Will a Russian default trigger a global financial crisis?

Russia is heading towards a debt of billions of dollars as Western sanctions cripple the superpower’s economy, analysts warn.

Moscow will pay $117 million (£90 million) today to investors holding a $2 bond. But with Russia’s foreign currency reserves frozen in response to the Ukraine invasion, credit rating agencies have predicted that a default is “imminent”.

Who and what does Russia owe?

“Vladimir Putin’s government – and companies like Gazprom, Lukoil and Sberbank – owe foreign investors about $150 billion,” explains BBCTim Bowler’s business reporter.

But due to Western sanctions, Russia cannot access about $630 billion (£470 billion) in foreign currency reserves.

The government could use dollars held in Russia, rather than abroad, to pay off a debt that is now due, but this would simply delay the matter.

The Russian Foreign Ministry has previously indicated that Moscow will pay international investors in rubles if they are unable to pay in dollars or euros.

But neither of the dollar-denominated bonds that will be settled today “do not allow the use of any other currency, so this has the potential to cause default,” Bowler said.

Last week, the World Bank’s chief economist Carmen Reinhart told Reuters that Russia was “close to great” with defaulting on its debt.

Credit rating agency Moody’s also said it expected Russia to default and warned that investors in Russia could lose between 35% and 65% of their money.

What is the potential global impact?

Investors “so far have not been alarmed by any potential impact on global financial markets,” said MarketWatch. William Jackson, chief emerging markets economist at Capital Economics, said that “while a default is symbolic, it is unlikely that it would have significant ramifications, even in Russia.” and elsewhere”.

Others have pointed out that even if Russia did not make the payment in dollars, it would technically default only after a 30-day grace period, at which point a solution to the Ukraine conflict could be may have been negotiated.

Daniel Lenz, head of euro rate strategy at DK Bank in Frankfurt, Germany, says The Independent that “a Russian default would no longer be a big surprise for the whole market,” adding that “if there are going to be big shock waves, you will see it.”

The Managing Director of the International Monetary Fund, Kristalina Georgieva, agrees, saying CNBC that a broader financial crisis in the event of a Russian default is unlikely at the moment.

However, Jackson did note that a sovereign default could be a prelude to defaults by Russian companies, which have much larger foreign debts than they owe. government.

The FT said the consequences of Russia’s last default in 1998 were “huge.” That default “followed the Asian financial crisis and sent shockwaves throughout financial markets,” it said.

While acknowledging that “relatively confident” analysts could avoid a rerun to 1998, “financial history is full of examples of unexpected quadratic effects from events how widely predicted would still lead to broader catastrophes.”

https://www.theweek.co.uk/news/world-news/956103/would-a-russian-default-trigger-a-global-financial-crisis Will a Russian default trigger a global financial crisis?

Fry Electronics Team

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