When a national government runs up huge bills by selling bonds, it cannot pay. So, it stalls. It says it will pay. It refuses to pay. The people who trusted the government and bought its bonds are ruined. The people who knew it was all a con job remain unharmed.
We are seeing this play out. Russia is saddled with over $780 billion in rubles worth of bonds from 1982. The was Brezhnev’s final year of life. Putin’s Russia cannot pay.
An international court, the European Court of Human Rights, says Russia must pay. So what? Russia will not pay.
The poor people who own these bonds, some very aged, may get something — a token payment. But maybe not.
A sovereign government can default. Investors who trust a government with their money long-term should assume that they will not be paid off.
Russia owes 25 trillion rubles. This is equal to half of the nation’s total output. It can’t pay. It won’t pay. It will default.
So will all the rest of them, including the USA. But now we get to see a defaulting nation squirm.
“This all should have been settled back in the 1990s,” said Boris Kheyfets, a Soviet debt specialist at the Russian Academy of Sciences’ Institute of Economics in Moscow. “How do you assume a debt that huge? It would collapse everything immediately.”
So it would. Every Western nation has done the same thing. There are more promises than productivity to fulfill them.
Soviet authorities began selling the 20-year certificates in 1982 for 25, 50 or 100 rubles, partly to redeem earlier bonds and partly to sop up cash from a command economy with few consumer goods. The State Domestic Lottery Bonds offered a token 3 percent interest and a chance at payouts of as much as 10,000 rubles, Kheyfets said. The top winners were entitled to a “chic” Volga sedan, while second prize was a Zhiguli.
Trusting Russians bought these bonds. Wise Russians didn’t.
Unlike other former Soviet republics that settled similar debts in the 1990s at a fraction of what was lost, Russia pledged to cover the whole amount. President Boris Yeltsin signed a law in 1995 ordering the government to restore savings via bank deposits and Soviet bonds based on what those holdings could have purchased in 1990. Payments started in earnest during Putin’s first term, when surging oil prices pushed the budget into surplus. Now Putin is back in the Kremlin for a third term and the budget is barely breaking even.
The bond holders will be stiffed. No court can compel Russia’s government to pay.
Who will tell Putin what he must do? No one.
In the 1990s, Russia was passing laws without thinking of how they’d be funded, Putin told a meeting of regional human rights officials Aug. 16. Repaying all lost savings immediately would mean “nothing left to pay salaries to soldiers, to doctors, to teachers,” Putin said, according to a transcript on the Kremlin’s website.
The elderly will get something. Maybe. Others won’t.
But what about the West? Medicare and Social Security are for the elderly. They all want lifetime subsidies.
“We make the payments every year, but it’s a miserly amount,” Kheyfets said. “I guess that’s just how it’s going to be until the people die.”
The estimated 25 trillion rubles in liabilities would increase Russia’s debt 10-fold. Conclusion: AGH. “Ain’t gonna happen.”
In 1997, Russia settled Tsarist bonds for $400 million. That was under 1% of foregone interest. That set the precedent.
Planning for retirement? Plan on a great default. Will you get paid if you are under 50? AGH.