Analysts from JPMorgan have warned, Western sanctions on Russia have significantly increased the likelihood of Moscow defaulting on its dollar- and other international market government debt.
Russia has more than $700 million in government bond repayments scheduled for this month. While in theory it has ample reserves to cover the debt, in practice sanctions have frozen some of its assets affecting its ability to service these debts.
“The sanctioning of Russian government entities by the United States, counter-measures within Russia to restrict foreign payments, and disruptions of payment chains present high hurdles for Russia to make a bond payment abroad,” reads a note from JPMorgan to clients.
“Sanctions … have significantly increased the likelihood of a Russia government hard currency bond default.”
The first date of repayment is March 16, when two bond coupons are scheduled to mature, said JP Morgan analysts. Although many of Russia’s debt have 30-day “grace period” built into them, the date of effective default could potentially be pushed back to April 15.
Russia has just under $40 billion worth of international market. Although the upcoming debt is small compared to the size of the Russian economy, but now since it is weighed down by sanctions, any missed payment will trigger a chain reaction of events.
According to JPMorgan’s estimates, bondholders have bought around $6 billion in Credit Default Swaps (CDS) as insurance for payouts; this could become complicated in the case of further debt sanctions.
Worries of Russian defaults comes at a time when the Institute of International Finance (IIF) issued a warning earlier this week, flagging how roughly half of Russia’s $640 billion of foreign exchange reserves had effectively been frozen by international sanctions.
If Russia decides to default on its debt it would primarily hit international investors since foreigners hold $20 billion of Russia’s dollar and rouble-denominated government debt, as of the end of last year, according to Russia’s central bank. Defaulting on its debt would also scar Moscow’s reputation in international markets.
“The likelihood that the government and companies are unable or unwilling to make external debt repayments has risen significantly,” said Jackson.