People queue at an ATM in Moscow.
Foto: IMAGO Images/SNA
Western sanctions once morest Russia are also having an effect in the financial sector. Fitch warned on Tuesday of an imminent default. The rating agency had previously lowered its rating of Russia’s creditworthiness by six notches to »C«. This means that the credit rating is only one rank above “D”, i.e. default. The other two major rating agencies, Moody’s and S&P, now see Russia’s creditworthiness in the so-called junk zone.
This is bad news for banks and investors. For example, on Thursday a bond issued by the Russian Federation, which is traded on the Stuttgart Stock Exchange, lost 41 percent of its value compared to the pre-war level. And the price is likely to fall further. However, this numerical loss only becomes reality for investors if they sell their shares – and find someone willing to buy beforehand. The bond issued in 2013 does not mature until 2028. Then Russia would actually have to pay back the borrowed money in full.
The situation is different with interest rates. At 7.05 percent, the bond is above-average lucrative for its buyers. The interest is regularly due semi-annually. Here, however, investors – most of whom are likely to come from Italy, France, Austria and Russia itself – are threatened with real disappointment in the near future if the Russian government suspends interest payments.
According to the Bloomberg news agency, a bond will be due for repayment on April 4 for the first time since the war began. Two billion US dollars are in the fire. Experts see a payment default as the most likely scenario, at least in this timely case. That would mean that Russia would not pay off its debts in response to the surprisingly harsh Western sanctions. The government in Moscow has already taken such counter-sanctions in other areas, restricting the export and import of certain products and raw materials.
Since the mutual sanctions prevent Russia from transferring the funds due for coupons and repayments to western investors, there is a risk of a “technical default”. Vladimir Putin’s empire would then be bankrupt like Argentina, for example: The country would no longer be able to meet its payment obligations to foreign creditors.
The financial markets have so far reacted calmly to this risk. Bond and stock markets and even energy and commodity markets seem to be calming down. This is also due to the minor importance of Russian foreign debt for global financial transactions. The total value of Russia’s government bonds denominated in dollars or euros amounts to just 49 billion US dollars. From the point of view of the financial professionals, this is a small sum.
Unlike during the state bankruptcy in 1998, the government in Moscow has ample financial reserves and hardly any debt. According to the German foreign trade organization GTAI, the Russian central bank holds 475.5 billion US dollars in currency reserves.
At around 18 percent of gross domestic product, national debt is exemplary for Western European standards. For comparison: In Germany, the debt level in 2020 was 68.7 percent. In addition, the sale of oil and gas continues to fill the coffers of the Russian energy companies Gazprom, Lukoil and Rosneft. The state makes a good profit from concession fees and taxes. A national bankruptcy – as repeatedly happened in highly indebted Argentina – is therefore not to be expected, since Russia is actually doing well financially.
The Russian budget is considered balanced from a price of around US$ 70 per oil barrel. The price is currently well over $100 due to market turbulence caused by the Ukraine war. So Moscow’s tills are ringing. “The Russian bear has enough financial fat to survive an extended hibernation,” writes the former president of the Federal Academy for Security Policy, Rudolf Adam, in a newspaper article. Adam’s conclusion: the West will have to come to terms with Russia.
However, due to the financial sanctions imposed by the EU, USA and Japan, which the financial centers of Switzerland and Singapore have joined, the Russian state has been cut off from part of its accumulated foreign exchange reserves. Since President Putin and his advisors naturally had to reckon with sanctions, these are likely to be largely parked in the domestic banking system and in accounts of “friendly” states that have not joined the sanctions, such as NATO countries Turkey and Serbia, India and before all China. Russia will need its foreign exchange in the medium term, for example to buy spare parts for machines, food or pharmaceutical products abroad.
The greatest current threat to Russia’s financial stability arguably lies dormant domestically. To prevent the outflow of dollars and euros, Putin and the Russian central bank have taken countermeasures. However, the country has not isolated itself completely. Companies can transfer the equivalent of up to 10,000 US dollars a day in foreign currency abroad to pay bills.
