September 25, 2022

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Fitch downgrades Russia's credit rating amid Ukraine crisis, says default 'imminent'

Fitch downgrades Russia’s credit rating amid Ukraine crisis, says default ‘imminent’

Rating cuts are signals for investors to stay away from Russia, lest they get caught up in extended sanctions or sink money into assets that are running out of value by the day. But a default, which analysts are beginning to consider inevitable, could have far more dire consequences, prompting lenders to seek out financial standing and flee developing international markets that depend on risk-bearing investors.

Lenders dealing with Russia often transact in dollars or euros precisely because Moscow’s economy is more volatile and visible. But President Vladimir Putin said his government might force lenders in certain countries to accept only Russian currency. As of Wednesday afternoon, the exchange rate was 120 rubles to 1 dollar. The Kremlin also banned its citizens from withdrawing more than $10,000 in hard currency from banks in the country.

Now, experts say, Russia is running out of dollars and other standard world currencies with which to pay creditors, and covering debts in rubles will only further devalue the currency because it is essentially worthless in world markets.

Western energy sanctions – President Biden has said the US will stop importing Russian fossil fuels, and the European Union has said it will cut consumption by two-thirds this year – which were issued in response to Putin’s invasion of Ukraine are also starving the Russian economy. new revenue. This means that injecting even a ruble into its domestic economy may be difficult to achieve.

Within Russia, default could mean enormous economic hardship for ordinary people. A lack of capital could mean massive unemployment, with the government and other major employers unable to raise money to cover salaries. Consumer credit will evaporate, with Russian banks cut off from international financial systems.

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Russians are scrambling for money in currencies other than the ruble. On the chat app Telegram, which is very popular in Russia, people on Wednesday shared the locations of ATMs where euros and dollars are available. The Telegram group alone had about 23,000 users.

Putin rose to power in the late 1990s in the wake of Russia’s default and the 1998 financial crisis. Now he risks surmounting even more severe economic hardship as he sues for his gratuitous war in Ukraine.

If the currency declines, it means that the country does not have the ability to pay its dollar-denominated debt. “She doesn’t have the dollars,” said Chris Robke, chief economist at market research firm FWD Bonds. “A coin buys nothing if it is worth nothing.”

On Monday, Russia’s Finance Ministry responded defiantly to those concerns, saying that Western creditors are less likely to repay because of the sanctions.

“The actual possibility of making such payments to non-residents will depend on the restrictive measures imposed by foreign countries in relation to the Russian Federation,” it said in a statement.

But this stance has made many investors more skeptical of Moscow’s willingness to service its debt, and an impending Russian default has raised fears that the credit crunch will spread to other emerging markets.

Medical and evacuation aid buses headed to Sumy, Ukraine, on March 8 after Russian air strikes. The United Nations estimates that two million people have fled Ukraine. (Hadley Green, Joshua Carroll/The Washington Post)

Russia could default as soon as April 15, when the 30-day grace period on a $107 million bond interest payment expires, Morgan Stanley’s global head of sovereign credit strategy for emerging markets wrote in a research note this week. Two additional bond payments of $359 million and $2 billion are scheduled for March 31 and April 4, respectively, with a 30-day extension, According to Reuters.

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Russia’s state-owned gas giant, Gazprom, has a $1.3 billion bond maturing on March 7.

Experts say a Russian default could rock the economies of developing market countries — favored by some lenders because of high yields — so much that investors can forego those places in favor of safer bets. This would flood Western markets with capital drawn from China, India, Brazil and Eastern European economies, driving up price inflation.

“If Russia is allowed to invade other countries and continues to invade, there is a risk of contagion to the value of the sovereign debt of those countries close to Russia,” said George Ball, president of Sanders Maurice Harris Financial Services in Houston. . It will also raise questions about some of the weaker members of emerging markets simply because investors will look for safer havens. There are ultimate contagion risks in areas that are more psychological than financial.”

Fitch has lowered Russia’s long-term foreign-exchange issuer’s credit rating, or IDR, from “B” to “C,” a rating that shows significant concern about Russia’s ability and willingness to service its debt.

The company noted that “the further tightening of sanctions, and proposals that could limit energy trade, increase the likelihood of a political response by Russia that includes at least the non-payment of its sovereign debt obligations.”

This is due, experts say, to Russia too isolated from the global financial systems to generate sufficient returns. Moscow cannot borrow money from eight of the world’s ten largest economies. Its economy depends on the export of natural resources, and some of its largest clients have cut ties. Its consumer economy is too small to support the protracted war effort, let alone pay its debts.

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Even if it manages to mobilize funds to make the payments, sanctions prevent Russia’s participation from major global financial clearinghouses. They simply do not have the logistical access to transfer capital.

In the very short term, Russia is a pariah. Whether it’s oil, their economy or their sovereign debt, no one wants to touch it. Paul said the rating agency’s cuts reflected the pariah nature, and that Russian debt prices had fallen sharply reflecting this. “People with assets in Russia or deposits in Russia are excited now and for some time to come. They cannot get money, securities, goods or services. They are outcasts and in the short term will freeze to death.”

Gerrit de Fink contributed to this report.