Russian Economy Could Default in Just a Few Weeks—Morgan Stanley

Russia may default on its foreign debt by the middle of next month, experts warned, as the country grapples with the catastrophic economic consequences arising from President Vladimir Putin's war in Ukraine.

"We see a default as the most likely scenario," Simon Waever, Morgan Stanley's head of emerging-market sovereign credit strategy, wrote in a note on Monday, according to a Bloomberg report.

The Russian economy is reeling from tough international sanctions, many of them targeting the country's financial sector. Some of Russia's banks have been cut off from the SWIFT international payments system and its currency, the ruble, went into free fall.

A default, which happens when a government is unable to service its national debts, may come as soon as April 15, after the end of a 30-day grace period on coupon payments that the Russian government owes on dollar bonds due in 2023 and 2043, according to the report. A default typically makes borrowing funds again in the future significantly more difficult and expensive.

'Catastrophic' Default Priced In

"In case of default, it is unlikely to be like a normal one, with Venezuela instead perhaps the most relevant comparison," Waever added, according to the outlet.

The South American country and its state-owned oil company, Petroleos de Venezuela SA, defaulted on $60 billion in 2017, plunging the country into a crisis.

"Markets are fully pricing in not just any old default, but a catastrophic one, with no possibility of restructuring in the foreseeable future," Gabriel Sterne, head of global strategy services and emerging market (EM) macro research at Oxford Economics, told Newsweek.

Indicative pricing values the 2023 bonds at around 29 cents on the U.S. dollar, according to Bloomberg.

Sterne said this "compares very unfavorably with other EMs at or on the cusp of default," giving the example of Zambia, which is at 72 cents, Suriname at 69 cents and Sri Lanka at 39 cents.

"The only buyers would be Russian locals, who may accept interest payments in rubles. Unfortunately, if such buyers exist, they could do very well at these prices," he said.

"This means financial humiliation for Russia, though given that the reason for default is that nobody is willing or able to hold its debt, probably the impact on the ability of its government or corporates to borrow overseas goes from nearly zero to slightly closer to zero."

The Russian government has borrowed about $49 billion in dollar and euro-denominated bonds, according to Bloomberg. Interest payments to some of the country's bondholders are due in the coming months.

George Catrambone, DWS Group's head of Americas trading, told Axios: "The default risk is real," and the market for Russian bonds is effectively frozen and there are relatively few prospective buyers.

Putin has signed a decree that Russia can pay foreign creditors only with rubles, whose value has slumped to a record low against the dollar.

Russian holdings make up only a small part of emerging market indexes and Western banks have little exposure to the country's assets.

Possible Impact on China

Economist Stephen Roach, a senior fellow at Yale University, told CNBC that the effects of a Russian default on its sovereign debt would also have an impact on its key ally.

"China cannot afford to stay in close alignment with Russia," he told the network, if Russia were to default.

Warnings about the economic impact of the war in Ukraine have been growing louder.

Four days after the invasion, the Institute of International Finance (IIF) said Russia was likely to default on foreign debt and its economy would contract by double digits, Reuters reported.

Ratings agencies Fitch, Moody's and S&P have slashed the country's sovereign-debt ratings to below investment-grade status, saying sanctions could undermine Russia's ability to service its debt.

Meanwhile, there is concern about the broader impact of the war on the global economy, especially on oil, gas and commodity prices. On Tuesday, the Brent crude oil price was pushed to around $140 a barrel.

"The concern now is that, if energy prices continue to climb, the global economy could be forced into a second recession in three years," entrepreneur and investor Neil Debenham told Newsweek.

"There will also be substantial pressures on businesses across the world which rely on supply chains with Russia—especially concerning raw materials such as palladium.

"As the war intensifies, aftershocks to businesses across the world could easily worsen," he added.

Russian exchange rate
People walk past a currency exchange office in central Moscow on February 28, 2022. The Russian economy has been hammered since Vladimir Putin announced the invasion of Ukraine, with the threat now looming that the country could default on its debt. ALEXANDER NEMENOV/Getty