The downgrades are signals to investors to steer clear of Russia, lest they get caught up in the expanding sanctions or sink money into assets that are bleeding value by the day. But a default, which analysts are beginning to see as inevitable, could have far more sweeping consequences, sending lenders scurrying for financial high ground and fleeing developing international markets that rely on risk-tolerant investors.
Lenders doing business with Russia often conduct transactions in dollars or euros specifically because Moscow’s economy is more volatile and emerging. But President Vladimir Putin has said his government could force lenders in certain countries to accept only Russian currency; as of Wednesday afternoon, the exchange rate was 120 rubles to $1. The Kremlin also has barred its citizens from withdrawing more than $10,000 in hard currency from the nation’s banks.
Now, experts say, Russia is running out of dollars and other standard global currencies with which to pay creditors, and covering debts with rubles could only serve to further devalue the currency because it basically worthless in global markets.
Western energy sanctions — President Biden said the United States would stop importing Russian fossil fuels, and the European Union said it would cut its consumption by two-thirds this year — issued in response to Putin’s invasion of Ukraine also serve to starve the Russian economy of new revenue. That means injections of even rubles into its domestic economy could be hard to come by.
Inside Russia, a default would mean tremendous economic hardship for ordinary people. A lack of capital could mean massive unemployment, with the government and other major employers unable to raise funds to meet salaries. Consumer credit would evaporate, with Russian banks cut off from international financial systems.
Russians are scrambling to take out money in currencies other than the ruble. On the Telegram chat app, which is highly popular in Russia, people on Wednesday were sharing the locations of ATMs that had euros and dollars available. One Telegram group alone had around 23,000 users.
Putin rose to power in the late 1990s on the heels of Russia’s 1998 default and financial crisis. Now he risks presiding over even more extreme economic suffering as he pursues his unprovoked war in Ukraine.
“If the currency nose-dives, by definition that means the country doesn’t have the ability to pay back its dollar-denominated debts. It just doesn’t have the dollars,” said Chris Rupkey, chief economist at market research firm FWD Bonds. “The currency doesn’t buy anything if it’s worth nothing.”
Russia’s finance ministry on Monday responded defiantly to those concerns, saying Western creditors were less likely to be repaid because of the sanctions.
“The actual possibility of making such payments to non-residents will depend on the limiting measures introduced by foreign states in relation to the Russian Federation,” it said in a statement.
That attitude, though, made many investors more skeptical of Moscow’s willingness to service its debt, and a forthcoming Russian default set off worries that a credit crisis could spread to other emerging markets.
Morgan Stanley’s global head of emerging-market sovereign credit strategy wrote in a research note this week that Russia could default as soon as April 15, when the 30-day grace period on a $107 million bond interest payment expires. Two more bond payments worth $359 million and $2 billion are due March 31 and April 4, respectively, with 30-day extensions, according to Reuters.
Russia’s majority state-owned gas giant Gazprom has a $1.3 billion bond payment due March 7.
A Russian default could shake the economies of developing market countries — favored by some lenders for their high-yield upside — so profoundly that investors could ditch those venues in favor of safer bets, experts say. That would flood Western markets with capital pulled out of China, India, Brazil and eastern European economies, fueling even higher price inflation.
“If Russia is permitted to and continues to invade other countries, there is contagion risk to the value of the sovereign debt of those countries that are proximate to Russia,” said George Ball, chairman of Sanders Morris Harris, a financial services firm in Houston. “It will also call into question some of the weaker members of the emerging markets simply because investors will be seeking the safest possible haven. There is definitive contagion risk for regions that are much more psychological than financial.”
Fitch downgraded Russia’s long-term foreign currency Issuer Default Rating, or IDR, from “B” to “C,” a classification that shows major concern for Russia’s ability and willingness to service its debt.
“The further ratcheting up of sanctions, and proposals that could limit trade in energy,” the firm noted, “increase the probability of a policy response by Russia that includes at least selective nonpayment of its sovereign debt obligations.”
That’s because, experts say, Russia is so cut off from global financial systems that it cannot bring in sufficient revenue. Moscow cannot borrow money from eight of the world’s 10 largest economies. Its economy is dependent upon exporting natural resources, and some of its largest customers have cut off relations. Its consumer economy is far too small to support a prolonged war effort, let alone pay off its debts.
Even if it could muster the funds to make the payments, sanctions are blocking Russia’s participation from key global financial clearinghouses. It simply does not have the logistical access to transfer capital.
“Over the very short term, Russia is a pariah. Whether it’s their oil, their economy or their sovereign debt, nobody wants to touch it. The rating agency downgrades reflect that outcast nature, and the prices of Russian debt have plummeted reflecting it,” Ball said. “People who have assets in Russia or deposits in Russia are toast for now and for some time ahead. They can’t get their hands on money or securities or goods or services. They are outcast and they will over the shorter term freeze to death.”
Gerrit De Vynck contributed to this report.