Amidst the relentless onslaught of sanctions imposed by the U.S. and its allies against Russia, the specter of a debt default looms large, casting a shadow of uncertainty and concern.
Currently, an estimated $150 billion in Russian bonds is teetering on the edge of jeopardy, and bondholders are growing increasingly apprehensive. The fear of a default sends shivers down the spines of many, as its potential repercussions could be even more catastrophic for the global economy than the ongoing impact of Russia’s war with Ukraine.
Recent sanctions announced include measures such as phasing out European imports of Russian oil and gas, severing Russian banks’ ties to the Swift international payment system, and disconnecting Russian broadcasters from European cable and Internet networks. However, it’s important to note that these proposed sanctions are yet to be approved by the European Union. Furthermore, the U.S. is taking its own punitive actions by barring its citizens from providing financial, accounting, or consulting services to Russians, in a bid to prevent them from circumventing the sanctions.
With Russia’s foreign accounts already frozen due to existing sanctions, the country’s ability to fulfill its debt obligations in foreign currencies, as stipulated in contracts, has become an almost insurmountable challenge.
These additional sanctions intensify the economic pressure on Russia, amplifying the risk of a debt default. Kislaya Prasad, the academic director of the Center for Global Business at the University of Maryland, acknowledges that the primary impact of a default would be felt within Russia itself and, to some extent, by those holding the debt. However, he believes that there might be attempts to renegotiate and delay payments rather than outright losses for bondholders. History has shown that in cases of default, investors willing to wait or advocate for higher repayment rates often step in to purchase the distressed debt at a discount.
In a worst-case scenario, a Russian default could set a perilous precedent, potentially encouraging other countries burdened by debt payments to consider similar actions. Lourdes Casanova, director of the Emerging Markets Institute at Cornell University, expresses concerns that this could trigger a global recession. Nevertheless, she remains optimistic about the likelihood of a Russian default, citing China’s support as a significant factor. Russia continues to export substantial quantities of oil and gas, with China serving as one of its largest buyers. Additionally, Russia possesses a substantial reserve of gold.
Nonetheless, the impact of the sanctions is already being acutely felt by ordinary Russians, with skyrocketing prices of goods and shortages of essential components like computer chips disrupting production. Casanova warns that a default could potentially lead to a banking crisis, rapidly devaluing the country’s currency and resulting in economic turmoil, job losses, high unemployment, and the need for austerity measures, including cuts to social programs.
Casanova points to the Latin American debt crisis in the 1980s as a cautionary tale, where defaults forced austerity measures on countries, leading to reduced spending on infrastructure, education, and healthcare, along with rising unemployment and declining wages. The consequences were dire, with a prolonged setback in development.
Even without a default, Russia’s war with Ukraine has already made a substantial impact on the global economy. Both countries were significant exporters of agricultural products, and cutbacks have driven up food prices worldwide. Conversely, Russians face constraints on their ability to purchase technology and luxury goods.
While the road ahead for Russia and its people may appear fraught with challenges, Prasad maintains a glimmer of hope, provided that the country continues to receive support from China. He emphasizes that Russian foreign debt is relatively small, and the country’s revenue from oil sales should suffice without heavy reliance on international borrowing.
