Russia risks "imminent" default on its debt, Wall Street analysts say
With Russia's economy groaning under Western sanctions, the nation is in danger of defaulting on its debt, credit ratings agencies and Wall Street firms say.
The rating agency Fitch on Tuesday downgraded Russia's debt for the second time in a week, noting that "a sovereign default is imminent."
Growing sanctions on Russian goods by foreign nations — including a ban on Russian oil and gas by the U.S. — have made it more likely that Russia will choose to skip out on some of its coming payments on nearly $500 billion in total sovereign debt, Fitch said.
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Since Russia invaded Ukraine on February 24, Western sanctions intended to punish the Russian ruling class have taken a toll on the nation's entire economy. Russia's currency, the ruble, has collapsed to a fraction of a cent while EU regulators are seizing Russian oligarchs' mansions and yachts. Major Western corporations are exiting their Russian investments and Russia's most valuable export — its oil and gas — looks increasingly unwanted.
The other two ratings agencies have also recently downgraded Russia, cutting its rating to junk level.
Last week, Moody's slashed Russia's credit rating to its second-lowest tier, citing the impacts of swift and severe Western sanctions. "[T]here is now a significant likelihood that Russia's ability to repay its sovereign debt obligations will be disrupted," the ratings agency wrote.
"The escalating military invasion, the acceleration in the imposition of sanctions on Russia … and the unpredictable actions that the government has undertaken in response to such sanctions has, in Moody's view, materially impaired Russia's ability and willingness to ensure timely repayment of its sovereign debt obligations," Moody's wrote in its downgrade.
S&P also knocked down Russia's rating to junk last week. The rating puts Russia's creditworthiness on par with the nations of Angola, Bosnia, Kyrgyzstan, Moldova, Mongolia, Nicaragua, Niger and Pakistan.
$700 million coming due
Russia has about $700 million in payments on debt coming due in March, analysts at JPMorgan noted last week. Most of these payments have a 30-day grace period, which means Russia could default as early as mid-April.
"Sanctions imposed on Russia have significantly increased the likelihood of a Russia government hard currency bond default. The sanctioning of Russian government entities by the U.S., counter-measures within Russia to restrict foreign payments, and disruptions of payment chains present high hurdles for Russia to make a bond payment abroad," the investment firm said.
A default occurs when an entity can't or won't pay its debt. In the case of Russia, there are several factors that could affect its ability to pay, economists note.
First, Russia is quickly losing access to international financial flows. The Russian central bank has been blocked from accessing hundreds of billions in foreign reserves; state-owned banks are subject to sanctions, and some private banks have been cut off from the SWIFT global payment system. These moves "make it exceptionally difficult for [financial institutions] to engage in international transactions," Fitch wrote.
Second, Russian entities could also choose to default, forcing foreign lenders to take losses on their debt "as a way of retaliating against Western sanctions," William Jackson, chief emerging markets economist at Capital Economics, said in a research report.
The Russian government could also ban repayments of foreign debts, Jackson noted.
While the ratings agencies are focused on debt held by the Russian government the biggest risk is in the corporate sector, Jackson wrote. More than half of Russia's debt — some $310 billion —is held by corporations. Another $170 billion is held by the government, central banks and local banks.
"The losses from a Russian default on external debt would be felt by foreign investors, not Russian investors. But there would still be indirect effects on Russia's economy," Jackson wrote.