A state bankruptcy in Russia following the far-reaching western sanctions in the wake of the invasion of Ukraine would probably not come as a surprise. The number of experts who meanwhile see Moscow’s debt service in acute danger is growing, while Russia is becoming more and more marginalized from an economic point of view. In any case, the international punitive measures seem to have enough potential for Putin’s empire to go bankrupt. It would be Russia’s second state bankruptcy in 24 years.
The American-British rating agency Fitch is already warning of an imminent default. It lowered its rating of Russia’s creditworthiness further into the junk zone on Wednesday – down six notches from a “B” credit rating to “C”. Russian government bonds also only have junk status – for investors, this indicates high-risk investments with a high risk of default – even with the two US rating agencies Moody’s and Standard & Poor’s (S&P).
First acid test on March 16th
The head of the Berlin economic research institute DIW, Marcel Fratzscher, considers a bankruptcy of the Russian state to be very likely in the coming months. As a result of the sanctions, there is a high risk that Russia will not service its debts to international creditors, Fratzscher told the German Press Agency (dpa). In addition, a default might lead to upheavals on the financial markets. According to the “Wiener Zeitung”, regarding 20 percent of the outstanding volume of Russian government bonds are held abroad.
According to the US financial news service Bloomberg, Russia currently has a total of around 49 billion dollars (45 billion euros) in government bonds outstanding in dollars and euros. The first acid test is already on March 16 – in a few days – when interest payments of more than 100 million dollars are due. As a result, a two billion dollar bond expires on April 4th.
A default is also the “most likely scenario” for the US investment bank Morgan Stanley. Hardly anyone wants anything to do with Putin’s papers. “I wouldn’t pay a penny for these bonds,” Bloomberg quoted ex-hedge fund manager Jay Newman as saying.
Much still unclear
A state bankruptcy in Russia would also affect Austrian investors. According to data from the National Bank (OeNB), the financial commitment of domestic insurers, private households and investment funds to Russian bonds and shares can be put at a total of almost one billion euros, of which more than 350 billion are in bonds. However, these figures do not show how high the volume is that Austrian investors only hold in Russian government bonds.
It is also unclear how a bankruptcy in Russia might affect the banking sector in Austria. With regard to the sanctions, the financial market supervisory authority only declared on Tuesday that the domestic financial system was stable and the currently foreseeable effects were “painful but manageable”.
1998 Russian crisis
The blackest day in the history of the new Russia was August 17, 1998. At that time, the government stopped servicing the internal debt due to tight budgets and allowed the ruble to be devalued. The financial markets tumbled and confidence in Russia was gone. After years of stability, the ruble lost 75 percent in just a few weeks. Russian banks might no longer meet their obligations. International financial organizations stopped supporting it.
This time the situation differs in essential points, the starting position is completely different. At that time, Russia had high national debts and low foreign exchange reserves. In addition, the ruble was still pegged to the dollar, so the central bank had to defend the exchange rate. Today, Russia’s coffers are bulging – not least thanks to high oil and gas prices. But the sanctions have frozen much of Russia’s central bank reserves ($640 billion).
S&P and Moody’s also emphasize that the main reasons for the increased risk of non-payment are not lack of money, but the consequences of the sanctions. They also severely limit the central bank’s options. Even if Russia were to pay, it would therefore be uncertain whether creditors abroad would get their money.
Another problem for international investors, as the dpa reports: credit default insurance may not work for some bonds. Because Russia might settle debts in rubles, but should not transfer the money abroad.
Putin is looking for sources of money
Meanwhile, Vladimir Putin has passed a law freeing up funds from a national wealth fund to buy government bonds and stocks. In addition, the Russian head of state has issued a capital amnesty: This means that money that has been smuggled abroad without the tax authorities can return to Russia without the threat of penalties or taxes.
The Russian ruble has meanwhile continued to slide. In Moscow trading, the dollar rose once morest the Russian currency by around 15 percent to 119.99 rubles. (dress)
