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Russia could default on its debt in days

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By Charles Riley, CNN Business

Russia sent the clearest signal yet that it will soon be fault — the first time it will have defaulted on its external debt obligations since the bolshevik revolution more than a century ago.

Half of the country’s foreign exchange reserves – about $315 billion – were frozen by Western sanctions imposed after the invasion of ukraine, Russian Finance Minister Anton Siluanov said on Sunday. As a result, Moscow will reimburse creditors of “hostile countries” in rubles until sanctions are lifted, he said.

Rating agencies would likely consider Russia to be in default if Moscow did not pay or repay debt issued in dollars or euros with other currencies such as the ruble or Chinese yuan. A default could drive the few remaining foreign investors out of Russia and further isolate the country’s crumbling economy.

The default could come as early as Wednesday, when Moscow will have to pay $117 million in interest on dollar-denominated government bonds, according to JPMorgan Chase. Although Russia has issued bonds redeemable in multiple currencies since 2018, these payments must be made in US dollars.

imminent default

Kristalina Georgieva, managing director of the International Monetary Fund, said on Sunday that a Russian default was no longer “unlikely”.

“Russia has the money to pay off its debt, but cannot access it,” she said during an interview on CBS’s Face the Nation.

Fitch Ratings last week downgraded Russia’s debt rating, saying Moscow’s willingness and ability to repay debt has been undermined and default “is imminent”. The rating agency also warned that Russia may attempt to repay creditors in some countries in rubles.

Capital Economics analysts said a default had already been reflected in the price of Russian dollar bonds, which tumbled to trade at just 20 cents on the dollar.

Interest payments due Wednesday have a 30-day grace period. But the rating agencies could declare Russia in default before the end of this period if Moscow makes it clear that it does not intend to pay.

Russia last defaulted on its domestic debt when the country was thrown into a financial crisis by a collapse in commodity prices in 1998. Its last foreign currency default came in 1918 when Bolshevik leader Vladimir Lenin repudiated the bonds issued by the Tsarist government.

What happens next

The Russian government has borrowed relatively little. JPMorgan estimates it had about $40 billion in foreign currency debt at the end of last year, about half of which was held 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 spread through the modern interconnected global financial system and economy.

International banks owe more than $121 billion to Russian entities, according to the Bank for International Settlements. European banks have total claims of more than $84 billion, with France, Italy and Austria the most exposed, and US banks owed $14.7 billion.

Georgieva said on Sunday that a financial crisis was unlikely to develop “at this time”, saying the exposure of Western banks was “not systemically relevant”.

Even if Moscow halts payments to foreign investors on all sovereign debt, the default of about $60 billion – including ruble debt held abroad – would be of the same order as Argentina’s in 2020 – a non-event for the markets.

But analysts at Capital Economics have warned that a major financial institution could be particularly exposed to Russian debt, which could cause wider financial contagion. A second risk is that a default could trigger missed payments by Russian companies.

Vladimir Potanin, Russia’s richest businessman, called on Moscow last week to ease restrictions on foreign currency so that interest can be paid on foreign bonds and loans. Otherwise, there was a risk that the country would default on all of its external debt, which it estimated at around $480 billion.

“For Russia, the main cost is the foreclosure of global capital markets, or at least higher borrowing costs for an extended period. But the sanctions did it anyway,” the Capital Economics analysts wrote.

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