Russia is ‘extremely likely’ to go bankrupt, says IIF

Russia is extremely likely to go bankrupt as a result of its foreign debt, and its economy will shrink to double digits this year following Western sanctions, an unprecedented move in scale and coordination, the Institute of International Economics said on Monday.

The IIF estimates that half of the central bank’s foreign exchange reserves, which on Monday raised interest rates and introduced some capital controls, are held in asset-freezing countries, severely shrinking the firepower of policymakers to support the Russian economy.

The central bank will give priority to protecting domestic savers with foreign investors “from the last on the list”.

“If this (crisis) escalates, then bankruptcy and restructuring are possible,” Elina Rybakova, IIF deputy chief economist, told reporters during a press conference. He said bankruptcy would be “extremely likely”, although the relatively small amount of foreign investment – about $ 60 billion – in Russian debt would limit the effects.

Russia invaded Ukraine last week, prompting the West to impose a series of sanctions. These include the freezing of central bank assets, the removal of many Russian banks from the global SWIFT payment system, and the blacklisting of individuals and entities. Russia calls its actions in Ukraine a “special operation.”

IIF Rybakova said the sanctions, which could be further strengthened, were “the toughest economic sanctions ever imposed on a country” and would put the Russian economy at a dead end, with inflation also soaring.

He said the conversion of Russian domestic foreign exchange reserves into rubles was also on the table, although the central bank would be reluctant to implement it initially as it tried to save domestic investors.