Russia and China: long battle over debt and tension in the markets

Putin is looking to pay unfriendly creditors in roubles

(Image credit: Dimitar Dilkoff/AFP via Getty Images)

published 18 March 2022

“The last comprehensive default on Russian foreign debt was in the aftermath of the Russian Revolution when the Bolshevik government repudiated Tsarist-era debts,” said Tommy Stubbington and Max Seddon in the FT. More than 100 years on, default loomed again this week as investors awaited payment of debt interest worth $117m on two dollar bonds due on Wednesday. “The deadline marked a crucial test of Moscow’s willingness and ability to continue servicing its external debt”, following the freezing of half its $630bn war chest of foreign reserves. Earlier this month, President Vladimir Putin said that creditors in “unfriendly” countries “should be paid in roubles rather than foreign currency”. Fitch, the credit ratings agency, said it would view any such “forced redenomination” as indicative “that a default, or a default-like process has begun”.

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Whatever the outcome this week, it looks like the start of “a long battle over Russian debt”, said DealBook in The New York Times. The question is just how damaging a series of defaults might be. There are good reasons to think that “the contagion should be limited”, said Julian Jessop in The Spectator. The total exposure of foreign banks to Russian entities was estimated at around $105bn last year, but in the context of the global financial system, which is in much better shape than in 2008, that isn’t huge. Moreover, the size of the problem is generally well-known (the UK’s direct exposure to Russian financial institutions, for instance, is much smaller than many EU members, notably France, Italy and Austria). And central banks still have some firepower left to limit any collateral damage. “Yet one lesson from past crises is that ripples in what might appear to be one small pond can cause a tsunami of losses.” We could see a domino effect if managers are forced to sell “good” assets as well as bad, to reduce risk and cover redemptions.

Tension is running high in Chinese markets, where several indices suffered their “biggest plunge” since 2008 this week, said Bloomberg. The “broad rout” followed reports that Russia had asked China for military help. Despite denials from Beijing, there are fears its embroilment “could bring a global backlash against Chinese firms, even sanctions”. There is a growing consensus that Beijing will reply “nyet” to Moscow’s requests and may even broker peace talks, said Ben Wright in The Daily Telegraph. Let’s hope so. “If China does back Russia financially – let alone militarily – then we need to brace ourselves.” Cutting Russia out of world trade may or may not result in a global recession. “Doing the same to China would doubtless result in a global depression.