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- Russia is teetering on the brink of its first foreign-currency bond default since the aftermath of the Bolshevik revolution in 1918.
- The government faces two key dollar-bond interest payments Wednesday, which could be the first in a line of defaults.
- However, analysts have said the impact is likely to be smaller than the country’s last debt crisis in 1998, which shook Wall Street.
Russia was being convulsed by communist revolution the last time it failed to pay its foreign-currency debts, in 1918.
But President Vladimir Putin’s brutal invasion of Ukraine and the tough Western sanctions have put the economy in crisis and left the government teetering on the brink of another default.
Such an event would ripple through global financial markets and further alienate Russia from the world economic system. It’s also raised memories of Russia’s last debt crisis in 1998, which shook Wall Street.
Here’s what you need to know.
Why is Russia facing default?
After Putin unleashed war in late February, Western governments united to impose stringent sanctions to restrict trade and all but cut the country off from global financial markets.
A major problem for the government is that sanctions have cut it off from roughly half of its $640 billion worth of foreign currency reserves. That makes it a lot harder to pay its debts.
Last week Fitch, a major credit ratings agency, slashed Russia’s once investment-grade credit rating to “junk” and said a default is “imminent.” The country’s bonds have collapsed to trade at around 20% of face value.
When might Russia default?
Russia faces its first big test Wednesday, when $117 million worth of interest payments on two dollar bonds come due. Russia has a 30-day grace period, making 15 April the key date to watch.
Finance Minister Anton Siluanov said Sunday the government is able to pay but may have to do so in Russian rubles, given the effects of sanctions. Most analysts have said this would amount to a default, given that the investors signed up to be paid back in dollars.
It could be the start of a long chain of defaults for the Russian government as well as the country’s major companies, such as Gazprom and Sberbank.
The government owed about $39 billion through foreign currency bonds at the end of 2021, JPMorgan has estimated, of which around $20 billion was held by foreign investors.
Russian companies had around $98 billion of foreign-currency debts, the bank’s analysts said, of which $21 billion was held by foreigners.
Who will be hurt?
The fallout from Russia’s debt crisis is likely to be less dramatic than many might have expected.
Russia’s foreign debts are actually pretty small compared to many other countries. That’s partly because the country has been under some form of Western sanctions since it invaded Crimea in 2014, which has deterred many would-be investors.
Yet a multibillion-dollar default will still be felt in financial centers around the world, especially if Russian companies are sucked in. Sanctions will make any restructuring agreements between debtor and creditors difficult, meaning investors may be forced to simply absorb their losses until the conflict is over.
Bloomberg in late February estimated BlackRock had the biggest exposure to Russian dollar debt, with about $1.5 billion worth of holdings. Capital Group, Legal & General, and Fidelity Investments each held more than $200 million.
Before the invasion, Russian debt was also included in funds and indexes owned by institutions such as pension funds, as well as some retail investors.
However, most of the damage has already been done, given the dramatic collapse in the value of Russian assets over the past two weeks.
Will it cause an economic or financial crisis?
Russia last defaulted in 1998, although not on its foreign-currency debt. The event sent shockwaves through the US financial system. One hedge fund, called Long Term Capital Management, had to be bailed out to the tune of $3.6 billion.
However, a Russian default would likely have a much smaller impact this time around, according to analysts.
“Financial links in particular are small,” Melanie Debono, senior Europe economist at Pantheon Macroeconomics, told Insider. “Banks in countries most exposed are well prepared to weather any disruption.”
But in the complex and opaque world of modern finance, there’s a risk that some companies could be overexposed and cause wider problems, just like LTCM. Jim Reid of Deutsche Bank said it is “clearly an important story to watch.”
A default is unlikely to make things much worse for Russia’s economy, however, which is already mired in a major crisis.
“I don’t think it’ll have a huge impact, because the economy is already pretty much cut out of international capital markets,” Andrew Kenningham, chief Europe economist at Capital Economics, told Insider.
Capital Economics expects the Russian economy to shrink by a crushing 12% this year as sanctions bite, war costs mount and foreign companies and capital flee the country.
However, Kenningham said he expects Russia’s government will still be able to meet its domestic obligations, helped by energy revenues.
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