Sanctions Have Sharply Increased Russia's Chances Of Bankruptcy, Warns JPMorgan

“Sanctions imposed on Russia have significantly increased the likelihood of the government’s defaulting on hard currency bonds,” JPMorgan’s emerging market strategists wrote in a note to customers on Wednesday.

Russia may have the money to pay off its debts. Russia’s central bank has a staggering $ 643 billion in international reserves.

However, JPMorgan said that the sanctions imposed by the United States against Russian government structures, countermeasures in Russia to limit payments abroad and disrupt payment chains “are major obstacles for Russia to make payments on bonds abroad.”

For example, sanctions against Russia’s central bank and the exclusion of some banks from SWIFT, the highly secure network banks used for communications, will affect Russia’s ability to access foreign currency to pay off debt, according to Capital Economics. This includes Russian reserves of reserves, as well as cash from export earnings.

Capital Economics estimates that about half of Russia’s international reserves will be affected by sanctions – and much of the rest is in gold, which may not be so easily converted into money.

“This would be a logistical bankruptcy rather than a lack of defaults,” said Peter Bukvar, chief investment officer at Bleakley Advisory Group.

According to JPMorgan, Russia has more than $ 700 million in payments in March, mostly with a 30-day grace period.

Although Western sanctions against Russia do not restrict secondary trade in the country’s existing bonds, JPMorgan noted that there were problems with the settlement of some bonds, as Russia’s national settlement depositary blocked the accounts of a Belgian-based settlement provider, Euroclear.

Some believe the Kremlin could set the stage for deliberate failure to punish the United States and Europe for crushing their economies.

“Putin is 100% bankrupt,” hedge fund manager Kyle Bass said in a telephone interview with CNN on Wednesday. “The West is suffocating him. Why would he agree to pay interest to the West right now?

Capital Economics noted that the Russian authorities have already banned the transfer of coupon payments on government debt in local currency to foreigners, emphasizing the fact that the authorities “act with little attention to Russian assets owned by foreigners.”

“Russia can use default as revenge against Western sanctions to inflict losses on foreign creditors. It is no exaggeration to think that the Russian authorities may ban the repayment of foreign debt,” Capital Economics reported.

Russia, currently the world’s 12th largest economy, last failed to pay its debt in 1998, sparking a crisis that has spread abroad.

It is not clear how wide the impact of non-compliance would be today. The global financial crisis of 2008 and the beginning of the Covid pandemic in 2020 showed how interconnected the global economy and the financial system are.

However, foreigners held only $ 20 billion of Russia’s debt in dollars and ruble-denominated government bonds worth $ 41 billion at the end of last year, the Financial Times reported, citing Russia’s central bank.

“Our financial system and financial institutions have relatively little exposure to Russia,” Jerome Powell, chairman of the Federal Reserve, said during a hearing in the House of Representatives on Wednesday. “Even the biggest exhibitions that each of them has are not very big.”

Asked what a Russian default would mean for the global financial system, Bass said: “Nothing. It just means that people will lose some money.”

Bukvar said he was encouraged by the relatively low exposure of foreigners to Russian debt. However, he is not sure how this will develop, because it is so rare to see sanctions against a large central bank.

“We all fly blind,” said Bukvar.