What Russia’s impending default means for the global economy
Russia is heading for a default that will hurt its economy for years and cost investors a fortune after the Kremlin invaded Ukraine – but its worst effects are unlikely to lead to a global economic crisis, say experts at The Post.
The first major test of Russia’s ability to repay its debts will come on Wednesday, when the country is due to make a $117 million interest payment on some of its bonds. Payment is supposed to be made in dollars – and the country has little access to US currency after it was frozen from global markets due to sanctions imposed by the US, EU and others.
“Russia has the money to pay off its debt, but cannot access it,” Kristalina Georgieva, director of the International Monetary Fund, said of the sanctions in an interview with CBS over the weekend.
If the country is unable to make payment in dollars, it will likely be declared in default. Last week, ratings firm Fitch further downgraded Russia’s rating to “junk” territory and warned of an impending default.
The IMF, which monitors the global economy, said it expected a “deep recession” in Russia following international sanctions. These sanctions – and the resulting recession – will mean that ordinary Russians will lose significant purchasing power. Already, the ruble is worth less than 1 cent on the dollar.
But because Russia, even without sanctions, is relatively isolated from the global economy, a default will not be a “systemic” risk as Greece’s default was in 2008 and 2009 when a crisis financial spread across Europe and eventually the rest of the world.
As for Russia, global banks’ exposure to the country is “definitely not systemically relevant”, the IMF said. William Jackson, chief emerging markets economist at Capital Economics, agrees, saying a default would be “symbolic” but would not have significant global ramifications.
Still, although the sanctions have frozen much of Russia’s foreign currency reserves, the country’s finances are healthy with low public debt, analysts say. When the government needs to borrow, its creditors are mainly domestic banks, not foreign investors who might abandon it in a crisis. Russia has 15 international bonds with a face value of about $40 billion outstanding, about half of which are held by international investors.
The government this week announced support for large businesses deemed crucial to the economy. But the sanctions put in place against Russia, such as the ejection of some Russian financial institutions from the SWIFT international payment system, have complicated international transactions.
Russian Finance Minister Anton Siluanov said about $300 million of the country’s $640 billion in gold and currency reserves are currently inaccessible.
Jeffrey Roach, the chief economist at LPL Financial, told the Post that a Russian debt default would not be as dramatic for the global economy as the crisis precipitated by Greece’s default.
Roach said the key metric to watch is the so-called credit default swap market. Known as CDS, it is basically an insurance policy that someone takes out on a bond; if the borrower defaults, then CDS may come into play. Investment bank JPMorgan estimates that there are around $6 billion in CDS outstanding that would need to be paid out in the event of a Russian debt default .
“Global risk contagion could increase if CDS settlements don’t work transparently in the event of Russian bond defaults,” Roach said. If something gets stuck in the system and debtors don’t receive their CDS, it could trigger problems globally.
Economic analysts have said the Russian invasion of Ukraine was not well thought out, especially in light of the fact that the country’s latest debt default came after its invasion of Chechnya.
“This upcoming default is deja vu,” said Sam Tabar, CSO of Bit Digital and former head of capital strategy at Merrill Lynch. After Russia bombed Chechnya in the mid-1990s, its economy lost somewhere close to 1.4% of its GDP.
“You would think Russia would be shy about military adventures given what happened the last time they had one,” Tabar told the Post.
A default on Russia’s external debt seemed unthinkable, with its international bonds trading above par until February. The harsh penalties changed all that and now the bonds are hovering at distressed levels, some as low as a tenth of their face value.
Most payments due — like Wednesday’s — have a 30-day grace period during which Russia has time to make the payment.
With post wires