Western sanctions may drive Russia to default on its public debt as the United States and European allies punish the country for its invasion of Ukraine.
With sanctions restricting Russia’s access to the international banking system, and even its own assets, it will have trouble paying the more than $700 million due on government bonds in March. The country has a 30-day grace period to make good on those payments, with Morgan Stanley estimating a default would occur no sooner than April 15.
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JPMorgan told clients Wednesday a default was becoming increasingly likely, just two days after a prominent banking lobby group offered a similar assessment.
“Sanctions imposed on Russia have significantly increased the likelihood of a Russia government hard currency bond default,” JPMorgan analysts said in a note.
The warnings come after G-7 nations moved to freeze at least half of the $630 billion in international reserves owned by Russia’s central bank, meaning the country will find it difficult to access the dollars, euros, and other currencies needed to pay foreign creditors.
Western nations also agreed to boot certain Russian banks from SWIFT, the international messaging system lenders use to make transactions securely. With no globally accepted alternative, Russia may be unable to execute its bond payments even if its central bank’s assets weren’t frozen.
“Russia is solvent in the sense that they could pay interest and principal on their existing debt fairly easily from their foreign reserves, if they wanted to — if they were allowed to by Western nations whose central banks largely control Russia’s access to its reserves,” David Feldman, a professor of economics at William & Mary, told the Washington Examiner. “So, they will be in ‘technical’ default, and it’s no de-fault of their own.”
The cost to insure Russian bonds has soared in recent days, while yields, an indicator of investment risk, have spiked since Russian President Vladimir Putin rolled tanks into Ukraine. Credit agency S&P lowered Russia’s rating to “junk” status last week, with Moody’s and Fitch following suit on Thursday.
Russia still has access to some of its central bank assets, but Feldman said it may decide to use its scarce resources to help stabilize the Russian economy instead of paying foreign creditors.
The value of the ruble has plummeted amid Western sanctions, in effect eroding the purchasing power of the currency. As Russians seek a safe haven in more stable assets, one way to slow the spiral is to flood the Russian economy with foreign currency reserves. Facing the freeze on its assets, Russia has ordered its companies to sell 80% of their foreign exchange revenues, basically forcing them to do what the central bank cannot because of the sanctions.
Coupled with other capital controls and a doubling of interest rates on Monday, Russia hopes to take the “panic edge” off the crisis.
“The central bank of Russia won’t want to squander its existing foreign exchange reserves paying down its debt,” Feldman said, and it will instead choose “to keep a little bit of that powder dry to help prevent a banking crisis inside Russia.”
The last time Russia defaulted on its debt was in 1998 when fiscal mismanagement and falling oil prices led to a financial crisis that extended beyond Russia’s borders.
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Steve Hanke, a professor of applied economics at Johns Hopkins University, said that despite concerns over a Russian default, he doesn’t expect the crisis to have a major impact on the global economy.
“This type of default will have a ripple effect, but it is unlikely to be a tsunami,” he told the Washington Examiner. “Banks do have exposure to Russia, but they limit the size of their country risk. So, Russia may be a challenge for some, but it should not bring down any well-managed bank or financial institution.”
