Russia is heading for a debt default that will hurt its economy for years and cost investors fortunes after invading Ukraine’s Kremlin – but its worst effects are unlikely to lead to a global economic crisis, experts told The Post.
The first major test of Russia’s ability to pay its debt will come on Wednesday, when the country is due to make a $117 million interest payment on some of its bonds. Payment is to be made in dollars – and the country has little access to US currency after being locked out of global markets due to US, EU and other sanctions.
“Russia has the money to service its debt but cannot access it,” Kristalina Georgieva, head of the International Monetary Fund, said about the sanctions in a CBS interview over the weekend.
If the country is unable to come up with the dollar payment, it is likely to default. Last week, rating agency Fitch further downgraded Russia’s rating to “junk” territory and warned of an impending default.
The IMF, which monitors the world economy, has said it expects a “deep recession” in Russia following international sanctions. These sanctions – and the resulting recession – will mean that Russians will lose significant purchasing power on a day-to-day basis. Already the ruble is worth less than 1 cent per dollar.
But because Russia is relatively isolated from the global economy even without sanctions, a default does not pose a “systemic” risk, as Greece’s default did in 2008 and 2009 when a financial crisis swept across Europe and eventually the rest of the world.
As for Russia, global banks’ exposure to the country is “definitely not systemically important,” the IMF said. William Jackson, chief emerging markets economist at Capital Economics, agreed, saying a default would be “symbolic” but would not have a significant global impact.
Although sanctions have frozen much of Russia’s foreign exchange reserves, the country’s finances are in good shape with a low public debt, analysts say. When the government needs to borrow, its creditors are mainly domestic banks, rather than foreign investors who might abandon them in a crisis. Russia has 15 international bonds outstanding with a face value of around $40 billion, about half of which are held by international investors.
The government this week announced support for large companies that are vital to the economy. But the sanctions imposed on Russia, such as the suspension of some Russian financial institutions from the international SWIFT payment system, have made international transactions more difficult.
Russia’s Finance Minister Anton Siluanov said about $300 million of the country’s $640 billion in gold and foreign exchange reserves are currently inaccessible.
Jeffrey Roach, LPL Financial’s chief economist, told the Post that a Russian debt default would not be nearly as dramatic for the global economy as the crisis triggered by the Greek default.
According to Roach, the most important metric to watch is what’s known as the credit default swap market. Known as a CDS, it is essentially an insurance policy that someone buys for a bond; If the borrower defaults, the CDS can take effect. Investment bank JPMorgan estimates that around US$6 billion worth of CDS are outstanding, which would have to be paid out in the event of a default on Russian debt.
“Global risk contagion could increase if CDS settlements don’t run smoothly when Russian bonds default,” Roach said. If something gets stuck in the system and debtors don’t get their CDS paid, it could trigger some problems around the world.
Economic analysts said Russia’s invasion of Ukraine was not well thought out, especially given that the country’s last default on debt came after its invasion of Chechnya.
“This impending default is déjà vu,” said Sam Tabar, CSO of Bit Digital and former head of capital strategy at Merrill Lynch. After Russia bombed Chechnya in the mid-1990s, its economy lost about 1.4% of its GDP.
“You’d think Russia would be gun-shy about military adventures given what happened last time,” Tabar told the Post.
A default on Russia’s external debt seemed unthinkable as its international bonds traded above par well into February. Harsh sanctions have changed all that and now bonds are trading at distressed levels, some at barely a tenth of their face value.
Most payments due – like those on Wednesday – have a 30-day grace period during which Russia has time to make the payment.
With postal wires
https://nypost.com/2022/03/15/what-russias-looming-debt-default-means-for-global-economy/ What Russia’s impending default means for the global economy