With Russia on the verge of default, the talk now turns to global contagion

Russian President Vladimir Putin attends a meeting with members of the government via a video link in Moscow, Russia March 10, 2022.

Mikhail Klimentyev | Sputnik | Reuters

According to rating agencies and international organizations, Russia is on the verge of default, but economists have yet to see the global contagion impact on the horizon.

International Monetary Fund Managing Director Kristalina Georgieva said on Sunday that sanctions of Western governments against Russia In response to its invasion of Ukraine will cause a sharp recession this year. She added that the IMF no longer considers the default of the Russian government to be an “impossible event.”

Her warning follows the words of World Bank Chief Economist Carmen Reinhart, who warned last week that Russia and its ally Belarus were “close enough” to default on their debt.

However, despite the high risk of default, the IMF’s Georgieva told CBS that a broader financial crisis in the event of a Russian default is now unlikely, given the $120 billion exposure. of global banks towards Russia is “systematically unrelated”.

However, some banks and investors may be disproportionately affected. US fund manager Pimco started the year with $1.1 billion exposure to credit default swaps – a type of debt derivative – on Russian debt, Financial Times reported last week. A spokesperson for Pimco was not immediately available for comment when contacted by CNBC.

The Russian state has a series of important payment dates coming up, the first of which is a $117 million payout for some eurobond coupons in US dollars on Wednesday.

Credit rating agency Fitch last week downgraded Russia’s government debt to “C”, indicating that “a sovereign default is imminent.”

S&P Global Ratings also downgraded Russia’s foreign and local currency credit rating to “CCC-” on the basis of measures taken by Moscow to alleviate unprecedented sanctions imposed by the US and its allies. would essentially increase the risk of default.”

“Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including those targeting the foreign exchange reserves of the Central Bank of Russia (CBR); this has partly caused large amounts of these reserves are inaccessible, undermining the CBR’s ability to function as a lender of last resort and undermining what had been – until recently – credit strength. Russia’s standout: its net external liquidity position,” said S&P.

Moody’s also downgraded Russia’s credit rating earlier this month to its second-lowest level, citing similar capital controls by the central bank as likely to hamper payments in foreign currencies, leading to default.

Moscow strengthened its financial position following a series of Western sanctions imposed in 2014, in response to its annexation of Crimea. The government runs a consistent budget surplus and seeks to scale down both its debt and reliance on U.S. dollar.

The accumulation of substantial foreign exchange reserves is aimed at mitigating the depreciation of domestic assets, but dollar and euro reserves have been effectively frozen by recent sanctions. While, Ruble has dropped to an all-time low.

“To mitigate high exchange rates and financial market volatility, and to maintain the remaining foreign currency buffer, the Russian authorities – among other steps – have introduced control measures capital that we understand may restrict non-resident government bondholders from receiving timely interest and principal payments,” added S&P.

Extension time

Russian Deputy Finance Minister Anton Siluanov said on Monday that Russia will use the reserves Chinese Yuan to pay Wednesday’s coupon for a sovereign eurobond issue in a foreign currency.

In addition, Siluanov suggested the payment could be made in rubles if the payment request was rejected by Western banks, a move Moscow would see as fulfilling its foreign debt obligations.

While any default on upcoming payments would only be symbolic – as Russia has not defaulted since 1998 – Deutsche Bank economists note that the payments are not paid. may begin a 30-day grace period granted to issuers before defaults are formally triggered.

“Thirty days is still time for a negotiation to end the war and so this is probably not the time where we see it,” said Jim Reid, global head of credit at Deutsche Bank. where the full stresses in the financial system can reside,” said Jim Reid, Deutsche Bank’s global chief credit officer. strategy, said in an email Monday.

“Anyway, the market has taken a big hit on market loss when it comes to news coming in or going down. Still, this is clearly an important story to watch.”

Russian property valuation by default

Russian debt trading has largely ceased to exist since sanctions on central banks and financial institutions were imposed, with government restrictions and actions taken by investors. and clearing exchanges freeze most positions.

Ashok Bhatia, deputy investment director for fixed income at Neuberger Berman, said in a recent note that investors will not be able to access any liquidity in Russian assets for some time. . Bhatia added that Russian government securities prices are currently pricing in a default scenario, which strategist Neuberger Berman thinks is a possible outcome.

“It is not clear why Russia would want to use foreign currency to settle these securities at the moment, and we expect much of this debt to be put into a ‘grace period’ within the next month,” he said.

“Russian hard currency sovereign securities are pegged at 10 – 30 cents against the dollar and will likely remain there.”

Bhatia said that the main macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure on global credit markets will be “relatively muted” given the recent volatility between the two categories. property continues.

“But since Russian stocks have been revalued to defaults, we believe those immediate effects have largely passed,” he said.

“Debates about the economic impact and central bank response will now come to the fore.”

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