Debt maturity and central bank hikes loom in Russia
London: The cost of Russia’s war with Ukraine will become much clearer next week, with a previously unthinkable sovereign default looming, more central bank emergency measures likely and a guaranteed stock market crash looming it reopens.
Moscow’s “special operation” in its former Soviet neighbor has cut Russia off from key parts of global financial markets by the West, triggering its worst economic crisis since the fall of the Soviet Union in 1991.
Potential debt default
Wednesday could mark another low. The government must pay $117 million on two of its dollar-denominated bonds. But he signaled that he wouldn’t, or if he did, it would be in rubles, which would amount to a default.
Technically it has a 30 day grace period, but that’s a minor point. If that happened, it would represent its first international default since the Bolshevik Revolution more than a century ago.
“Default is very imminent,” said Roberto Sifon, a top analyst at S&P Global, which just hit Russia with the world’s largest ever sovereign credit rating downgrade.
That state-run energy giants Gazprom and Rosneft have made international bond payments in recent days and that around $200 billion in still-unlicensed government reserves leave a glimmer of hope that may not happen, even if those odds seem bleak.
Wednesday could be busy for other reasons as well.
Russian financial newspaper Vedomosti reported that central bank and Moscow stock exchange sources said this week that suspended local stock and bond trading could resume by then.
It would be chaotic at least in the short term. Big Russian companies, also listed on the London and New York markets, saw these international stocks plummet to virtually zero when the crisis hit and have now come to a halt.
“A lot of financial institutions are sitting on Russian assets that they want to get rid of, but they can’t,” said Rabobank currency strategist Jane Foley.
“They really have no choice but to sit on it. But this means that when they are allowed to trade, the selling can be quite persistent.
More probable borders
It won’t stop there. Russia’s central bank is due to meet on Friday after already more than doubling interest rates to 20% and implementing sweeping capital controls to try to prevent a full-scale financial crisis.
Western investment banks like JPMorgan now expect the economy to plunge 7% this year due to the combination of bank concerns, sanctions damage and the instant spike in inflation caused by a 40% drop in the rouble.
This compares to the 3% growth forecast at the start of the year. This also means a peak-to-trough fall of around 12%, which would be larger than the 10% fall in the 1998 ruble crisis, the 11% lost in the global financial crisis, and the 9 % of the covid19 pandemic.
“The CBR might raise rates a bit more, that would be the safest guess right now,” said Arthur Budaghyan, chief emerging markets strategist at BCA Research.
However, the most crucial measures at this stage could be new capital controls to try to keep the financial system in a cocoon.
“It’s much more important to make sure banks can operate, can still process payments and keep credit in the economy so that they can at least operate to some degree,” Budaghyan said.