The Russian government is scheduled to pay $117 million (£89.58m) on a bond payment, it emerged on Wednesday, March 16. Under the terms of the bond this must be repaid in dollars however Russia’s access to foreign currency has now become severely limited after sanctions placed a freeze on the central bank’s reserves. Instead President Putin has issued a decree that “unfriendly countries” will have to be paid in rubles, with the US, UK and all EU member states all on the list. If Russia fails to pay today it will trigger a 30-day grace period in which to pay, after which it will be formally in default.
During this time the country will also hit other payment deadlines with the most immediate being $66 million (£50.51m) due on 21 March and $102 million (£78.05m) due on 28 March.
A major test will come on 4 April when a $2 billion (£1.53bn) principal payment is due.
Victoria Scholar, Head of Investment at interactive investor, predicted even with the 30 day grace period “full-blown collapse is almost inevitable at this stage”.
She explained: “The onset of war, Western sanctions, the exodus of international conglomerates and freefalling investor confidence have led to Russia’s downfall with its currency, financial system, and the wider economy in a state of ruin.”
Phillip Pearce, Associate for Global Capital Markets, at Validus Risk Management warned default would, in turn, make it harder for Russia to borrow further.
“Obviously, sanctions make it difficult for Russia to raise funds now but this isn’t something that’ll be easily improved if sanctions are ever removed as investors have been spooked by recent events and will be wary to enter the market again without being heavily compensated for the additional risk” he explained.
Russia meanwhile has insisted it can meets its debt obligations with finance minister Anton Siluanov accusing the west of try to “organise an artificial default.”
William Jackson, Chief Emerging Markets Economist at Capital Economics, predicted the default would not have a major impact on global markets, explaining it was not much bigger than a previous default by Argentina in 2020, which caused few tremors.
However, he pointed out future risks if one financial institution was revealed to be particularly exposed to Russia and if the Russian government’s default was followed by corporate defaults among Russia’s companies- whose external debts are much larger than the government’s.
So far large firms such as Gazprom have continued to service debts but Mr Jackson warned “with trade disrupted, sanctions potentially being widened and the economy set for a deep recession, the likelihood of corporate defaults is rising.”
Across both Government and corporate debt Russia is thought to owe around $150 billion (£114.79bn) in foreign currencies.
World Bank chief economist Carmen Reinhart has previously warned about the risks to western companies, saying: “I worry about what I do not see.”
“Financial institutions are well-capitalised, but balance sheets are often opaque… there is the issue of Russian private sector defaults.”
Mr Pearce pointed out foreign debt was now a lot lower in Russia after investors had been spooked after the annexation of Crimea in 2014, but warned what remained would have to be absorded.
He said: “A lot of the damage has already been done as the value of Russian debt has plummeted since the invasion, but those paper losses could be realized for many investors as the sanctions will make it difficult for them to negotiate and restructure the debt, ultimately the losses may have to be absorbed until sanctions are eased.”
Italian bank UniCredit has been revealed to be one of Europe’s most exposed companies with around 7.4 billion euros (£6.22bn) in loans.
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The bank’s Chief Executive Andrea Orcel has said UniCredit is now urgently reviewing its Russian business.
Citigroup meanwhile has nearly $10 billion (£7.65bn) worth of exposure to Russia, with the firm announcing plans to expand its exit process from the country.
Edward Skyler, Citigroup Executive Vice President for Global Public Affairs, added: “We have also decided to stop soliciting any new business or clients.
“We are providing assistance to multi-national corporations, many of whom are undergoing the complex task of unwinding their operations”