Last week, Fitch Ratings downgraded its rating on Russia’s long-term foreign currency debt, “reflecting[ing] Fitch believes a sovereign default is imminent.
Russia could validate Fitch’s warning on Wednesday. This is the deadline by which the government must make $117 million in interest payments on the dollar bonds. He has a 30-day grace period to pay, but can be declared in default before that date.
Russian officials have said the government will continue to repay its debt, including what is due on Wednesday. But they said payments would be made in rubles, as dollar settlements are not possible given the sanctions imposed by the West. Evading payments or making them in rubles instead of dollars means default.
And that could trigger a slew of other debt defaults on Russian government and big business, according to Bloomberg. The Russian government and private debtors owe a total of $150 billion in foreign currency to their creditors. The country last defaulted on its debt in 1998.
“Russia has the money to pay off its debt, but cannot access it,” Kristalina Georgieva, managing director of the International Monetary Fund, said in an interview on CBS’s Face the Nation on Sunday. Russia’s central bank has about $640 billion in foreign currency reserves, but up to half of that is controlled by central and commercial banks in the United States, Europe and their allies, reports the New York Times.
“It will be a monumental default,” Jonathan Prin, portfolio manager at Greylock Capital Associates, told Bloomberg. “In dollar terms, this will be the most impactful emerging market default since Argentina. In terms of broader market impact, this is probably the most widely felt emerging market default since Russia itself in 1998.” Argentina has defaulted on debt multiple times since 2001 .
Regarding Fitch’s Russian debt downgrade, “the further increase in sanctions and proposals that could limit energy trade increases the likelihood of a policy response from Russia that includes at least nonpayment. selective in its sovereign debt obligations,” the rating agency said. noted.
“To a lesser extent, the risk of imposing technical barriers to debt servicing, including through the direct blocking of funds transfers or through clearing and settlement systems, has also increased somewhat since our last exam. [March 2].”
Earlier this month, JP Morgan presented a grim forecast for the Russian economy, predicting “a collapse in Russian GDP”. A report by the bank’s economists, led by Bruce Kasman, said: “The sanctions will hit the Russian economy, which now appears to be headed for a deep recession.”
They predict an 11% fall in GDP from peak to trough, similar to the dire state of the economy during the 1998 debt crisis.
“The sanctions undermine the two pillars that promote stability – the Russian Central Bank‘s ‘fortress’ foreign exchange reserves and Russia’s current account surplus,” the economists said. The current account measures a country’s trade in goods and services and capital transfers.