The downgrade is a signal for investors to stay away from Russia, lest they fall into the zone of expanding sanctions and invest in assets that are depreciating in value every day. But a default that analysts are beginning to see as imminent could have far wider implications, forcing lenders to rush in search of high financial positions and leave emerging international markets that rely on risk-tolerant investors.
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Lenders doing business with Russia often transact in dollars or euros precisely because Moscow’s economy is more unstable and growing. But President Vladimir Putin said his government could force lenders in some countries to accept only Russian currency; as of Wednesday afternoon, the exchange rate was 120 rubles to $1. The Kremlin has also banned its citizens from withdrawing more than $10,000 in hard currency from national banks.
Now, according to experts, Russia is running out of dollars and other standard world currencies that can be used to pay off creditors, and covering debts with rubles can only lead to further depreciation of the currency, because it costs practically nothing on world markets.
Western energy sanctions – President Biden on Tuesday said the US would stop importing Russian fossil fuels and the European Union said it would cut its consumption by two-thirds this year – imposed in response to Putin’s invasion of Ukraine are also serving to drain the Russian economy. new income. This means that injecting even rubles into the domestic economy may be difficult.
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Inside Russia, a default would mean enormous economic hardship for ordinary people. The lack of capital can mean mass unemployment as the government and other large employers fail to raise funds to pay wages. Consumer credit will evaporate and Russian banks will be cut off from international financial systems.
Russians are struggling to withdraw money in currencies other than the ruble. On Telegram, a popular chat app in Russia, people on Wednesday shared the location of ATMs where euros and dollars were available. The Telegram group alone had about 23,000 users.
Putin came to power in the late 1990s immediately after the 1998 Russian default and financial crisis. Now he risks more economic suffering as he continues his unprovoked war in Ukraine.
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“If the exchange rate falls, this by definition means that the country is unable to repay its dollar debts. He just doesn’t have the dollars,” said Chris Rupki, chief economist at research firm FWD Bonds. “You can’t buy anything with a currency if it’s worth nothing.”
Russia’s finance ministry responded defiantly to those concerns on Monday, saying sanctions made Western creditors unlikely to receive repayments.
“The real possibility of making such payments to non-residents will depend on the restrictive measures introduced by foreign states in relation to the Russian Federation,” the report says.
However, this attitude has left many investors more skeptical about Moscow’s willingness to service its debt, and a pending Russian default has heightened fears that the credit crunch could spread to other emerging markets.
Buses carrying medical aid and evacuation headed towards Sumy, Ukraine on March 8 after Russian airstrikes. According to UN estimates, 2 million people left Ukraine. (Hadley Green, Joshua Carroll/The Washington Post)
Morgan Stanley’s head of emerging markets sovereign lending strategy wrote this week in a research note that Russia could default as early as April 15, when the 30-day grace period on $107 million in bonds expires. Two more bond payments of $359 million and $2 billion are due on March 31 and April 4, respectively, with 30-day extensions, according to Reuters.
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Russia’s largest state-owned gas giant, Gazprom, as payment on a $1.3 billion bond maturing March 7.
Experts say a default in Russia could shake the economies of developing market economies, favored by some lenders for their high yields, so much so that investors may abandon these sites in favor of safer rates. This would flood Western markets with capital withdrawn from the economies of China, India, Brazil and Eastern Europe, leading to even higher price inflation.
“If Russia is allowed to continue to invade other countries, there is a risk of contaminating the value of the sovereign debt of those countries that are in close proximity to Russia,” said George Ball, chairman of Sanders Morris Harris, a financial company in Houston. . “It will also call into question some of the weaker participants in emerging markets, simply because investors will seek the safest possible haven. There is a certain risk of infection for regions that are much more psychological than financial.”
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Fitch has downgraded Russia’s Long-term Foreign Currency Issuer Default Rating (IDR) to ‘C’ from ‘B’, signaling serious concerns about Russia’s ability and willingness to service its debt.
On the Fitch scale, AAA means the lowest risk of default and “exceptionally strong” ability to meet financial obligations. A ‘C’ rating indicates that a default process has begun or that solvency has been irretrievably reduced.
“The ‘C’ rating reflects Fitch’s view that a sovereign default is imminent,” the agency said in a statement, pointing to “events” that “further undermined Russia’s willingness to service its public debt.”
“Further tightening of sanctions and proposals that could restrict energy trade,” the firm added, “increase the likelihood of a political Russian response that includes at least a selective default on its sovereign debt obligations.”
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This is because, according to experts, Russia is so cut off from the world’s financial systems that it cannot generate sufficient income. Moscow cannot borrow money from eight of the ten largest economies in the world. Its economy depends on the export of natural resources, and some of its biggest clients have cut ties. Its consumer economy is too small to sustain a prolonged war, let alone pay off its debts.
Even if Russia is able to raise funds to make payments, sanctions block Russia’s participation in key global financial clearing houses. It simply does not have logistical access to transfer capital.
“In the very short term, Russia is a pariah. Whether it’s their oil, their economy, or their sovereign debt, no one wants to touch it. The rating agency downgrade reflects this pariah nature, and Russian debt prices have plummeted to reflect this,” Ball said. “People who have assets in Russia or deposits in Russia are fried now and for some time to come. They cannot get their hands on money, securities, goods or services. They are outcasts, and soon they will freeze to death.”
Gerrit De Wink contributed to this report.