Russia could default on its debt in a few days

Russia has sent the clearest signal yet that it will soon default — the first time it has defaulted on its foreign debt obligations since the Bolshevik revolution more than a century ago.

Half of the country’s foreign reserves – about $315 billion – have been frozen by Western sanctions imposed after the invasion of Ukraine, Russian Finance Minister Anton Siluanov said on Sunday.

As a result, Moscow will pay creditors of “hostile countries” in rubles until sanctions are lifted, he said.

Credit rating agencies would likely consider Russia to be in default if Moscow fails to pay or repay debts issued in dollars or euros with other currencies such as the ruble or Chinese yuan.

A default could drive Russia’s few remaining foreign investors and further isolate the country’s crumbling economy.

The default could come as early as Wednesday, when Moscow must deliver $117 million in interest payments on dollar-denominated government bonds, according to JPMorgan Chase. Although Russia has issued bonds that can be paid in multiple currencies since 2018, these payments must be made in US dollars.

imminent default

Kristalina Georgieva, managing director of the International Monetary Fund, said Sunday that a Russian default was no longer “unlikely”.

“Russia has the money to pay off its debt, but it cannot access it,” she said during an interview with CBS’s Face the Nation.

Last week, Fitch Ratings downgraded Russia’s debt, saying Moscow’s willingness and ability to repay its debts has been undermined and default “is imminent.” The ratings agency also warned that Russia may try to pay creditors in specific countries in rubles.

Analysts at Capital Economics said a default was already reflected in the price of Russian dollar bonds, which had dropped to trade at just 20 cents on the dollar.

Interest payments due on Wednesday come with a 30-day grace period. But rating agencies can declare Russia in default before the period ends if Moscow makes it clear that it does not intend to pay.

Russia last defaulted on its domestic debt when the country was plunged into financial crisis by a collapse in commodity prices in 1998. Its most recent foreign currency default occurred in 1918, when Bolshevik leader Vladimir Lenin repudiated bonds issued by Russia. tsarist government.

What happens next

The Russian government lent relatively little. JPMorgan estimates it had about $40 billion in foreign currency debt at the end of last year, with about half of that in the hands of foreign investors.

But the potential consequences of a default are difficult to assess. The 2008 global financial crisis and the coronavirus pandemic showed how negative shocks can ripple through the interconnected modern financial system and global economy.

International banks owe more than $121 billion to Russian entities, according to the Bank for International Settlements. European banks have more than $84 billion in total credit, with France, Italy and Austria the most exposed, and US banks owed $14.7 billion.

Georgieva said on Sunday that a financial crisis is unlikely to develop “for the time being”, saying the exposure of Western banks is “not systemically relevant”.

Even if Moscow were to suspend payments to foreign investors on all sovereign debt, the default of about $60 billion — including ruble debt held abroad — would be on par with Argentina’s in 2020.

But analysts at Capital Economics have warned that a large financial institution could be particularly exposed to Russian debt, which could cause wider financial contagion. A second risk is that a default could trigger missed payments by Russian companies.

Vladimir Potanin, Russia’s richest businessman, last week called on Moscow to loosen restrictions on foreign currency so that interest could be paid on foreign bonds and loans.

Otherwise, there was a risk that the country would default on all of its foreign debt, which he estimated at around US$480 billion.

“For Russia, the main cost is staying out of global capital markets, or at least higher borrowing costs for an extended period. But sanctions did it anyway,” analysts at Capital Economics wrote.