Would a Russian debt default trigger global financial crisis?

Aftermath of Russia’s last default ‘looms large’

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(Image credit: Geoff Caddick/AFP/Getty Images)

Russia is spiralling towards a multibillion-dollar debt default as Western sanctions cripple the superpower’s economy, analysts have warned.

Moscow is due to make $117m (£90m) in interest payments today to investors holding $2-denominated bonds. But with freezes imposed on Russia’s foreign currency reserves in response to the Ukraine invasion, credit rating agencies have predicted that a debt default is “imminent”.

What and who does Russia owe?

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Vladimir Putin’s “government – and firms such as Gazprom, Lukoil and Sberbank – owe about $150bn to overseas investors”, explained the BBC’s business reporter Tim Bowler.

But as a result of Western sanctions, Russia is unable to access about $630bn (£470bn) of foreign currency reserves.

The government could use dollars held in Russia, rather than overseas, to pay the debt now due, but this would simply delay the problem.

Russia’s Foreign Ministry has indicated previously that Moscow would make payments to international investors in roubles if it were unable to pay in dollars or euros.

But neither of the two dollar-denominated bonds due to be paid today “allow for any other currency to be used, so this would likely trigger a default”, said Bowler.

Last week, World Bank chief economist Carmen Reinhart told Reuters that Russia was “mighty close” to defaulting on debt repayments.

Credit ratings agency Moody’s also said it expected Russia to default, and warned that investors in Russia could lose between 35% and 65% of their money.

What is the potential global impact?

Investors “so far aren’t panicking over any potential hit to global financial markets”, said MarketWatch. William Jackson, chief emerging markets economist at Capital Economics, said that “while a default would be symbolic, it seems unlikely that it will have significant ramifications, both in Russia and elsewhere”.

Others have pointed out that even if Russia fails to make the payment in dollars, it would be in technical default only after a 30-day grace period, by which time a settlement for the Ukraine conflict may have been negotiated.

Daniel Lenz, head of euro rates strategy at DK Bank in Frankfurt, Germany, told The Independent that “a Russian default would no longer be any great surprise for the market as a whole, adding that “if there were going to be big shock waves, you would see that already”.

The International Monetary Fund’s managing director, Kristalina Georgieva, agreed, telling CNBC that a wider financial crisis in the event of a Russian default was unlikely for now.

However, Jackson has noted that a sovereign default could be a prologue to defaults by Russia’s corporates, whose external debts are much larger than those of the government.

The FT said the aftermath of Russia’s last default in 1998 “looms large”. That default “followed on the heels of the Asian financial crisis and sent shockwaves through financial markets,” it said.

While acknowledging that analysts are “relatively confident” a rerun of 1998 can be avoided, “the history of finance is littered with examples of how unexpected second-order effects from widely anticipated events still ended up causing broader calamities”.

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