Russian ruble falls to all-time low following economic sanctions
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The country has already been downgraded by global ratings agency Fitch to a C rating, typically used for countries close to default. Russia’s first major test will come on March 16 when it faces a payment of $107 million (£81.41million) to bondholders. Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank, commented: “Russia might default on its sovereign debt as soon as next week if the government pays in ruble interests on Eurodollar bonds that do not have “fallback optionality.” Fall back optionality allows governments to make payments in different currencies, in this case rubles rather than dollars, however Ms Spinozzi explained not all bonds have this option.
Russia’s ability to use foreign currencies has been severely diminished by the freezing of its central bank’s foreign reserve assets with further restrictions coming following a decree from President Putin that ‘unfriendly countries’ should only be paid in rubles.
This list includes the US, UK and all EU member states however some companies appear to have continued paying in the nominated currency.
Earlier this week Gazprom paid investors on a US dollar coupon with the company claiming the transfer was made before Putin’s decree on Friday.
Future payments however look far less certain.
William Jackson, Chief Emerging Markets Economist at Capital Economics, said: “It looks highly likely that the Russian government won’t make the debt payments on 16th March- or will make those payments in rubles and will breach the terms of the bond contract.”
He added though, that a Russian default would be unlikely to have major impact on the global economy with exposure to Russia having reduced considerably in recent years.
Although default is now “widely expected and priced in”, Mr Jackson warned: “The risk is that there is one institution with particularly large exposure, which is masked by the aggregate data, which could trigger contagion elsewhere.”
Two major banks, Italian UniCredit and French BNP Paribas, have already warned about their potential exposure to Russia.
UniCredit admitted that a worst case scenario involving writing-off its Russian business would cost around 7.4 billion euros (£6.21billion), while BNP Paribas said it has around three billion euros (£2.52billion) exposed to Russia.
Beyond public statements Mr Jackson explained: “Data limitations, and the opaque nature of financial linkages, mean that these vulnerabilities are impossible to fully assess in advance of problems emerging.”
The World Bank has also expressed similar concerns with the organisation’s chief economist Carmen Reinhart warning both Russia and Belarus were “mighty close” to default.
Speaking to Reuters, Ms Reinhart said: “I worry about what I do not see.”
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“Financial institutions are well-capitalised, but balance sheets are often opaque… there is the issue of Russian private sector defaults.
“One cannot be complacent.”
Fellow UN institution the International Monetary Fund has already warned both Russia and Ukraine will likely face a deep recession this year.
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