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  • Writer's pictureCrest Economics

Russian Economy teeters on the brink of default – May 2022

Reeling from international sanctions, Russia stands on the edge of defaulting in their payment of national debt. Modern bondholders are witnessing Russia’s international reputation plunge to new lows over the 3 months. Russia had to tap into its limited dollar reserves to make last-minute coupon payments worth $650m on two bonds to foreign investors. Failure to repay debt payments would deal a heavy economic blow to Russia as losing access to foreign credit markets would lose any ability to draw on international funds to support its domestic economy.

Whilst the rouble fell to historical lows of $0.012 USD earlier in March, the rouble’s recovery shows the success of the country’s capital controls and booming energy exports. However, it seems inevitable a default would happen with Russia’s dollar stockpile dwindling - Russia will force up the cost of its import, only worsening the inflation crisis engulfing its society.

According to Liam Peach, an emerging markets economist at consultancy Capital Economics, Russia’s public finances are currently “largely sound” on the back of strong oil prices. Yet the impacts of a default could be more severe if the taint spreads to Russian businesses. A sovereign default may have bigger implications on Russia’s economy if it triggers a wave of corporate defaults, whose debts are much larger than those of the sovereign - hitting Russia’s banking sector and weighing on investment.

Furthermore, the EU has announced that Russia's largest lender Sberbank would become the latest firm to be kicked of SWIFT, the global messaging system used to facilitate financial transactions. A major steel firm as one of Russia’s largest steel producers is one of the latest companies to fall under further sanctions. The bloc has also agreed to phase out imports of Russian crude oil over the next 6 months.

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