• International sanctions on the Russian central bank have frozen $630 billion foreign exchange reserves
• Russia defaulted on sovereign foreign currency debt during the Bolshevik Revolution in 1918
Russia is likely to default on its foreign currency debts for the first time in decades, with fears mounting that the economy and its currency, Rouble, to collapse further.
Moscow was due to pay $117 million in interest on two U.S. Dollar-denominated sovereign Eurobonds on Wednesday, which it had sold back in 2013.
However, international sanctions on the Central Bank of Russia in response to the unprovoked invasion of Ukraine have frozen the country’s $630 billion foreign exchange reserves.
Russian Finance Minister Anton Siluanov indicated on Monday that Russia would use its reserves of Chinese yuan to make some of its payments, and other payments to creditors from “hostile” countries will be made in Roubles. Both of these actions will trigger a default anyway.
First foreign currency debt default in century
Moscow has hiked the country’s key interest rate to 20% from 9.5% and ordered capital control — to limit the flow of foreign capital in and out of the domestic economy —as a measure to mitigate the impact of falling Rouble and stabilize the economy.
The steps have led major rating agencies to downgrade Russia’s government debt, saying that the country is highly likely to default on debt.
Moscow will have 30 days, as a grace period, after it makes the payment on Wednesday before it becomes official.
The event would mark Russia’s first sovereign default on foreign currency debt since the Bolshevik Revolution in 1918; however, the country defaulted on domestic debt in 1998.
Worries over $150 billion default
A failure to pay or paying the foreign investors in Rouble would see Russian ratings cut to default status by the agencies, which would elevate the borrowing costs and limit financing options for Moscow, even from the likes of China.
As the Russian government is not hugely dependent on foreign financing, it will not affect much of its strong public finance.
However, the corporate debt could come under threat and would put Russian oligarchs’ assets on the table.
Moreover, a potential wave of defaults would spiral to Russia’s nearly $150 billion foreign-currency debt owed by both the government and Russian companies, including energy company Lukoil, the state-owned largest publicly-listed natural gas company globally Gazprom, and Russia’s largest lender Sberbank.
However, economists have broadly dismissed fears of a global domino effect. On Sunday, IMF chief Kristalina Georgieva said that international banks’ over $120 billion exposure to Russia is “not systematically relevant.”
Moreover, Russia’s foreign currency sovereign debt held by overseas investors is relatively small at around $20 billion and would not affect much of the economy as creditors had largely marked down their holdings.
Picture Credit: FT