Russia could default on its debt after Western sanctions were imposed in the wake of its invasion of Ukraine.
It is scheduled to make $117 million in interest payments to investors on two dollar-denominated bonds on Wednesday.
But Russia’s access to $630 billion (£470 billion) in foreign exchange reserves has now been frozen.
Rating agencies have warned that a default is “imminent”.
The International Monetary Fund (IMF) has said that while it is concerned about the impact of a Russian debt default, it does not believe it would trigger a global financial crisis.
The Russian government – and companies like Gazprom, Lukoil and Sberbank – owe around $150 billion to foreign investors.
Most of it is in either dollars or euros, and Russian institutions are now barred from accessing dollar or euro assets held abroad due to sanctions.
Should Russia default, it would be the country’s first default since 1998.
It would also be the first default on foreign currency debt since the 1917 revolution, when the new Bolshevik government refused to honor the debts of the last tsar.
Russia’s Foreign Ministry has said it would make payments to international investors in rubles if it were prevented from paying them in dollars or euros.
Neither of the two dollar-denominated bonds due Wednesday allows for the use of any other currency.
However, some of Russia’s other debt arrangements allow the use of different currencies – in which case payment in rubles might be acceptable.
This would depend on whether the ruble payment was of the same value as the original dollar or euro payment investors expected.
Investors in Russia have seen their investments fall in value over the past few days.
The problem for many will have been Russia’s rapid fall from financial grace, leaving them little time to react by selling their holdings.
Rating agency Moody’s says Russia’s rating on its 21-point scale of how reliable a country is as a place to invest is now the second-lowest and could fall further.
Colin Ellis, Moody’s Chief Credit Officer, told the BBC: “Not only are we signaling that we expect a default, but we are also telling investors how much they can lose – and that aligns with them being between 35% and Losing 65% of their money. ”
One result of an official default is that investors could start making claims on credit default swaps. These act as insurance, and investors usually buy them up front to cover losses if a country or company later defaults on its debt obligations.
The last time Russia defaulted – in 1998 – it sent shocks through financial markets. A default now would be of great symbolic importance, but according to William Jackson, chief economist at Capital Economics, “is unlikely to have a significant impact”.
The IMF has announced that it will downgrade its forecast of 4.4% global economic growth in 2022 as a result of the war. However, IMF chief Kristalina Georgieva has also dismissed the idea of a broader shock to the global financial system from a Russian default.
However, she warned that the sanctions imposed on Russia would lead to a “deep recession” there and that the war would push up global food and energy prices.
The unknown factor is what defaults Russian companies might face – and what impact they might have on foreign investors who have invested heavily in Russia.
Any default is likely to exacerbate the financial and economic problems Russia now faces.
Before invading Ukraine, Russia was considered one of the most creditworthy, low-debt countries in the world. But things have changed dramatically now.
Foreign firms have fled in droves, and Moscow has already imposed tight credit controls to limit cash outflows to protect the economy and the ruble. Despite this, Russia’s economy is expected to shrink by 7% this year due to sanctions.
Inflation was already at 9.15% in February before the invasion of Ukraine. It is now forecast to rise significantly this year – despite the Russian central bank raising interest rates from 9.5% to 20%.
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