Well, if the most likely scenario is realized and the rating agencies announce that Belarus is in a state of default, what consequences will this have for the national financial system?

Belarusian economist Mihas Zaleski once answered a similar question: You don't care how strong the wind blows over your grave.

Maybe with the announcement of the default of Belarus, that will be the case?

No one has been giving non-political loans to Belarus for so long.

And without default.

So maybe more defaults, less defaults - the result according to Zaleski's formula?

— The short-term consequences of the current default will not be as devastating as in 1998.

In part, everything has already been destroyed by now.

There are reasons to believe that Mikhas' formula is fair.

But it is more suitable for the Russian case.

The initial reaction will not be the same as the Russian default in 1998 or the Argentine default at the beginning of the 21st century.

Such consequences as then - the destruction of the financial system, mass bankruptcy of banks - will not occur in this case.

The logic of Zalesky's formula will work - what has already died cannot die.

Tragic consequences for the Belarusian financial system occurred in the last two years.

But what will happen and why is it more dangerous for us than for Russia?

Russia has a margin of safety in the form of gold and foreign exchange reserves, in the form of a budget balance.

And we have literally every penny in the account.

There are banks that continue to work with Belarusian banks, that are ready to serve import-export operations, are ready to help with settlements with Western banks.

These are banks of such countries as Turkey, Kazakhstan, Georgia.

For them, the verdict of the rating agencies regarding the default of Belarus is an additional obstacle.

And now Belarusian business suffers from the fact that no one wants to do business with it.

After the announcement of default, the situation will worsen.

There is not much western money left in Belarusian banks, but there is money from countries of the "third world", China, for example.

And in many agreements about this money, the so-called covenants are prescribed - conditions that in case of default of the recipient of the loan, in this case, Belarus, the creditor has the right to demand early repayment of the loan.

Russia can ignore such inconveniences due to its safety margin.

Therefore, Armageddon, something similar to 1998, will not happen now.

But the fact that this will become an additional factor of turbulence on the Belarusian financial market is true.

- What will happen to the rate of Belarusian state Eurobonds?

My understanding is that when a country defaults, its government securities are worth junk.

Will it make any difference?

- So they are already traded at such prices.

Everything according to Zalesky's formula.

Liquidity there is almost zero.

They are traded at a price of 10-15% of the face value.

This is already a default state.

In the best times, they traded at 95-105% of face value.

- If Belarus defaults, how long will the market remember it?

In the report of the Bloomberg agency about Russia's current default, I was struck by the mention that the last time this happened in Russia was in 1918 (!).

This is when the Bolsheviks refused to pay the royal debts.

104 years have passed, a lot has happened during this time, to put it mildly.

And the market remembers that Leninist default.

Time will pass, the war will end, Lukashenka will leave, a democratic government will emerge in Belarus, which will conduct a responsible financial policy.

But perhaps, in this wonderful future, for some Indonesian or Brazilian investor, all this progress in little-known Belarus will not have any meaning.

And one thing will be important - the fact that in 2022 this country defaulted.

And that's all, period, it's better not to invest money there - it's up to these investors to decide.

It won't be like that?

- Thank you for this question.

This is my main argument why I always say I am against default.

We argue a lot with colleagues about this.

Many of them say that if the default is almost inevitable due to financial reasons, then there is no need to delay and it can even become a cleansing procedure for the economy.

I can agree with that to a certain extent.

But if we think about the long-term perspective, then what you said comes into play.

Default leaves behind a long memory, not for years, but even for decades.

This does not mean that Belarusian debt and Belarusian bonds will never be bought by anyone.

But, firstly, it will be more expensive than it would be without default.

And, secondly, the attitude towards Belarusian bonds will be skeptical anyway.

As football fans say, the game is forgotten, but the score on the scoreboard remains.

The reasons for the default will be forgotten, its very fact will be remembered for a long time.

And for investors, the default line in the credit file of Belarus will be very important.

This decision to the government and the National Bank about the payment of debts in rubles was a surprise for me.

I thought they would delay this decision as long as possible, until February 2023.

Then it will be necessary to repay more than 800 million dollars.

I don't have a definite answer as to why they did it now.

One of the versions is an attempt to pass off a financial default as a "semi-default", to get caught up in the Russian situation, saying that the same thing happened to us.

Although, in fact, our situation is very different from the Russian one.

- Isn't it possible that the Russians asked, suggested, advised to do this?

- It is not excluded.

There is a very big political component in this decision.

Using only financial logic, it is difficult to justify it.

Until recently, the Belarusian authorities were guided by the principle of not burning all bridges.

Most of them were burned, but all of them did not want to smoke.

As one of my colleagues jokes, there is a strong "return to 2019" party in the government.

This decree burns, if not all, then many of the few remaining bridges.

Therefore, I do not rule out that it really could have been a Russian proposal and it could have been a decisive factor.