Russia faces 'avalanche' of debt defaults

Amid the looming specter of inevitable Russian defaults, the International Monetary Fund (IMF) has warned that the war against Ukraine was weakening the economic prospects for most countries.

The IMF managing director Kristalina Georgieva’s stark warning came as Russia faced its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country's central bank, economists at the consultancy Oxford Economics warned.

Credit-rating agency S&P Global has announced that Russia is now in a "selective default," often a harbinger of a full default.

Russia does have a 30-day grace period, which gives it a little breathing room. But S&P Global isn't optimistic that circumstances will change, and if Russia doesn't make the payments in dollars by early May, the country will default.

A default would make Russia more of a pariah in the global economy, analysts warned. “There is likely to be an avalanche of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.”

While Russia was not a big seller of foreign debt, major hedge funds and asset managers had bought bonds. There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JP Morgan, with $21.3 billion owned by foreign investors.

However, data from Morgan Stanley shows that Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion.

Much of Russia's debt was registered in the UK, which is where it's likely that most of the court fights will take place. Economists said the US might eventually end up seizing the money from the Russian central bank's foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpiles.

Credit rating experts noted that countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, albeit through a complicated process taking a long time to resolve as in the case of Argentina’s default in 2001. Since memories of a default linger Russia may have to pay more to borrow from foreign investors in the future, they said.

— issacjohn@khaleejtimes.com