Fitch, the rating agency for Russia, downgraded Russia’s debt Tuesday. It noted that “a sovereign default was imminent.”
Fitch stated that Russia is more likely to choose not to pay some of the coming payments on its nearly $500 billion total sovereign debt due to growing sanctions placed on Russian goods.
The entire country’s economy has been affected by Western sanctions since Russia invaded Ukraine in February 24. The ruble, Russia’s currency has plummeted to a fraction, while EU regulators seize Russian oligarchs’ homes and yachts. Major Western corporations are leaving Russia’s investments, and Russia’s most important export, its oil and gas, is becoming increasingly unwelcome.
Russia was also downgraded by the other rating agencies, reducing its rating to junk.
Moody’s cut Russia’s credit rating last week to its second lowest tier. It cited the impact of severe and swift Western sanctions. The ratings agency stated that Russia’s ability of repaying its sovereign debt obligations is at risk.
Moody’s stated in its downgrade that Russia’s “escalating military invasion”, the acceleration of sanctions against Russia’s imposition… and the unpredicted actions taken by the government in response to these sanctions have, in Moody’s opinion, materially impaired Russia’s capability and willingness to timely repay its sovereign debt obligations.”
S&P also downgraded Russia’s rating from junk to junk last week. This rating places Russia’s creditworthiness at par with those of Angola and other countries like Angola, Bosnia-Kyrgyzstan Moldova, Mongolia Nicaragua, Niger, Niger, Moldova, Kyrgyzstan, Kyrgyzstan and Kyrgyzstan.
$700 million due
Analysts at JPMorgan estimated that Russia has approximately $700 million in debt payments due in March. Russia could default in mid-April because most of these payments have a grace period of 30 days.
Russia’s hard currency bond default risk has been significantly increased by sanctions imposed on Russia. According to the investment firm, the U.S. sanctioning Russian government entities, as well as counter-measures within Russia to limit foreign payments and disruptions to payment chains, make it difficult for Russia to make a bond repayment abroad.
When an entity is unable or unwilling to pay its debts, it is called a default. Economists point out that Russia’s ability to pay could be affected by several factors.
First, Russia is losing international financial flows very quickly. The Russian central bank was prevented access to hundreds of billions of dollars in foreign reserves. State-owned banks are also subject to sanctions. Some private banks have been disconnected from the SWIFT global payments system. Fitch stated that these moves make it extremely difficult for financial institutions to transact internationally.
Second, Russian entities may also decide to default, causing foreign lenders to absorb losses on their debt “as an option of retaliation against Western sanctions,” William Jackson (chief emerging markets economist at Capital Economics) stated in a research .
Jackson suggested that the Russian government could also prohibit repayments of foreign loans.
Jackson stated that while the rating agencies focus on Russian government debt, the greatest risk lies in the corporate sector. Corporations hold more than half of Russia’s debt, which is around $310 billion. The government, central banks, and local banks also hold $170 billion.
Foreign investors would feel the losses of a Russian default in respect to its external debt, and not Russian investors. Jackson said that there would be indirect effects on Russia’s economy.
