Half of the country’s foreign exchange reserves – some $315 billion – have been frozen due to Western sanctions following the invasion of Ukraine, Russian Finance Minister Anton Siluanov said Sunday. As a result, Moscow will pay creditors from “unfriendly countries” in rubles until sanctions are lifted, he said.
Credit rating agencies are likely to consider Russia in default if Moscow misses payments or repays debt issued in dollars or euros in other currencies such as the ruble or Chinese yuan. A default could force the few remaining foreign investors out of Russia and further isolate the country’s crumbling economy.
According to JPMorgan Chase, a default could come as early as Wednesday, when Moscow would need to hand over $117 million in interest payments on dollar-denominated government bonds. While Russia has issued bonds since 2018 that can be redeemed in multiple currencies, these payments must be made in US dollars.
Kristalina Georgieva, managing director of the International Monetary Fund, said Sunday that a Russian default is no longer “incredible.”
“Russia has money to service its debt, but it can’t access it,” she said in an interview with the CBS program Face the Nation.
Last week, Fitch Ratings downgraded Russia’s debt rating, saying Moscow’s willingness and ability to service its debts is undermined and a default is “inevitable.” The rating agency also warned that Russia could try to pay off creditors in certain countries in rubles.
Analysts at Capital Economics say the default has already weighed on the price of Russian dollar bonds, which have fallen to 20 cents on the dollar.
Interest payments due on Wednesday have a 30-day grace period. But the rating agencies may declare Russia defaulted before the end of this period if Moscow makes it clear that it does not intend to pay.
The last time Russia defaulted on its domestic debt was when the country plunged into a financial crisis due to falling commodity prices in 1998. The last currency default occurred in 1918, when the Bolshevik leader Vladimir Lenin refused bonds issued by the tsarist government.
What will happen next
The Russian government borrowed relatively little. JPMorgan estimated that it had about $40 billion of foreign currency debt at the end of last year, with about half of that debt owned by 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 spill over into today’s interconnected global financial system and economy.
According to the Bank for International Settlements, Russian companies owe more than $121 billion to international banks. European banks have total claims in excess of $84 billion, with France, Italy and Austria being the most vulnerable, while US banks owe $14.7 billion.
Georgieva said on Sunday that a financial crisis is unlikely to develop “at the moment”, saying that the risks of Western banks are “not of systemic importance”.
Even if Moscow stops making payments to foreign investors on all sovereign debt, a default of about $60 billion, including ruble debt held abroad, would be at the same level as Argentina’s in 2020, which is not an event for the markets.
But analysts at Capital Economics have warned that one large financial institution could be particularly exposed to Russian debt, which could spark wider financial contagion. The second risk is that a default could lead to late payments from Russian companies.
Vladimir Potanin, Russia’s richest businessman, last week urged Moscow to ease restrictions on foreign exchange so that interest can be paid on foreign bonds and loans. Otherwise, there was a risk that the country could default on all of its external debt, which he estimates is about $480 billion.
“For Russia, the main price is to close access to global capital markets, or at least to increase the cost of borrowing for a long period. But the sanctions still led to this, ”wrote analysts at Capital Economics.