Russia faces 'avalanche' of debt defaults

Russia faced its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.


Issac John

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Customers exit German Karl Lagerfeld's shop in Evroreisky (European) shopping mall in Moscow. — AFP file photo
Customers exit German Karl Lagerfeld's shop in Evroreisky (European) shopping mall in Moscow. — AFP file photo

Published: Mon 18 Apr 2022, 8:01 PM

Last updated: Tue 19 Apr 2022, 10:30 AM

Amid the looming specter of inevitable Russian defaults, the International Monetary Fund (IMF) has warned that the war against Ukraine was weakening the economic prospects for most countries.

The IMF managing director Kristalina Georgieva’s stark warning came as Russia faced its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country's central bank, economists at the consultancy Oxford Economics warned.

Credit-rating agency S&P Global has announced that Russia is now in a "selective default," often a harbinger of a full default.

Russia does have a 30-day grace period, which gives it a little breathing room. But S&P Global isn't optimistic that circumstances will change, and if Russia doesn't make the payments in dollars by early May, the country will default.

A default would make Russia more of a pariah in the global economy, analysts warned. “There is likely to be an avalanche of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.”

While Russia was not a big seller of foreign debt, major hedge funds and asset managers had bought bonds. There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JP Morgan, with $21.3 billion owned by foreign investors.

However, data from Morgan Stanley shows that Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion.

Much of Russia's debt was registered in the UK, which is where it's likely that most of the court fights will take place. Economists said the US might eventually end up seizing the money from the Russian central bank's foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpiles.

Credit rating experts noted that countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, albeit through a complicated process taking a long time to resolve as in the case of Argentina’s default in 2001. Since memories of a default linger Russia may have to pay more to borrow from foreign investors in the future, they said.

The US Treasury earlier this month blocked Russia from paying $650 million due on two bonds using funds held at American banks. Russia has instead tried to pay in roubles, but credit ratings agencies have said this would constitute a default.

Russia has a 30-day grace period from April 4 to pay in dollars. But thoughts are now turning to the next steps, and how bondholders might recoup their money.

Tatiana Orlova, a lead emerging markets economist at Oxford Economics, said investors face a very long and difficult legal road. "Russia's debt crisis will be among the most difficult in history to resolve since the default has its roots in politics rather than finance," she wrote in a report.

One of the key problems is that political and financial relations between Russia and the West have completely broken down. That makes the usual default process, whereby bondholders and the government enter negotiations and thrash out a deal, seem unlikely to happen.

Orlova said another problem for bondholders is that Ukraine may lay a claim to Russian assets in international courts to pay for the rebuilding of the country. In that case, investors would have to weigh up whether they want to compete with the Ukrainian government for Russian assets.

According to the IMF, the consequences of Russia’s invasion were contributing to economic downgrades for 143 countries, although most of them should continue to grow. The war has disrupted global trade in energy and grain and is threatening to cause food shortages in Africa and the Middle East, the IMF said, describing the persistently high inflation as “a clear and present danger” to the global economy.

The IMF also warned of “the fragmentation of the world economy into geopolitical blocs,” with the West imposing far-reaching sanctions on Russia and China expressing support for the autocratic Russian regime of President Vladimir Putin.


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