Russia risks ‘imminent’ debt default, Wall Street analysts say

As Russia’s economy groans under Western sanctions, the nation is at risk of defaulting on its debt, according to rating agencies and Wall Street firms.

The rating agency Fitch on Tuesday lowered the rating of Russian debt for the second time in a week, noting that “a sovereign default is imminent”.

Growing sanctions imposed on Russian products by foreign countries – including the United States banning Russian oil and gas – have made it more likely that Russia will choose to skip some of its upcoming payments on nearly $500 billion. dollars of total sovereign debt, Fitch said. .

Since Russia invaded Ukraine on February 24, Western sanctions intended to punish the Russian ruling class wreaked havoc on the country’s entire economy. The Russian currency, the ruble, has collapsed fraction of a penny while EU regulators seize the mansions of Russian oligarchs and yachts. The big Western companies are get out of their Russian investments and Russia’s most valuable export – its oil and gas – seems increasingly undesirable.

The other two rating agencies also recently downgraded Russia’s rating, bringing its rating to an undesirable level.

Last week, Moody’s cut Russia’s credit rating at its second-lowest level, citing the impacts of swift and severe Western sanctions. “[T]there is now a high likelihood that Russia’s ability to repay its sovereign bonds will be disrupted,” the rating agency wrote.

“The escalation of the military invasion, the acceleration of the imposition of sanctions against Russia…and the unpredictable actions the government has taken in response to those sanctions have, according to Moody’s, significantly hampered the ability and willingness of Russia to ensure the timely repayment of its sovereign debt obligations,” Moody’s wrote in its downgrade.


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S&P also downgraded Russia’s rating to junk last week. The rating puts Russia’s creditworthiness on par with the nations of Angola, Bosnia, Kyrgyzstan, Moldova, Mongolia, Nicaragua, Niger and Pakistan.

$700 million is coming due

Russia has about $700 million in payments on its debt maturing in March, JPMorgan analysts noted last week. Most of these payments have a 30-day grace period, meaning Russia could default as early as mid-April.

“Sanctions imposed on Russia have significantly increased the likelihood of a default on hard currency obligations of the Russian government. Sanctioning Russian government entities by the United States, countermeasures in Russia to restrict foreign payments and disruptions to payment chains present significant hurdles for Russia to make a bond payment abroad,” the investment firm said.

A default occurs when an entity is unable or unwilling to pay its debt. In Russia’s case, several factors could affect its ability to pay, economists note.

First, Russia is rapidly losing access to international financial flows. The Russian central bank has been prevented from accessing hundreds of billions of foreign exchange reserves; public banks are subject to sanctions and some private banks have been cut off from the SWIFT global payment system. These movements “make it extremely difficult for [financial institutions] to engage in international transactions,” Fitch wrote.

Second, Russian entities could also choose to default, forcing foreign lenders to take losses on their debt “as a means of retaliation against Western sanctions,” said William Jackson, chief emerging markets economist at Capital Economics, in a research report.

The Russian government could also ban the repayment of foreign debts, Jackson noted.

While rating agencies focus on debt held by the Russian government, the biggest risk is in the corporate sector, Jackson wrote. More than half of Russia’s debt – some $310 billion – is held by corporations. Another $170 billion is held by the government, central banks and local banks.

“The losses from a Russian default on foreign debt would be felt by foreign investors, not Russian investors. But there would still be indirect effects on the Russian economy,” Jackson wrote.

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