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• According to ratings agencies and international bodies, Russia is on the verge of defaulting on its debt, but economists do not see a global contagion effect on the horizon. 
• Kristalina Georgieva, Managing Director of the International Monetary Fund, said on Sunday that sanctions imposed by Western governments on Russia in response to its invasion of Ukraine would cause a sharp recession this year. She went on to say that the IMF no longer considers a Russian sovereign debt default to be a “improbable event.” 
• Last week, World Bank Chief Economist Carmen Reinhart warned that Russia and its ally Belarus were “dangerously close” to defaulting on debt repayments. 
• Despite the high risk of default, a wider financial crisis in the event of a Russian default was deemed unlikely for the time being, with global banks’ $120 billion exposure to Russia being deemed “not systematically relevant.” 
• However, some banks and investment firms may suffer disproportionately. According to the Financial Times, US fund manager Pimco began the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt.
• The Russian government has a number of key payment dates coming up, the first of which is a $117 million payment of eurobond coupons denominated in US dollars on Wednesday.

• Last week, Fitch downgraded Russia’s sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.” 
• S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-,” citing Moscow’s efforts to mitigate the unprecedented barrage of sanctions imposed by the US and its allies as “likely substantially increasing the risk of default.” 
• The Russian government has a number of key payment dates coming up, the first of which is a $117 million payment of eurobond coupons denominated in US dollars on Wednesday. 
• Last week, Fitch downgraded Russia’s sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.”

• Russia’s military conflict with Ukraine prompted a new round of G7 government sanctions, including ones targeting the Central Bank of Russia’s (CBR) foreign exchange reserves; this has rendered a large portion of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and undermining what had been – until recently – Russia’s standout credit strength: its net external liquidity position. Moody’s downgraded Russia’s credit rating to the second-lowest tier earlier this month, citing the same central bank capital controls that are likely to impede payments in foreign currencies, resulting in defaults.

• Following a slew of Western sanctions imposed in 2014 in response to its annexation of Crimea, Moscow took steps to shore up its financial position. 

• The government ran consistent budget surpluses and sought to reduce both its debts and its reliance on the US dollar. 

• The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but recent sanctions effectively froze reserves of dollars and euros. Meanwhile, the Russian ruble has reached new lows.

• To mitigate the resulting high exchange rate and financial market volatility, as well as to preserve remaining foreign currency buffers, Russia’s authorities have enacted capital-control measures, which we understand could prevent nonresident government bondholders from receiving interest and principal payments on time. 
• Russian Finance Minister Anton Siluanov said Monday that Russia will use its Chinese yuan reserves to pay the coupon on a sovereign eurobond issue in foreign currency on Wednesday. 
• The payment could be made in rubles if the payment request is rejected by western banks, which Moscow would regard as fulfilling its foreign debt obligations.

• Although any upcoming payment defaults would be symbolic – Russia has not defaulted since 1998 – Deutsche Bank economists noted that non-payments will likely trigger a 30-day grace period granted to issuers before defaults are officially triggered. 

• Thirty days still gives time for a negotiated end to the war, so this is probably not the time to see where the full stresses in the financial system may reside.

With news or write downs, there has already been a significant mark to market loss. However, it is clear that this is an important storey to follow.

Since the imposition of a web of sanctions on central banks and financial institutions, trading in Russian debt has largely ceased, with government restrictions and actions taken by investors and clearing exchanges freezing most positions. 

Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and are expected to remain there. 

 Bhatia suggested that the key macroeconomic risk arising from the Ukraine conflict is energy prices, but the spillover pressure to global credit markets will be “relatively muted,” with recent volatility across asset classes continuing. 

However, given that Russian securities have been repriced to default levels, we believe that the immediate impact is over. 

Debates about the economic consequences and central bank responses will now take centre stage.