“Sanctions imposed on Russia have significantly increased the likelihood of a Russia government hard currency bond default,” JPMorgan emerging markets strategists wrote in a note to clients on Wednesday.
Russia may have the cash to make its debt payments. The Central Bank of Russia lists a staggering $643 billion of international reserves.
However, JPMorgan said sanctions leveled by the United States on Russian government entities, countermeasures within Russia to restrict foreign payments and the disruption of payment chains “present high hurdles for Russia to make a bond payment abroad.”
For instance, sanctions on Russia’s central bank and the exclusion of some banks from SWIFT, the high-security network banks used to communicate, will impact Russia’s ability to access foreign currency to pay down debt, according to Capital Economics. That includes Russia’s stockpile of reserves as well as cash from export revenue.
Capital Economics estimates that about half of Russia’s international reserves will be impacted by sanctions – and much of the rest is in gold, which may not be as easily converted into cash.
“It would be a logistical default rather than a lack of funds default,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Russia has more than $700 million in payments coming due in March, mostly with a 30-day grace period, according to JPMorgan.
Although Western sanctions on Russia have not restricted the secondary trading of the country’s existing bonds, JPMorgan noted that there have been settlement issues with some bonds because the Russian National Settlement Depository has blocked the accounts of Euroclear, a Belgium-based settlement provider.
Some believe the Kremlin could be setting the stage for an intentional default to punish the United States and Europe for crushing its economy.
“Putin is 100% going to default,” hedge fund manager Kyle Bass told CNN in a phone interview on Wednesday. “The West is strangling him. Why would he agree to pay the West interest right now?”
Capital Economics noted that Russian authorities have already prohibited the transfer of coupon payments on local currency sovereign debt to foreigners, underscoring the point that authorities are “acting with scant regard for foreigners’ holdings of Russian assets.”
“Russia could use default as a way of retaliating against Western sanctions to inflict losses on foreign lenders. It’s not far-fetched to think that the Russian authorities could ban foreign debt repayments,” Capital Economics wrote.
It’s not clear how widespread the impact of a default today would be. The 2008 Global Financial Crisis and the onset of the Covid pandemic in 2020 showed how interconnected the world economy and financial system are.
However, foreigners held just $20 billion of Russia’s dollar debt and ruble denominated sovereign bonds worth $41 billion at the end of lats year, the Financial Times reported, citing Russia’s central bank.
“Our financial system and financial institutions have relatively little exposure to Russia,” said Jerome Powell, chairman of the Federal Reserve, at a House hearing Wednesday. “Even the largest exposures that any of them have are not very big.”
Asked what a Russian default would mean for the global financial system, Bass said, “Nothing. It just means people are going to lose some money.”
Boockvar indicated he’s encouraged by the relatively low exposure foreigners have to Russia’s debt. However, he isn’t sure how this would play out because it’s so rare to see sanctions on a major central bank.
“We’re all flying blind,” Boockvar said.