Following the Kremlin’s invasion of Ukraine, Russia is on the verge of a debt default that will harm its economy for years and cost investors a fortune — but the worst impacts are unlikely to result in a global economic crisis, analysts told The Washington Post.
The country’s capacity to pay its debts will be put to the first significant test on Wednesday, when it is expected to make a $117 million interest payment on some of its bonds. The payment is meant to be made in dollars, but the country has limited access to the US currency due to sanctions imposed by the United States, the European Union, and others.
In a CBS interview over the weekend, Kristalina Georgieva, the chief of the International Monetary Fund, said of the sanctions, “Russia has the money to service its debt, but it can’t access it.”
If the country cannot make the payment in dollars, it will very certainly be declared in default. Fitch downgraded Russia’s credit rating to “junk” status last week, warning of an impending default.
The International Monetary Fund, which monitors the world economy, has predicted a “severe recession” in Russia as a result of the international sanctions. Because of the sanctions — and the ensuing recession — ordinary Russians will lose a significant amount of purchasing power. The ruble is currently worth less than one cent per dollar.
However, because Russia is relatively isolated from the global economy even without sanctions, a default will not be a “systemic” concern like Greece’s default in 2008 and 2009, when a financial crisis spread over Europe and subsequently the rest of the globe.
After President Vladimir Putin ordered his forces into Ukraine last month, Russia’s banking system was cut off from the rest of the world.
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Global banks’ exposure to Russia is “certainly not structurally relevant,” according to the IMF. A default would be “symbolic,” but not have large global repercussions, according to William Jackson, chief developing markets economist at Capital Economics.
Despite the fact that sanctions have frozen a substantial amount of Russia’s foreign currency reserves, economists say the country’s finances remain sound, with low government debt. When the government has to borrow, it generally borrows from domestic banks rather than international investors who would desert it in a crisis. Russia has 15 international bonds with a face value of around $40 billion on the market, with overseas investors holding roughly half of them.
This week, the government promised help for large businesses that are considered vital to the economy. However, restrictions imposed on Russia, such as the exclusion of several Russian financial institutions from the SWIFT international payments system, have made international transactions more difficult.
About $300 million of Russia’s $640 billion in gold and foreign currency reserves, according to Finance Minister Anton Siluanov, is currently unreachable.
The so-called credit default swap market, according to Roach, is the essential measure to keep an eye on. CDS, or credit default swaps, are essentially an insurance policy on a bond; if the borrower defaults, the CDS can kick in. According to JPMorgan, there are approximately $6 billion in outstanding CDS that would need to be paid out if Russia defaulted on its debt.
“Global risk contagion could worsen if CDS settlements fail to perform as expected if Russian bonds collapse,” Roach added. If something goes wrong in the system and debtors aren’t paid their CDS, it might cause worldwide problems.
Economic specialists say Russia’s invasion of Ukraine was poorly planned, especially given the country’s past debt default, which occurred following its invasion of Chechnya.
“This approaching default feels like deja vu,” said Sam Tabar, Bit Digital’s CSO and former Merrill Lynch head of capital strategy. Russia’s economy lost roughly 1.4 percent of its GDP after bombarding Chechnya in the mid-1990s.
“Given what occurred the last time it had one, you’d think Russia would be wary of military adventures,” Tabar told The Post.
With its international bonds trading over par until well into February, a Russian external debt default seemed inconceivable. Sanctions have changed everything, and bonds now trade at distressed values, with some trading at less than a tenth of their face value.
The majority of payments due, such as the one due on Wednesday, have a 30-day grace period during which Russia can make the payment.
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