What happened in Russian default? Or any sovereign default?

Discussion in 'Economics' started by MathAndLogic, May 16, 2011.

  1. I was in school during the Russian default and was not paying much attention. From what I have read from the web, there was no foreign country invading Russia, taking Russian land, looting Russian gold or national treasure or agricultural produce. It seems to me the Russians did a brave thing and it helped destroyed LTCM. In retrospect, there wasn't much damage to their economic image or reputation either, and Russia is a vibrant, growing economy today.

    So, when a country is in huge debt, maybe it should just say: "Fcuk the creditors who try to enslave us. You want a piece of me? You have to get through my army, navy, and my air force, AND MY NUKES first !!"
  2. Don't need to invade Russian, there were plenty shills who are willingly to sell out and become wealthy Oligarchy of new Russia. It is called coloured revolution. Default on its debts is just part of game. Common man will suffers though inflation, politician and few its cronies will become fabulous wealthy.
  3. toc


    No body was invading Russia but nearly everyone was looting Russia if they had a chance. During 1990s, $3 to 5 Billion was leaving Russian economy each month and landing in the Swiss and other banks in the West. Culprits were Russian Oligarch, Mafia and their foreign cahoots.

    In 1990s, oil prices were below $20 a barrel or around and as of today it is said that 'Russian economy is balance at oil price of $70 per barrel'. So one can imagine how much deficit Russians were into at that time. Worst Russia had to take all the financial obligations of the USSR and it ended up writing off $161 Billion in credit to mostly third world nations but also others like Libya and Syria etc.

    Unfortunately, Russians have not done anything substantial to diversify their economy from energy and commodities sector. Commodities cycle in bull run can last upto 2018 to 2020 and after that another bear run in commodity prices.

    Due to commodity run, as of today Russia does look good financially but in depth not much has changed. Most of the money and power hangs around Moscow and go 50 miles out and you see the sudden drop in standards of living, infrastructure as if those areas are purposefully neglected.

    US will show the finger to the debtors not verbally but devaluing its currency and watering out the debt that way. Stupid Chinese have been sending them goods and in return got only 'paper promises' which in devaluation scenario would mean 'a big joke' on the face.

    :D :cool: :p
  4. toc


    Still pretty much the same. Yeltsin stopped most of the weapons research and with also went a minor source of export income to the economy. Today Russian weapons programs are in such bad shape that they are buying French ships and would not develop new weapons until and unless foreign nations invest into the technology development. They have upgraded only their missiles with new ones like Topol, Bulava etc. Rest famous systems like S-400, Sukhoi-30/33/35, Mig-35s are all extension or/and modification from the Soviet research.

    At one point in 1990s Russians were without a satellite coverage to intercept or locate a missile launch on their territory. US could have conducted a 'First Strike' with much more advantageous position..........but that is not American mindset. 'Cause if it was, then US would have invaded USSR in 1945 WWII's end with 'Atom Bombs' in the inventory.............something which Russians did not have for next 5 years or so.

    :D :cool: :p
  5. toc


    'I disagree with your analysis of US being saved by devaluing the dollar further.'

    Do not get me wrong, more than HALF of US debt is owed to US citizens and US financial instituitions. So devaluation can only go a limited distance but even in that 'it will hurt' common person of lower and middle class. Around 20-25% is owed to Chinese and rest is here and there. Can't imagine that US leadership is not doing anything drastic to undo the 'debt crisis'. They seem to be doing nearly nothing at all as if they are drunk or may be knowing that world might end in 2012 or so.

    :D :cool: :p
  6. toc


    US not good guys but they know that even 1 nuke on their land will cause them lots of discomfort. US does and still hates Russia as much as it did USSR. This hate and fear of Russians is the reason why US did not cut its defense budget down after 1991 and now it is $700B and up. They missed a golden chance to get their books in order but emotion of hate is very strong to overcome. Now they are stuck with mountain of debt and some slick toys like F-22s.

    :D :cool: :p
  7. toc


    To be correct Canadians are buying F-35s for roughly 7-8 Billion. F-22s are not to be exported to anyone including Israel and UK........atleast as of now. Canadians do not need F-35s but they have to buy them to keep the US factory humming.

    US can afford to shut down all its new weapons program for 5 years and still find itself well ahead of anyone and/or few others combined. But too much ego/hate/fear does bring powers down, as per the history books.

  8. Well, it's not like Russia only defaulted on its obligations to its foreign creditors. Domestic investors, including bank depositors suffered losses, which were extremely painful and led to a lot of turmoil. Otherwise, yeah, it seems like it all worked out OK in the end, but it sure wasn't pretty back then.
  9. LeeD


    The main reason for Russian default in 1998 is apparently little known.

    In the year preceding the deafault the Russian government was trying to set-up a US-style system for financing the budget deficit. Instead of "printing money", which was the main way to finance any shortfall since the Soviet Union, the Russian government decided to issue bonds. With money leaving the country by shipload, ministers figured no sane local investor would buy long-term bonds. So, instead of issuing 30-year and 50-year bonds the government decided to issue 3-month and 6-month bonds in the form of so-called GKOs.

    It was decided that the bonds would not be offered directly to investors. Instead they would be sold at an auction to a small number of select banks, the primary dealers. It was assumed that the banks will sell these bonds on to actual investors and the market will sort out a fair interest rate.

    What happened instead is primary dealers colluded and formed a cartel. They drove the interest rate on GKOs to 150% at one point. Compare this to 5% interest on a typical saving account at the time.

    Naturally, this program proved so lucrative to the select banks that they kept all the government bonds to themselves and didn't sell any to clients or in the open market.

    As you can guess, financing budget deficit at interest rate over 100% wasn't sustainable and this ultimately led to the default.

    Icorrect! In fact, Russia received substantail loan via IMF and World Bank. In fact, if Russia asked for financial assistance earlier, both the default and near doubling of Rouble prices in the next few days could probably have been avoided.

    In fact, it's the local investors in Russian debt who got screwed. Forein investors just had their coupons dealayed by a few months. In the end, they didn't even have to take a haircut. So, there was no reason for any drastic action.

    MathAndLogic, default is a technical term and it means the bond issuer doesn't pay on time. If the money is payed in full a few days later than promised, technically it's a default.
  10. Indeed. Moreover, the whole "fuhgetaboutit, we're not paying you back" story is inaccurate. For example, Russia has, in fact, re-negotiated/pre-paid/bought back/repaid all its debts to the Paris Club, including those it inherited from the old Soviet Union ($48bn). So the idea that countries like Russia are doing well today because they told their Western creditors to take a hike is pure unadulterated bullsh1t (not surprising, given its author).
    #10     May 16, 2011