Last week, the World Bank’s chief economist, Carmen Reinhart, warned that Russia was “mightily close” to defaulting on their debt. The next instalment of payments on two dollar-denominated bonds is due on Wednesday, March 16, though a 30-day grace period will follow, meaning the worst of the fallout might not be seen for another month – but when it does, analysts are warning of a knock-on effect that will ricochet around the globe.
On Monday, Russia’s finance ministry said it had approved a temporary procedure to pay its debt in roubles, rather than dollars, if western sanctions prevent banks from honouring debts in the currency of issue.
Making payments in roubles could be seen as tantamount to a default, analysts say, as the bonds do not contain clauses allowing repayment in foreign currencies. Russia says this is part of the West’s plan to punish Russia over the ongoing conflict in Ukraine.
Finance minister Anton Siluanov said in a statement: “Claims that Russia cannot fulfil its sovereign debt obligations are untrue. We have the necessary funds to service our obligations.
“The freezing of the central bank and government’s foreign currency accounts can be seen as a desire from several Western countries to organise an artificial default.”
This is not the first time Russia has faced defaulting on its debts.
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The last time was in 1998, when Russia suffered what was – at the time – the largest sovereign default in history.
However, the climate was different then. Russia was just eight years into its transition from communism after the collapse of the Soviet Union, and the international community wanted to help – indeed, the International Monetary Fund (IMF) stepped in to help restructure the debt.
This time, they are the result of the international community’s sanctions against the barbaric war in Ukraine.
The 1998 default also represented domestic debt, not international borrowings, as they will in 2022 – the last time this happened in Russia was in 1917, after the Bolshevik Revolution.
But the ramifications in 1998 were huge, reported in the Sunday Times by city editor Jill Treanor as helping “trigger a global cataclysm”.
The default caused severe damage for neighbouring economies, sent shock waves through the global financial system, and led to banks across the globe losing billions.
It also had a hand in triggering the US Federal Reserve’s unprecedented $3.6billion (£2.8billion) bailout of the hedge fund Long Term Capital Management, which had already been under pressure before the emerging markets crisis that had started in Asia and snowballed with Russia.
So what could a default in 2022 mean?
Analysts are divided on whether a Russian default now would have a global impact on the scale seen in 1998.
rkets, while braced for default, were taken by surprise by the sudden uptick in Putin’s aggression, and its ramifications for the global market.
Before now, Russia had always been considered a good creditor, likely to pay its debts on time.
Mohamed A El-Erian, president of Queens’ College Cambridge and legendary bond investor, predicts things will only get worse.
He told The Times: “You are going to see mounting arrears out of Russia. It’s going to be part of a massive financial dislocation.”
And Ms Reinhart from the World Bank said: “I worry about what I do not see. Financial institutions are well-capitalised, but balance sheets are often opaque….One cannot be complacent.”
Others, however, have said this current threat will not pose as great a problem as the default of 1998.
Sir Howard Davies, former chairman of the Financial Services Authority, said: “Last time the problem was Russia was borrowing too much, the economy was in deep trouble, was fundamentally unstable and unviable.
“Now the reason they will default is simply because they don’t have access to foreign currency, because the sanctions are essentially cutting them off from the financial system.”
He added: “I don’t think it’s necessarily a kind of canary-in-the-coal mine moment where you have contagion effects.”
Whatever happens, it’s becoming increasingly clear that a Russian default is likely.
IMF chief Kristalina Georgieva told CBS: “In terms of servicing debt obligations, I can say that we no longer think of Russian default as an improbable event. Russia has the money to service its debt, but cannot access it.”
She added: “What I’m more concerned about is that there are consequences that go beyond Ukraine and Russia.”