What Happens If Russia Defaults on Its Sovereign Debt?

Mohit Oberoi, CFA - Author
By

Mar. 9 2022, Published 11:19 a.m. ET

The crippling sanctions that Western nations have imposed on Russia for its invasion of Ukraine are expected to take a toll on the country’s economy. There are also fears that the country might default on its debt. Could Russia default on its debt and what happens in that case?

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In a major move, U.S. President Joe Biden announced that the country will ban oil imports from Russia. The U.K. and Canada are the other two countries that have banned oil imports from Russia. If more countries come forward and boycott Russian oil, it could have massive repercussions for the country since it relies heavily on energy exports.

Is a Russian debt default imminent?

Many analysts including Simon Waever, Morgan Stanley's head of emerging-market sovereign credit strategy, think that a Russian debt default is imminent. Credit rating agencies also believe so and have downgraded Russian sovereign debt to junk.

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Russian bond prices have tumbled and some trade at a discount of 70 percent to the face value, which is an indication that markets see the default as imminent.

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Also, Russia has already stopped the coupon payments to foreigners owning ruble-denominated bonds. The move would hamper the country’s ability to raise foreign capital in the future, even if it doesn't default on the debt now.

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How soon could the Russian debt default come?

On March 16, coupon payments on a Russian bond are due. A Russian debt default could come as soon as April 15, which is after the 30-day grace period ends.

Russia defaulted on its debt in 1998.

If Russia defaults on its debt obligations, it would be the second time that the country would default. Russia defaulted on debt in 1998. However, these were ruble-denominated bonds. This time, the country risks defaulting on its foreign currency bonds as well.

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What happens if Russia defaults on its debt?

Sovereign debt defaults usually have a domino effect and global repercussions. While Russia’s share of the global GDP is nowhere near that of the former Soviet Union, it's still the world’s 11th largest economy.

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Stephen Roach, an economist and a senior fellow at Yale University, thinks that a Russian debt default would hit emerging markets including China. He said, “If Russia does default on its debt ... there will be broad spillover effects to sovereign debt in emerging markets around the world and China will not be unscathed from that.”

The impact might be even bigger for emerging markets that mainly rely on oil imports to satiate domestic demand. A mix of falling currencies, rising energy prices, and a possible rise in bond yields would spoil the fiscal calculus of several emerging markets including India, which has so far refrained from voting against Russia at the UN.

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How would defaulting on debt have a long-term impact on Russia?

Russian President Vladimir Putin might have miscalculated several things when he decided to invade Ukraine. His miscalculations include the resolve of Ukrainian armed forces and political leadership, the West’s ability to hit it with punitive sanctions, bans on its oil and gas exports, and the overall costs of the war.

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One thing that Putin might have got totally wrong seems to be the long-term costs of his belligerence. Investing in Russian stocks and bonds was already risky and there was a significant risk premium, as is reflected in depressed valuations of Russian stocks. If Russia ends up defaulting on the bonds also, it would further erode the faith in the country as an investment destination.

The Russian economy will continue to pay a price for Putin’s invasion of Ukraine for many years after the war ultimately ends.

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