AFP

Russia said Monday that two of its debt payments were prevented from reaching creditors, pushing the country closer to its first foreign default in a century due to sanctions over the Ukraine offensive.

The announcement came on the 124th day of Russia’s military intervention in Ukraine, with Western sanctions so far failing to force the Kremlin to change its course.

The Western economic penalties have largely severed the country from the international financial system, making it difficult for Moscow to service its debt.

The Russian authorities insist they have the funds to honour the country’s debt and accuse the West of seeking to drive Moscow into a default artificially.

“There are no grounds to call this situation a default,” Kremlin spokesman Dmitry Peskov told reporters after a key payment deadline expired Sunday.

“These claims about default, they are absolutely wrong,” he said, adding that Russia settled the debt in May.

A 30-day grace period for the payment of $100 million in interest payments expired on Sunday night, most of which had to be paid in foreign currency.

In a statement, the Russian finance ministry said that two of its debt payments had not been transferred to creditors, but denied that the event amounted to a default.

International settlement and clearing systems “received funds in full in advance” but the payments were not transferred to the final recipients due to “the actions of third parties”, the ministry said.

“The non-receipt of money by investors did not occur as a result of the absence of payment, but due to the actions of third parties,” the ministry added, saying such an event did not amount to a default.

“The actions of foreign financial intermediaries are beyond the Russian finance ministry’s control,” the statement said.

Finance Minister Anton Siluanov has earlier dismissed the situation as a “farce”.

– ‘Vicious circle of decline’ – 

While some experts dismiss the event as a technical default, others say it will have far-reaching consequences.

“This default is important as it will impact on Russia’s ratings, market access and financing costs for years to come,” said Timothy Ash, an emerging markets strategist at BlueBay Asset Management.

“And that means lower investment, lower growth, lower living standards, capital and human flight (brain drain), and a vicious circle of decline for the Russian economy.” 

Russia lost the last avenue to service its foreign-currency loans after the United States removed an exemption last month that allowed US investors to receive Moscow’s payments.

In response, Russia said it would pay in rubles that could be converted into foreign currency, using a Russian financial institution as a paying agent, even though the bonds do not allow payments in the local currency.

Russia has accused the West of seeking to push it into an “artificial default” through unprecedented sanctions imposed after President Vladimir Putin sent troops to Ukraine on February 24.

The measures included freezing the Russian government’s stockpile of $300 billion in foreign currency reserves held abroad, making it more complicated for Moscow to settle its foreign debts.

The country last defaulted on its foreign debt in 1918, when Bolshevik revolution leader Vladimir Lenin refused to recognise the massive debts of the deposed tsar’s regime.

Russia defaulted on domestic debt in 1998 when, due to a drop in commodity prices, it faced a financial squeeze that prevented it from propping up the ruble and paying off debts that accumulated during the first war in Chechnya.

The International Monetary Fund’s number two official, Gita Gopinath, said in March that a Russian default would have “limited” impact on the global financial system.

Turkey’s beleaguered lira extended its biggest rally of the year on Monday in response to a new rule that analysts fear moves the once promising emerging market a step closer towards prohibitive capital controls.

The financial regulation — announced after the market had closed on Friday night — represents Turkey’s latest attempt to prop up the lira without raising the main interest rate.

President Recep Tayyip Erdogan’s pressure on the central bank to keep borrowing costs well bellow the rate of inflation has sparked an economic crisis that has seen the lira slump and prices explode.

Erdogan rejects conventional economics and affirms that high interest rates cause inflation instead of slowing it down.

The annual rate of consumer price increases now officially stands at 73.5 percent. Independent economists believe it could be nearly double that figure.

The dollar dropped to 16.1 liras early Monday before recovering slightly and trading around the 16.6 mark.

The US currency was worth around 17.4 liras before the measure was announced. It stood at 7.4 liras at the start of last year and 5.9 liras in January 2020.

Turkey’s real interest rate of minus 59.5 percent provides a major incentive for consumers to spend money before it loses value and for banks to convert their holdings into dollars and euros.

The new rule attempts to put a stop to that by limiting bank loans to companies holding significant foreign-denominated assets.

It requires firms with more than 15 million liras ($900,000) in foreign currency — should that figure represents more than 10 percent of their assets or annual sales — to sell their dollars and euros before receiving any more loans.

The measure meant that some big firms whose lira loans matured Monday had to sell their foreign currencies in order to make the payments.

BlueBay Asset Management economist Timothy Ash called the regulation “backdoor capital controls”.

The banking regulator clarified Sunday that the measure did not apply to individuals or independent entrepreneurs.

– ‘Liraisation’ –

Erdogan’s economic team has ruled out imposing strict currency control and is espousing its allegiance to the markets.

But it is gradually rolling out rules aimed at draining foreign currencies out of the Turkish financial system and forcing everyone to conduct their business in liras.

Turkey already forces exporters to convert 40 percent of their hard currency into liras.

The measure is helping the government refill state reserves that have dwindled down to the lowest level of Erdogan’s rule to support indirect lira exchange rate interventions.

The finance ministry said the new lending rule was in line with an independent “Turkish Economy Model” promoted by Erdogan.

The head of Turkey’s MUSIAD big business association also welcomed the measure — seen by economists as another step in Erdogan’s push for the “liraisation”.

The new rule will “prevent dollarisation, which is the main factor behind the rise in the exchange rate,” MUSIAD chief Mahmut Asmali told reporters.

But OMG Capital Advisors consultancy head Murat Gulkan said the measure could have a damaging long-term effect on Turkey’s business climate.

The new rules will “complicate the operating conditions of banks and companies,” Gulkan said.

“The cornerstone of the system is the policy rate of the central bank. When that cornerstone is misplaced, it is necessary to take extraordinary steps like this latest decision.”

Ash agreed that the lending rule “over-complicates things for business and banks when what everyone knows Turkey needs is plain and simple interest rate increases”.

Asian and European markets rallied Monday, building on last week’s advances as speculation that inflation may have peaked tempered expectations about central bank interest rate hikes.

With prices surging at a pace not seen in a generation, central banks have been forced to lift borrowing costs and wind back their ultra-loose monetary policies in recent months, sending a chill across trading floors.

But a string of weak data has led many investors to believe that inflation may have plateaued or is about to, giving room for banks to be less hawkish.

The prospect that rates will not go as high as initially expected helped send Wall Street stocks higher Friday, with the S&P 500 and Nasdaq ending up more than three percent.

Asia and Europe continued the rally on Monday while Wall Street opened higher, with the Dow adding 0.2 percent

Hong Kong led gainers, climbing more than two percent thanks to a strong performance in Chinese tech firms. 

Indications that China’s crackdown on the sector could be coming to an end added to the upbeat mood in the city.

“Market conviction that perhaps the Fed won’t now hike rates as aggressively as previously feared and/or that rate cuts before the end of 2023 are now an even more realistic prospect… have had a big hand” in boosting sentiment, said National Australia Bank’s Ray Attrill.

While Fed chiefs continue to flag further big interest rate hikes in the pipeline, expectations for a prolonged period of increases have waned, which has in turn taken some heat out of the dollar.

Market analyst Patrick O’Hare at Briefing.com said the question going forward is: “can the market look past a weakening fundamental situation that includes higher interest rates, persistently high inflation, and slower growth?”

The strong rebounds seen last week were possible as the market was so oversold, he said, but may soon hit resistance. 

“That should become increasingly apparent in coming weeks as more companies temper their full-year outlooks” as they release their second quarter earnings.

Bitcoin has also won some support, trading above $21,000 after a recent slump.

– G7 action over Russia –

Elsewhere, traders were keeping a close eye on the G7 summit in Germany, focused on further co-ordinated financial action against Russia following its invasion of Ukraine.

Among the new action being weighed by the G7 was a price cap on Russian oil imports and fresh sanctions on Russia’s defence sector, the White House said.

G7 member France urged oil producers to ramp up crude output by ‘exceptional’ volumes owing to Russian supply constraints.

The group — comprising also Britain, Canada, Germany, Italy, Japan and the United States — kicked off their gathering Sunday by announcing plans to ban imports of Russian gold.

It was the latest in a series of sanctions aimed at punishing President Vladimir Putin for his February 24 invasion.

– Key figures at around 1330 GMT –

London – FTSE 100: UP 0.4 percent at 7,239.40 points

Frankfurt – DAX: UP 0.5 percent at 13,176.68

Paris – CAC 40: DOWN 0.4 percent at 6,049.55

EURO STOXX 50: UP 0.2 percent at 3,541.76

New York – Dow: UP 0.2 percent at 31,555.45

Tokyo – Nikkei 225: UP 1.4 percent at 26,871.27 (close)

Hong Kong – Hang Seng Index: UP 2.4 percent at 22,229.52 (close)

Shanghai – Composite: UP 0.9 percent at 3,379.19 (close)

Euro/dollar: UP at $1.0580 from $1.0559 Friday

Pound/dollar: DOWN at $1.2268 from $1.2280

Euro/pound: UP at 86.24 pence from 85.95 pence

Dollar/yen: UP at 135.35 yen from 135.17 yen

Brent North Sea crude: UP less than 0.1 percent at $113.16 per barrel

West Texas Intermediate: DOWN less than 0.1 percent at $107.54 per barrel

burs-rl/

Sri Lanka’s heavily loss-making state-run electricity monopoly asked for a shocking price rise of over 800 percent for its poorest customers with the bankrupt nation out of fuel, regulators said Monday.

The South Asian nation has been hammered by a foreign exchange crisis, leaving it woefully short of dollars for imports, including fuel to generate electricity and for transport.

The Ceylon Electricity Board (CEB) lost 65 billion rupees ($185 million) in the first quarter and sought an 835 percent price hike for the heavily-subsided smallest power consumers, the Public Utilities Commission of Sri Lanka (PUCSL) said.

Currently, anyone using less than 30 kilowatts a month pays a flat 54.27 rupees ($0.15), which the CEB sought to raise to 507.65 rupees ($1.44).

“A majority of the domestic consumers will not be able to afford this type of steep increase,” PUCSL chairman Janaka Ratnayake told reporters in Colombo. 

“Hence we proposed a direct subsidy from the Treasury to keep the increase to less than half of what they have asked.”

Domestic rates have yet to be decided, but prices will go up by 43 to 61 percent for commercial and industrial users, he added.

The CEB will also be allowed to charge users who earn foreign exchange, such as exporters, in dollars, he added, to help the generator finance imports of oil and spare parts.

The government imposed 13-hour power cuts a few months ago, but blackouts have been reduced to about four hours a day as rains filled hydropower reservoirs.

Over the past six months the government has already increased diesel prices nearly fourfold and petrol  by more than two and a half times.

Sri Lanka remains virtually without both diesel and petrol. The energy minister has said he is unable to say when fresh stocks will arrive in the country, which does not have its own oil.

Kanchana Wijesekera apologised to motorists on Sunday and announced two ministers were travelling to Moscow to secure cheaper Russian oil.

Wijesekera himself travelled to Qatar to negotiate concessionary terms for hydrocarbon imports.

Meanwhile, a delegation from the US Treasury and the State Department opened talks with Prime Minister Ranil Wickremesinghe, his office said.

“The United States has agreed to provide technical assistance for fiscal management in Sri Lanka,” the premier’s office said in a brief statement.

Unable to repay its $51 billion foreign debt, the government declared it was defaulting in April and is negotiating with the International Monetary Fund for a possible bailout.

Russia said Monday that two of its debt payments were prevented from reaching creditors, pushing the country closer to its first foreign default in a century due to sanctions over the Ukraine offensive.

The announcement came on the 124th day of Russia’s military intervention in Ukraine, with Western sanctions so far failing to force the Kremlin to change its course.

The Western economic penalties have largely severed the country from the international financial system, making it difficult for Moscow to service its debt.

The Russian authorities insist they have the funds to honour the country’s debt and accuse the West of seeking to drive Moscow into a default artificially.

“There are no grounds to call this situation a default,” Kremlin spokesman Dmitry Peskov told reporters after a key payment deadline expired Sunday.

“These claims about default, they are absolutely wrong,” he said, adding that Russia settled the debt in May.

A 30-day grace period for the payment of $100 million in interest payments expired on Sunday night, most of which had to be paid in foreign currency.

In a statement, the Russian finance ministry said that two of its debt payments had not been transferred to creditors, but denied that the event amounted to a default.

International settlement and clearing systems “received funds in full in advance” but the payments were not transferred to the final recipients due to “the actions of third parties”, the ministry said.

“The non-receipt of money by investors did not occur as a result of the absence of payment, but due to the actions of third parties,” the ministry added, saying such an event did not amount to a default.

“The actions of foreign financial intermediaries are beyond the Russian finance ministry’s control,” the statement said.

Finance Minister Anton Siluanov has earlier dismissed the situation as a “farce”.

– ‘Vicious circle of decline’ – 

While some experts dismiss the event as a technical default, others say it will have far-reaching consequences.

“This default is important as it will impact on Russia’s ratings, market access and financing costs for years to come,” said Timothy Ash, an emerging markets strategist at BlueBay Asset Management.

“And that means lower investment, lower growth, lower living standards, capital and human flight (brain drain), and a vicious circle of decline for the Russian economy.” 

Russia lost the last avenue to service its foreign-currency loans after the United States removed an exemption last month that allowed US investors to receive Moscow’s payments.

In response, Russia said it would pay in rubles that could be converted into foreign currency, using a Russian financial institution as a paying agent, even though the bonds do not allow payments in the local currency.

Russia has accused the West of seeking to push it into an “artificial default” through unprecedented sanctions imposed after President Vladimir Putin sent troops to Ukraine on February 24.

The measures included freezing the Russian government’s stockpile of $300 billion in foreign currency reserves held abroad, making it more complicated for Moscow to settle its foreign debts.

The country last defaulted on its foreign debt in 1918, when Bolshevik revolution leader Vladimir Lenin refused to recognise the massive debts of the deposed tsar’s regime.

Russia defaulted on domestic debt in 1998 when, due to a drop in commodity prices, it faced a financial squeeze that prevented it from propping up the ruble and paying off debts that accumulated during the first war in Chechnya.

The International Monetary Fund’s number two official, Gita Gopinath, said in March that a Russian default would have “limited” impact on the global financial system.

Here are the latest developments in the war in Ukraine:

– End war by year end: Zelensky –

Ukrainian President Volodymyr Zelensky urges world leaders gathered at the G7 summit to do their utmost to end Russia’s invasion of his country by the end of the year.

He also calls on the G7 to “intensify sanctions” against Russia, a G7 source says.

In his address via video link to the gathering in the German Alps, Zelensky says battle conditions will make it tougher for his troops as they mount their fightback.  

He urges G7 nations to “not lower the pressure and to keep sanctioning Russia massively and heavily”, in addition to the multiple rounds of sanctions that Western allies have already unleashed on Moscow.

– G7 to up pressure on Putin, vows solidarity –

The G7 vows solidarity with Ukraine “for as long as it takes”, in a statement issued after Zelensky’s video address.

The host of the group’s summit in Germany, Chancellor Olaf Scholz, says the G7 will “increase pressure” on Russian President Vladimir Putin over the invasion of Ukraine.

“This war has to come to an end,” Scholz tweets.

The G7 also tells Russia it must allow grain shipments to leave Ukraine to avoid exacerbating a global food crisis.

It tells Moscow it must allow Ukrainians taken to Russia against their will to return home at once. 

And it expresses “serious concern” over Russia’s plans to deliver missiles capable of carrying nuclear warheads to Belarus in the coming months.

– New G7 sanctions take shape –

A senior US official says the G7 is making progress in talks on capping the amount of money that Russians can get for their key oil exports.

The White House also unveils new measures to hamper Russia’s ability to resupply the weaponry used in its onslaught against Ukraine.

The G7 also plans to turn funds raised in recently imposed trade tariffs on Russian exports into assistance for Ukraine.

– Finland, Sweden to meet Erdogan on NATO bids –  

The leaders of Finland and Sweden will discuss their stalled bids to join NATO with Turkish President Recep Tayyip Erdogan on Tuesday at the start of an alliance summit in Madrid, the Finnish presidency tweets. 

Russia’s invasion of Ukraine on February 24 saw the two Nordic countries abandon decades of military non-alignment by applying for NATO membership in May.

But the joint membership bid, initially believed to be a speedy process, has been delayed by opposition from Ankara, which accuses them of providing safe haven to Kurdish militants.

– Kremlin denies default report –

The Kremlin insists there are “no grounds” to say that Russia has defaulted on its foreign currency sovereign debt, as Western sanctions over its Ukraine offensive bite.

“These claims about default, they are absolutely wrong,” Kremlin spokesman Dmitry Peskov tells reporters after a key payment deadline expired on Sunday. He says Russia settled the debt in May.

Bloomberg News reported earlier on Monday that Russia defaulted on its foreign currency sovereign debt for the first time in more than a century, after the grace period on some $100 million of interest payments due Sunday had expired.

– US anti-aircraft missiles for Ukraine –

The United States is planning to send Ukraine sophisticated anti-aircraft missiles to defend against Russian attacks, a source familiar with the process tells AFP.

An announcement is “likely this week” on the purchase of NASAMS, an “advanced medium- to long-range surface-to-air missile defence system”, as well as other weaponry to help Ukraine fight Russia’s invasion.

Zelensky has pleaded for more powerful defences against Russian air attacks since the start of the invasion in February.

– Putin to visit Tajikistan, Turkmenistan –

Putin will travel to Tajikistan on Tuesday, the Kremlin says, his first trip abroad since Moscow launched its “special military operation” in Ukraine. 

He is also expected in Turkmenistan on Wednesday for a summit of countries bordering the Caspian Sea. 

burs-jmy/mw/gil

Turkey’s beleaguered lira extended its biggest rally of the year on Monday in response to a new rule that effectively forces many banks to part with some of their foreign currency.

The banking regulation — announced after the market had closed on Friday night — represents Turkey’s latest attempt to prop up the lira without raising the main interest rate.

President Recep Tayyip Erdogan’s pressure on the central bank to keep borrowing costs well bellow the rate of inflation has sparked an economic crisis that has seen the lira slump and prices explode.

Erdogan rejects conventional economics and affirms that high interest rates cause inflation instead of slowing it down.

The annual rate of consumer price increases now officially stands at 73.5 percent. Independent economists believe it could be nearly double that figure.

The dollar dropped to 16.1 liras early Monday before recovering slightly and trading around the 16.7 mark.

The US currency was worth around 17.4 liras before the measure was announced. It stood at 7.4 liras at the start of last year and 5.9 liras in January 2020.

Turkey’s real interest rate of minus 59.5 percent provides a major incentive for consumers to spend money before it loses value and for banks to convert their holdings into dollars and euros.

The new rule attempts to put a stop to that by limiting banks’ foreign-denominated assets.

It requires banks with more than 15 million liras ($900,000) in foreign currency — should that figure represents more than 10 percent of their assets or annual sales — to sell their dollars and euros before issuing any more loans.

The measure meant that some big banks whose lira loans matured Monday had to sell their foreign currencies in order to make the payments.

BlueBay Asset Management economist Timothy Ash called the regulation “backdoor capital controls”.

The banking regulator clarified Sunday that the measure did not apply to individuals or independent entrepreneurs.

– ‘Liraisation’ –

Erdogan’s economic team has ruled out imposing strict currency control and is espousing its allegiance to the markets.

The head of Turkey’s MUSIAD big business association also welcomed the measure — seen by economists as another step in Erdogan’s push for the “liraisation” of the emerging market’s economy.

The new rule will “prevent dollarisation, which is the main factor behind the rise in the exchange rate,” MUSIAD chief Mahmut Asmali told reporters.

But OMG Capital Advisors consultancy head Murat Gulkan said the measure could have a damaging long-term effect on Turkey’s business climate.

The new rules will “complicate the operating conditions of banks and companies,” Gulkan said.

“The cornerstone of the system is the policy rate of the central bank. When that cornerstone is misplaced, it is necessary to take extraordinary steps like this latest decision.”

Ash agreed that the measure “over-complicates things for business and banks when what everyone knows Turkey needs is plain and simple interest rate increases”.