As the crisis in Ukraine continues to escalate and the West applies increasing pressure on Moscow, there is growing talk on the possibility of Russia defaulting on its debt.
Concerning a Russian default, over the weekend, the IMF’s managing director, Kristalina Georgieva stated that is not ‘improbable’ given that while they have sufficient funds to service their debt, they cannot access these funds. Georgieva did however state that such a default would not trigger a wider global financial crisis given that the total exposure of banks to Moscow was $120bn – a figure which she said was “not systematically relevant”. Indeed, according to the Financial Times, international investors hold some $20bn in Russian foreign currency bonds. And in recent years, Russia has shrunk its USD holdings from 45% of its foreign currency reserves in 2013, to just 16.4% by 2021.
Following Western sanctions and Fitch’s downgrading of Russian sovereign debt to junk status, the Russian finance ministry has stated that the West is merely desiring an ‘artificial default’. For example, the Kremlin’s Minister of Finance, Anton Siluanov stated that “the freezing of foreign currency accounts of the Bank of Russia and of the Russian government can be regarded as the desire of a number of foreign countries to organise an artificial default that has no real economic grounds”.
No doubt Siluanov will be looking for ways to navigate Moscow’s growing financial problems, with for example the Russian government due to pay some $120m in USD denominated debt later in the week. For example, Siluanov stated that the Kremlin was unable to access roughly half of its $640bn worth of foreign exchange reserves and gold bullions, although he added that the problem was somewhat alleviated by their ability to access their yuan denominated reserves. According to central bank data, the renminbi accounts for some 13% of Russia’s foreign currency reserves while Beijing holds 14% of Russia’s reserves. Nevertheless, Moscow’s inability to access certain reserves is necessitating the Kremlin to look for solutions – indeed, following the Duma passing a temporary measure concerning the repayment of foreign debt, it appears likely that they may repay foreign currency denominated debt in roubles – a move which Siluanov said would be “absolutely fair”.
Nevertheless, while a Russian default is unlikely to trigger a global crisis, owing to the conflict and its effect on global risk sentiment, energy security, commodity prices and food scarcity the IMF are expected to revise down their global growth forecast for 2022.
Beijing’s Balancing Act
Over the weekend, news has also emerged that Russia has requested assistance from China in the supply of military material in a move which highlights how the Kremlin’s is struggling in its campaign. While the specific details of the request – and its outcome – are unclear, subsequent reactions to these reports are indicative of how the conflict in Ukraine is manifesting geopolitical fault lines within the global community.
Washington is seemingly applying pressure on Beijing to ensure that no such assistance is provided with for example the US National Security Adviser, Jake Sullivan stating that there would be severe “consequences” if China went ahead with the requests. Of course, in recent weeks, the CCP have criticized the West for proving military equipment to Ukraine, arguing that it is adding “fuel to the fire” and just last month Putin and Xi met in Beijing stating that Sino-Russian relations has “no limits”. China continues to play a balancing act and has so far tried to give the impression of a mediator while it was telling of their wider geo-political aims that they abstained from voting on a UN Security Council resolution which condemned the Russian invasion of Ukraine.
FED and BoE Monetary Policy Decisions
This week also sees the Fed and Bank of England give their latest interest rate decision on Wednesday and Thursday, respectively. The general market consensus is that the Fed are expected to continue on course with a 25bpt hike on 16th March with around five further hikes this year. Similarly, a 25bpt hike from the BoE has also been pretty much priced into the market which would see the base interest rate rise from 0.5% to 0.75%. While there was a chance of a 50bpt hike both sides of the pond this week, such possibilities have been subdued following the Russian invasion of Ukraine, given its determinantal impact on prospect of growth.
Have a great day.