Credit rating agencies will likely consider Russia to be in default if Moscow defaults on its debt issued in dollars or euros in other currencies such as the ruble or the Chinese yuan. A default could drive the few remaining foreign investors out of Russia and further isolate the country’s collapsing economy.
The default could come as early as Wednesday, when Moscow needs to turn over $117 million in interest payments on dollar-denominated government bonds, according to JPMorgan Chase. Although Russia has issued bonds that can be repaid in multiple currencies since 2018, these payments must be made in US dollars.
Kristalina Georgieva, managing director of the International Monetary Fund, said on Sunday that Russia defaulting on its debt is no longer “highly unlikely”.
“Russia has the money to service its debt, but it can’t get to it,” she said during an interview on CBS’s Face the Nation.
Last week, credit rating agency Fitch downgraded Russia’s debt, saying that Moscow’s willingness and ability to service its debt had been undermined and a default was “imminent”. The rating agency also warned that Russia may try to repay creditors in certain countries with rubles.
Analysts at Capital Economics said the default was already reflected in the price of Russian dollar bonds, which collapsed to trade at just 20 cents on the dollar.
Wednesday’s interest payments come with a 30-day grace period. But credit rating agencies could declare Russia default before that period ends if Moscow makes it clear it has no intention of paying.
The last time Russia defaulted on its domestic debt was when the country slipped into a financial crisis due to the collapse of commodity prices in 1998. The most recent foreign currency default came in 1918 when Bolshevik leader Vladimir Lenin repudiated bonds issued by the tsarist government.
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The Russian government has borrowed relatively little. JPMorgan estimated it had about $40 billion in foreign currency debt at the end of last year, with about half of that being held by foreign investors.
But it is difficult to gauge the potential consequences of defaulting. The global financial crisis of 2008 and the coronavirus pandemic showed how negative shocks can spread across the financial system and the modern interconnected global economy.
According to the Bank for International Settlements, international banks owe more than $121 billion on Russian entities. European banks have more than $84 billion total claims, with France, Italy and Austria the most exposed, and US banks owe $14.7 billion.
Georgieva said on Sunday that the financial crisis was unlikely to develop “at the moment,” saying Western bank exposures were “systemically irrelevant.”
Even if Moscow stopped payments to foreign investors on all of its sovereign debt, a default of about $60 billion — including ruble debt held abroad — would be in the same ballpark as Argentina in 2020 — an unfavorable event for markets.
But analysts at Capital Economics warned that a major financial institution could be particularly vulnerable to Russian debt, which could cause a wider financial contagion. The second risk is that default could result in Russian companies not making payments.
Analysts at Capital Economics wrote: “For Russia, the main cost is its exclusion from global capital markets, or at least higher borrowing costs for a long time. But the sanctions did it anyway.”
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