Russia faces the risk of default following the invasion of Ukraine

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OWestern sanctions could lead Russia to default on its public debt as the United States and European allies punish the country for its invasion of Ukraine.

With sanctions restricting Russia’s access to the international banking system, and even to its own assets, it will struggle to pay more than $700 million payable on government bonds in March. The country has 30 days Grace period to honor these payments, with Morgan Stanley Estimate a default would occur no earlier than April 15.

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JP Morgan Recount a default was becoming increasingly likely on Wednesday, just two days after a prominent banking lobby group proposed a similar assessment.

“The sanctions imposed on Russia have significantly increased the likelihood of a default on Russian government hard currency bonds,” JPMorgan analysts said in a note.

Warnings come after G-7 nations moved to freeze at least half of the $630 billion in international reserves held by Russia’s central bank, meaning the country will struggle to access the dollars, euros and other currencies needed to pay foreign creditors.

Western nations too agreed to start certain russian banks QUICK, the international messaging system used by lenders to conduct transactions securely. Without globally accepted alternative, Russia may be unable to make its bond payments even if its central bank assets were not frozen.

“Russia is creditworthy in the sense that it could quite easily pay the interest and principal of its existing debt from its foreign exchange reserves, if it wanted to – if it were allowed to do so by Western countries whose central banks largely control Russia’s access to its reserves,” David Feldman, an economics professor at William & Mary, told the Washington Examiner. “So they will be in ‘technical’ default, and it’s not their own fault.”

the cost to insure Russian bonds have skyrockets in recent days, while yields, an indicator of investment risk, have dope since Russian President Vladimir Putin launched tanks into Ukraine. Credit agency S&P downgraded Russia’s rating to junk status last week, along with Moody’s and Fitch suit suit Thursday.

Russia still has access to some of its central bank assets, but Feldman said it may decide to use its scarce resources to help stabilize Russia’s economy instead of paying foreign creditors.

The value of the ruble has plummeted amid Western sanctions, effectively eroding the currency’s purchasing power. Like the Russians seek shelter in addition stable assets, one way to slow the spiral is to flood the Russian economy with foreign exchange reserves. Faced with the freezing of its assets, Russia has order his companies to sell 80% of their foreign exchange earnings, essentially forcing them to do what the central bank cannot do because of the sanctions.

Combined with other capital controls and a double interest rates on Monday, Russia hopes to ease the “panic edge” of the crisis.

“Russia’s central bank won’t want to squander its existing foreign exchange reserves to pay off its debt,” Feldman said, and will instead choose “to keep some of that powder dry to help prevent a banking crisis in Russia.”

the last time Russia defaulted on its debt in 1998, when fiscal mismanagement and falling oil prices caused a financial crisis that spread beyond Russia’s borders.

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Steve Hanke, a professor of applied economics at Johns Hopkins University, said despite concerns about a Russian default, he doesn’t expect the crisis to have a major impact on the global economy. .

“This type of fault will have a ripple effect, but it’s unlikely to be a tsunami,” he told the Washington Examiner. “Banks have exposure to Russia, but they limit the size of their country risk. So Russia may be a challenge for some, but it shouldn’t bring down a well-run bank or financial institution.”

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