Sanctions could lead Russia to default, says international finance institute

Financial sanctions imposed by the United States and countries allied to Russia could lead the country to default on its foreign debt. The assessment is from the Institute of International Finance (IIF), an association that brings together the largest banks in the world. In a note published on Monday, the IIF also says that Russian GDP must succumb to the impact of international punishments.

For analysts at the agency, the decision to ban large Russian banks from the Swift system was considered one of the most serious imposed on a country in recent history. While the scope and effectiveness of this measure were still being debated, the announcement of restrictive actions to the Central Bank of Russia and the signal that the strength of sanctions may increase, led the IIF to predict strong impacts on the Russian economy.

“The commitment of members of the international community is clear. Understanding the impact of these actions, however, is critical. The bottom line is that these sanctions will have a significant impact on Russia’s overall economy, and average Russians are already feeling the cost. The sanctions target Russia’s domestic financial system, causing bank runs and forcing Russia’s central bank to continue raising interest rates,” the statement reads.

In an attempt to control the damage caused by the bank run and the banishment of the international financial system, IIF analysts believe that the Russian central bank will have to adopt strict capital controls and even declare a bank holiday if the demand for the currency increases sharply.

“As a result, we anticipate negative growth in an economy that has already been hampered by growing isolationism,” the document says.

The IIF also reiterated that it will examine additional sanctions that may be adopted in various areas that it considers essential and that could affect the international financial system. The functionality of the global payments system, access to US currency, hydrocarbon exports and export controls are among the Banks Association’s biggest concerns.

“One of the biggest impacts on the global economy will likely be on trade. While details on how the new sanctions affect energy are still emerging, we know that sanctions on its central bank will make it more difficult for Russia to export energy and other commodities. As a result, we may see commodity prices soar,” warns the IIF report.