G7, Russian Default, and Oil Price Cap



One among many agendas on this year's G7 summit, held on the 26 to 28 of June 2022 in Germany, is to put forward collective responses for on-going global challenges. The Group of Seven (G7), which consists of seven of the world's advanced economies, seeked a deal to impose a price cap on Russian oil in order to curb Russia’s ability to finance its war in Ukraine. In a joint statement, the G7 members are determined to implement various methods to limit Russia's revenues. The significant price of crude oil grounds the idea of an oil price cap, as Russia’s revenues have not notably declined. The purpose is to enforce the cap by restricting European insurance for Russian shipments, shipping services, and US finance. Under the scheme, those services would only be available to importers who adhered to the price ceiling. The G7 believes that Russia's oil imports to India and other countries still financed the Ukraine invasion since some countries are still allowed to import oil from Russia. As a result, it will affect Russia’s source of income and theoretically, reduce energy prices and ease the inflation caused by the war. Oil price cap will most likely succeed as service providers are mostly located in the European Union or the UK. On the other hand, this restriction must still be encouraged and involves many countries, especially Ukrainian oil consumers, such as India. Russia’s situation will become much more challenging with the addition of this new sanction, as they had previously been declared in default on their bond repayment.


Russia was declared to have defaulted on its foreign debts on Monday (6/27), the first default since the Bolshevik revolution more than a century ago, back in 1918. Also, the first time Moscow has formally reneged on its debts since the Russian financial crisis in 1998. The country missed a deadline of Sunday night to meet a 30-day grace period on interest payments of US$100 million on two Eurobonds initially due on 27 May. President Vladimir Putin's spokesman, Dimity Peskov, clarified that Russia has the money to service the payments, but sanctions made it impossible to get the sum to international creditors. The country was determined to avoid the default, which could be a major blow to the nation's prestige. The Russian Finance Ministry stated that they had attempted to make the payments but were not transferred to the final recipients due to the actions of third-party financial intermediaries. According to Trading Economics data, Russia has bonds in foreign currency amounting to US$40 billion, and its total foreign debt reached US$453.4 billion at the end of the first quarter of 2022. Making the interest amount of US$100 million on the two Eurobonds to be relatively low. Russia even has much larger foreign exchange reserves, sitting at about US$640 billion, almost half of which is placed abroad. The war between Russia and Ukraine made the United States and its allies freeze the foreign exchange reserves, making them inaccessible to the Russian Central Bank. Assuming half of its foreign exchange reserves are frozen, Russia will still hold around US$300 billion. Thus there shouldn't be any difficulty in paying US$100 million. However, the sanctions imposed by the West have made it impossible for Russia to pay its debts. The Russian Central Bank stated that they are preparing legal steps to regain access to Russia's reserves.


Although the short-term impact on Russia's economy is unclear, there will undoubtedly be significant consequences in the long run. While Russia is currently unable to borrow from abroad, and its existing bonds have collapsed in value to pennies on the dollar, the default is likely to cut off access to foreign financing for years. On the other hand, Indonesia will not be significantly impacted by Russia's bankruptcy due to Indonesia's minor trade cooperation with Russia. According to Yusuf Rendy Manilet, an economist at Center of Reform on Economics (CORE), the default that potentially occurs in Russia will affect the performance of exports and imports between Indonesia and Russia. However, in terms of the percentage of trade relations between Indonesia and Russia, it is somewhat small, only around 0.6% of the total exports made by Indonesia. In this current situation, there wouldn't be any direct impact on Indonesia as Indonesia does not import oil from Russia and changes would be more focused on global scale: rising commodity prices, food prices, and market volatility. The Russia and Ukraine war is one of the most significant contributors to the economic slowdown this year. Therefore, the likelihood of a recession, which is mostly brought on by high inflation in America and Europe, is currently more concerning.


Sources:

CNBC

CNN

Financial Times


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