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Andreas Cervenka

Economic war can play into the hands of China

PUBLISHED: LESS THAN 2 HOURS AGO

UPDATED: LESS THAN 20 MIN THEN

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On Wednesday, Russia is expected to take the first steps towards a state bankruptcy. It is the first time since the Russian revolution in 1917 that the country does not pay interest on its foreign debts.

But economic warfare against Russia is also likely to strike back - not least against the United States.

On Wednesday, Russia will pay interest of a total of 117 million dollars, about 1.1 billion kronor. The Russian state has said that the money will come, but in the form of Russian rubles instead of in dollars.

It would be classified as Russia suspending payments, according to credit rating agency Fitch. Russia then has 30 days to pay, otherwise the country will officially go bankrupt.

The Russian state has approximately SEK 380 billion in debt in foreign currency, primarily dollars. About half have been lent by investors outside Russia. The last time the country did not pay on its foreign debts was after the Russian Revolution of 1917.

In 1998, Russia suspended payments, but this time only on banknotes in rubles.

In addition to the Russian state's debts, companies such as Gazprom and banks also have foreign loans totaling $ 105 billion, according to the news agency Bloomberg.

Should these also fail to pay, the Russian collapse would be one of the largest ever, the blow only when Greece did not pay its lenders in full in connection with the euro crisis - even though at that time it was not officially called a bankruptcy but a "restructuring" .

Argentina (three times between 2001 and 2020), Venezuela (2017) and Lebanon (2020) are three other countries that have gone bankrupt in modern times.

Russia's problem is not a lack of money. Russia's national debt is low relative to GDP, only 20 percent, and before the invasion of Ukraine, the country was considered highly creditworthy due to its large revenues from oil and gas exports. The country also has a large foreign exchange reserve of over 630 billion dollars or 6,000 billion kronor. But EU and US sanctions have left more than half of those assets frozen.

The latter was a unique measure, and may have led to a paradigm shift in the world economy. This is the opinion of analyst Zoltan Poszar at the bank Credit Suisse, which played a key role during the financial crisis in 2008 when he worked at the US Federal Reserve and was one of the few who saw the vulnerabilities in the financial system.

The Russian bankruptcy in 1998 triggered a global financial crisis as several foreign funds speculated in Russian government securities with borrowed money. This time, the spillover effects are expected to be smaller, but Zoltan Poszar is among those who believe that there is cause for some concern.

China is one of Russia's few remaining allies in the world.

China is one of Russia's few remaining allies in the world.

Photo: Alexei Druzhinin / AP

 The fact that a country's assets in dollars and euros can become unusable overnight sends an ominous signal to other nations, not least China, which has the world's largest foreign exchange reserve worth almost SEK 31,000 billion, a large part of which is in dollars. China is the second largest foreign lender to the United States. The country is in a kind of low-intensity economic war with the West with tariffs and various forms of sanctions.

If dollar assets are no longer completely secure, China and other countries in Asia will look for alternatives. This in turn threatens the dollar's position as the world's reserve currency, not least when it comes to trading in commodities such as oil.

A sign came as early as Tuesday when the Wall Street Journal reported that one of the world's largest exporters of oil, Saudi Arabia, could consider accepting Chinese yuan instead of dollars. Ever since 1974, Saudi Arabia has paid exclusively for its oil in the US currency.

These are huge amounts. China buys about a quarter of Saudi Arabia's exports, at today's prices it is equivalent to 170 million dollars a day. The second largest oil exporter to China is Russia

India is also considering using the yuan as a reference in oil deals with Russia, according to the Chinese newspaper Global Times.

China has long wanted to strengthen the yuan's position in the world, and this would mean a breakthrough. Although the dollar and euro are still completely dominant, a shift from the dollar could lead to higher interest rates and even more inflation in the West, warns Zoltan Poszar.

China is one of Russia's few remaining allies in the world. The invasion of Ukraine has evolved into a global power struggle that provides a clue as to how modern wars are fought: conflicts in which the financial arsenal is as important as missile and ammunition supplies.