Russian debt default not improbable: IMF

Russia’s default on its debts in the wake of unprecedented international sanctions over its invasion of Ukraine is no longer improbable, but that will not trigger a global financial crisis, International Monetary Fund managing director Kristalina Georgieva has said.

“I can say that no longer we think of Russian default as an improbable event,” Georgieva said on CBS’s “Face the Nation” on Sunday. “Russia has the money to service its debt, but cannot access it.”

When asked if such a situation could trigger a financial crisis for the rest of the world, the IMF head responded, “For now, no.”

“We expect a deep recession in Russia, and this abrupt contraction is affecting already how the Russian population is taking the heat on them,” Georgieva added.

The rouble has depreciated significantly with the sanctions, meaning real incomes in Russia have shrunk and the purchasing power of the Russian population has significantly diminished, Georgieva said.

With Russia and Russian banks under sanctions by the US and its allies after the full-scale invasion of Ukraine, Russia’s credit rating has faced downgrades. Fitch Ratings said last week that a bond default is “imminent” as a result of measures imposed since the war in Ukraine began on February 24.

The total exposure of banks to Russia amounted to around $120 billion, an amount that while not insignificant, was “not systemically relevant,” she said.

Asked if Russia could access the $1.4 billion in emergency IMF funding approved for Ukraine last week if Moscow won the war and installed a new government, Georgieva said the funds were in a special account accessible only by the Ukrainian government.

Georgieva said she was most concerned about the ramifications of the invasion beyond Russia and Ukraine, especially in terms of neighbouring nations that are taking in a large number of refugees.

She cited concerns for “countries that have yet to recover from the Covid-induced economic crisis” and for countries that are “more dependent on energy imports from Russia.”

Last week, Georgieva said the IMF would downgrade its previous forecast for 4.4 per cent global economic growth in 2022 as a result of the war, but said the overall trajectory remained positive.

Since Russia began its unprovoked invasion of Ukraine over two weeks ago, international sanctions have been imposed against Moscow, severing many of its ties to the global economy.

In response, the Kremlin and Russian Central Bank have attempted to prevent the rouble from further devaluation and retaliate Western sanctions by stopping its foreign exports of grain, banning the purchase of dollars and other foreign currencies, and limiting the amount of foreign currency Russians take out of their bank accounts.

Economists say the fallout could last long after the war in Ukraine ends and tarnish Russia’s standing for decades, even if sanctions are eased.

“Measures like this are going to stay in place for a long time. I think this is going to cut Russia off from access to Western finance, trade, and investment for years, if not decades, to come,” Edward Alden, a senior fellow at the Council on Foreign Relations, said.

The IMF last year blocked access to Afghanistan’s funds by the Taliban after they seized control of the government, citing a lack of clarity over recognition of the Taliban rulers within the international community.

— issacjohn@khaleejtimes.com