Russia: default is inevitable

Last week, the three major rating agencies classified Russia’s public debt as “C”, the last step before default. Tomorrow, 16 March, Russia must pay back USD 117 million dollar on bonds. But this will not be paid because the central bank prohibits foreign currency outflows and the Russian president has signed a decree allowing creditors to be repaid in rubles. In fact, according to Fitch, the probable strengthening of sanctions in the energy sector should result in the non-payment of sovereign bonds. Furthermore, according to Moody’s, capital controls by the central bank should prevent cross-border payments including sovereign debt services. Moreover, on 2 March, a coupon on a sovereign bond was only paid to investors resident in Russia and non-residents were not paid. This default is paradoxical, to say the least, for a country whose external sovereign debt is less than 20% of GDP (estimated at $220 billion) while the central bank holds the equivalent of USD 630 billion in reserves. But half of these are abroad and remain blocked by Western sanctions. Even if the situation is very different from the previous Russian default in 1998 when the Russian state was bankrupt, which is not the case today, the consequences on the international financial system of a probable Russian default will not be painless. Indeed, in addition to the external sovereign debt, the external debt of the Russian private sector amounts to 37 billion dollars. These sums are certainly significant, but they are not “systemic” for the global financial sector. But some European funds and banks will be affected by these losses. We must therefore remain very vigilant to the financial shocks that will be triggered by a Russian default that seems inevitable.