It owes $150 billion for foreign-currency bonds. Russia has pledged to pay them back, but in rubles, given the West’s sanctions.
Last week, Fitch Ratings lowered its rating on Russia’s long-term foreign currency debt, “reflect[ing] Fitch’s view that a sovereign default is imminent.”
Russia may validate Fitch’s warning Wednesday. That’s the due date for the government to make $117 million in interest payments on dollar bonds. It has a 30-day grace period to pay, but can be declared in default before then.
Russian officials said the government will keep repaying its debt, including what’s due Wednesday. But they said the payments will be made in rubles, as dollar settlements aren’t possible given the West’s sanctions. Shirking payments or making them in rubles rather than dollars means a default.
And that could trigger a bunch more defaults on debt of the government and major Russian companies, according to Bloomberg. Russia’s government and private debtors owe a combined $150 billion in foreign currency to their creditors. The country last defaulted on its debt in 1998.
“Russia has the money to service its debt, but cannot access it,” Kristalina Georgieva, managing director of the International Monetary Fund, said Sunday in an interview on CBS’ Face the Nation. Russia’s central bank has about $640 billion in foreign currency reserves, but as much as half of that is controlled by central and commercial banks in the U.S., Europe and their allies, The New York Times reports .
“This will be a monumental default,” Jonathan Prin, a portfolio manager at Greylock Capital Associates, told Bloomberg. “In dollar terms, it will be the most impactful emerging-market default since Argentina’s. In terms of broader market impact, it’s probably the most broadly felt emerging-market default since Russia itself in 1998.” Argentina has defaulted on its debt several times since 2001.
As for Fitch’s downgrade of Russian debt, “The further ratcheting up of sanctions and proposals that could limit trade in energy increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations,” the rating agency said.
“To a lesser extent, the risk of imposition of technical barriers to servicing debt, including through the direct blocking of transfer of funds or through clearing and settlement systems have also risen somewhat since our last review [March 2].”
Earlier this month, J.P. Morgan offered a bleak forecast for Russia’s economy, predicting “a collapse in Russian GDP.” A report from the bank’s economists, led by Bruce Kasman, said, “The sanctions will hit their mark on the Russian economy, which now looks headed for a deep recession.”
They forecast an 11% plunge in GDP from peak to trough, similar to the economy’s plight in the 1998 debt crisis.
“Sanctions undermine the two pillars promoting stability—the ‘fortress’ foreign exchange reserves of the Central Bank of Russia and Russia’s current account surplus,” the economists said. The current account measures a country’s trade in goods and services and capital transfers.
