Russia heading for first default in decades

This is an audio transcript of the FT News Briefing podcast episode: Russia heading for first default in decades

Jess Smith
Good morning from the Financial Times. Today is Tuesday, June 28th, and this is your FT News Briefing.

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Moscow dismissed its looming debt default as a farce. Credit Suisse is in trouble again. It was just found guilty in a case involving Bulgarian drug money laundering. And travellers in the UK are bracing for a summer of strikes. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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A Russian missile slammed into a shopping mall in central Ukraine yesterday. Ukrainian authorities last night confirmed 13 dead and more than 40 civilians wounded. President Volodymyr Zelenskyy posted a video showing the shopping mall on fire after the attack. He pleaded with western leaders for more missile defence systems. This attack is the latest sign that Moscow is prepared to escalate its war on Ukraine despite international efforts to isolate the Russian economy.

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And Moscow looks set to default on its debt for the first time in almost 25 years. Almost $100mn worth of interest payments on Russian government bonds came due this past Sunday with no sign of payment. Here’s the FT’s Nikou Asgari.

Nikou Asgari
Russia has repeatedly called this an absolute farce and unjustified and an artificial default because unlike in many traditional classic sovereign country defaults, Russia has the money to pay. It has more than the money to pay. They have so much cash from oil and gas reserves and oil and gas sales, but they simply can’t pay, given the sanctions in place, they can’t get the money to bondholders. They’ve offered to pay the interest payments in roubles instead of dollars. But under the terms of the bonds, you simply can’t do that. You can’t change the currency that the bonds are in. And they see this as a western problem, that the west is against them. But really it’s a Russian problem. This has all arisen because of Russia’s war in Ukraine and all the sanctions because of that.

Jess Smith
So Nikou, what would a default mean for Russia and how significant would this be?

Nikou Asgari
Short term it’s not very significant at all, really, for Russia. I mean, the country is flush with cash and the population on the ground really won’t feel any effects of this. But in the long term, if and when Russia decides to come back to foreign bond markets and foreign investors choose to buy its bonds, which at the moment is almost impossible given, you know, the war and the fact that it’s become an international pariah. If and when that time does come, Russia will face much higher borrowing costs on its debt than it did before the war and before its default.

Jess Smith
And coming back to the present, what would a default mean for foreign investors? You know, the ones holding this Russian government debt?

Nikou Asgari
The next step is really to see what bondholders decide to do. They can either demand to get their money back if 25 per cent of them vote to do so. But that will require a lot of litigation and it’s unclear how, realistically, how that will proceed and how that will go ahead. On the other hand, the bondholders might decide to wait and just see how both the war plays out, how sanctions play out, and just see what happens. It’s all down to the bondholders, really.

Jess Smith
Nikou Asgari is the FT’s acting capital markets reporter.

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Credit Suisse has another notch on its belt of scandals. Yesterday, a Swiss court found the lender guilty of failing to stop the laundering of Bulgarian drug money. It’s the first time a Swiss court has found a domestic bank guilty of a corporate crime. Here’s the FT’s Sam Jones with details.

Sam Jones
Prosecutors said that there were sufficient red flags that Credit Suisse really should have recognised that this money might be tainted. And two of the most obvious of those were one, the fact that a large number of deposits were made in cash, bundles and bundles of banknotes, brought in suitcases, driven in the trunk of cars overland to Switzerland, which obviously does not hint at a legitimate source of that money. And two, that two of the individuals connected to the clients Credit Suisse was working with were actually assassinated, which again, is not the kind of thing that happens in most ordinary lines of business.

Jess Smith
So Sam, as you’ve reported, the court imposed a fine of SFr2mn. So clearly it’s not gonna dent the bank’s bottomline. But what impact could this verdict have on Credit Suisse’s reputation?

Sam Jones
Credit Suisse is already reeling from a number of scandals that have hit it over the last two years that range from the sort of Greensill fund scandal through to corporate spying. And this is another one, so it’s another kind of chink in the armour of Credit Suisse. There’s unlikely to be an immediate legal implication in terms of any further cases coming down the line. And, of course, Credit Suisse has also said that it rejects the court’s ruling and it will appeal this case. So this isn’t the final word in this saga. But this is a sort of landmark case in a more important way, which is that this is the first time that a Swiss bank has been found guilty of criminal offences by Swiss courts. So this is a sort of a watershed in that sense.

Jess Smith
That’s the FT’s Austria and Switzerland correspondent Sam Jones.

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The UK is facing a summer of union strikes. Last week the country had its biggest rail strike in a generation and the rail union is threatening more stoppages unless the government backs its demands for higher pay. Other unions could follow suit. Our economics correspondent Delphine Strauss has been following this and she joins me now. Hi, Delphine.

Delphine Strauss
Hello.

Jess Smith
Delphine, before we get into the broader landscape, I want to ask about the rail strike. I mean, what’s the frustration behind it and what’s the rail union demanding?

Delphine Strauss
The dispute is about a number of things, but it boils down to a very big reorganisation of the railway, which has been hit really hard by the pandemic and by the post-pandemic shift to remote working, which means that there is quite a big stand-off over job security, over all kinds of changes to the way they work. But also, and this is what applies to all kinds of other people across the country over pay, inflation’s heading into double digits. And what’s caught the government by surprise is that a lot of union members who’ve in the past been seen as quite militant and activist and haven’t had necessarily that much public sympathy, this time have a lot of the public on their side.

Jess Smith
Do you see this possibly rippling into other industries? I mean, could we see more strikes by unions and not just rail workers?

Delphine Strauss
We’ve seen more disputes with unions heading towards strike action than we have had for quite some time. Some aviation workers at Heathrow airport have voted for strike action, and there are similar votes taking place at the moment with postal workers, with communications workers in a number of other sectors. The big question is what happens in large parts of the public sector where the government has been trying to hold down pay deals to a much lower level than the ones we’ve seen across the private sector. We haven’t yet heard what the government’s offer is going to be for teachers, for nurses, for other public sector workers. And if it does lead to big disputes, they would take, you know, several months to get going. But those are the ones that could really lead to large numbers of people striking if things go wrong.

Jess Smith
And more broadly, Delphine, has the UK labour movement changed as the economy shifted since the pandemic? And I mean, how does all this labour activity fit in with a new economic landscape?

Delphine Strauss
There has been a pick-up in union activity both in the UK and elsewhere and we’ve obviously seen a big rise in support for unions in the US. You know, lots of talk of whether this will be a sort of new era for the unions. At the moment that’s not the case really in the UK. It is still an environment in which union membership is much lower than it was in the past. But unions are not the only way in which workers can wield bargaining power. What we’re seeing is that in a tight labour market, a lot of people are ready to vote with their feet. They’re ready to switch jobs. You know, as we’ve seen in aviation and hospitality, if you’re not offering job security or working conditions that people want, then you will have a problem hiring. And we’re seeing pay going up, you know, faster as a result in a lot of areas.

Jess Smith
Delphine Strauss is the FT’s economics correspondent. Thanks, Delphine.

Delphine Strauss
Thanks very much.

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Jess Smith
Before we go, new data shows that US companies spent more on private jets for top executives’ personal use last year than they have in a decade. That’s according to a division of Institutional Shareholder Services. Many companies relaxed restrictions on private jet use out of fear their top bosses would catch Covid on commercial flights. One of the biggest such spenders was Facebook parent Meta. Last year, the company spent $1.6mn on private flights for Mark Zuckerberg.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.