Russia’s default has been “priced down” by investors, but the risks remain and the “butterfly effect” can affect multiple entities

Russia’s attack on Ukraine and the resulting international sanctions have raised the threat of potential default by Moscow.

Jackson, chief economist of the Emerging Markets for Capital Economics, said Russia’s defaults are “symbolic” and will not have a significant impact on Russia or elsewhere.

Potential Russian defaults are “priced” primarily by foreign investors. Non-residents hold only about $ 20 billion in Russian foreign currency sovereign debt, which he considers “relatively small.”

“Even if the government stops paying foreign investors for all its sovereign debt (domestic and foreign) holdings, a total of about $ 70. [billion] It wasn’t bigger than Argentina’s default debt in 2020 and didn’t cause any turmoil in the global market (although in Argentina, bond prices didn’t fall that much), “Jackson said.

However, economists anticipate two risks. First, systematically important institutions could be significantly exposed to Russia’s sovereign debt. If this entity is affected, it can cause a “wider financial transmission”.

Second, sovereign defaults may only be a prelude to corporate defaults. The external debt of Russian companies is greater than that of the government. Sanctions can disrupt Russia’s trade and put the economy in recession, increasing the likelihood of corporate defaults.

Earlier, Cristalina Georgieva, managing director of the International Monetary Fund (IMF), stated that Russia’s defaults are no longer considered “unlikely events.” However, the country’s banking sector has $ 120 billion in foreign exposure, which Georgieva does not consider to be “systematically related.”

Some experts disagree and believe that Russia’s defaults can be quite devastating.

Russia’s debt was evaluated as investment grade just a few weeks ago, so these securities are held in various benchmarks and fixed income portfolios. As a result, the effects of Russia’s defaults can cause tremors in funds, pension funds, foundations, etc. that invest in such securities.

“This will be a monumental default.” Said Jonathan Pudding, Portfolio Manager at Gray Rock Capital Associates, quoted by Bloomberg. “On a dollar basis, it will be the most influential emerging market default since Argentina. In terms of broader market impact, it is probably the most widely felt emerging market default since Russia itself in 1998. am.”

In August 1998, Russia devalued its currency, causing some of its ruble-denominated debt to default and surprised the global market. LTCM, a popular hedge fund at the time, was hit hard and had to be bailed out by the Fed. The dollar fell more than 10% against the yen within two days in October of that year.

Willem Buiter, an outside member of the Bank of England’s Monetary Policy Committee at the time, said: Note Although there are differences between the situation in 1998 and the current situation, there is still the potential for casualties if Russia defaults on its sovereign debt.

“We always have the effect of butterflies. The bad news is that we don’t know much about the web of direct and indirect exposures of financial and non-financial entities to the currently very confused asset and commodity markets. That’s it, “he told Reuters.

Russia will pay approximately $ 117 million in interest on $ 2 bonds on March 16.

Moscow has announced that it is in a position to make payments, but acknowledged that if sanctions prevent Russian banks from fulfilling their obligations in the issuing currency, payments may have to be made in rubles. Neither bond is reportedly allowed to pay in currencies other than the US dollar.

Naveen Athrappully


Naveen Athrappully is a news reporter on business and global events in The Epoch Times.