Russia is facing effective bankruptcy as soon as Wednesday after the World Bank warned that crippling sanctions have left the Kremlin “mighty close” to a default on its foreign debts.
Carmen Reinhart, chief economist at the World Bank, said that Russia and Belarus are now in “square default territory”, with payments on about $40bn of Moscow’s external bonds at risk.
Analysts fear the country will fail to make a $117m (£89m) coupon payment on a sovereign eurobond next week. It will have a 30-day grace period to pay up, but may be deemed to have defaulted if it attempts to pay in roubles.
Foreign investors hold about half of Russia’s currency-linked bonds, leaving banks that bought debt from Moscow potentially exposed to multi-billion-dollar losses as a result. France is most at risk, with $4.5bn of Russian government bonds held by the country’s lenders.
It came as Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said that Russia is facing a “deep recession” from sanctions which have cut access to its central bank reserves, reduced living standards and sparked an exodus of Western businesses.
A large-scale default would be Russia’s first since the aftermath of the Bolshevik revolution in 1917.
The ratings agency Fitch has cut Russia’s sovereign debt rating to “C”, deep in junk territory, warning a default is “imminent” as Moscow is increasingly frozen out of the global financial system.
Ms Reinhart said: “They’re not rated by the agencies as a selective default yet, but mighty close.” Althea Spinozzi, a fixed rates strategist at Saxo Bank, said Russia might default “as soon as next week”.
Defaulting would mean Moscow is ostracised on global debt markets, leaving it unable to tap Western investors for money. But president Vladimir Putin’s “Fortress Russia” strategy may leave the nation resilient to this, and sanctions rule out such borrowing in the near term in any case.
The fate of tens of billions more in corporate debt is also at stake.
Alastair George, chief investment strategist at investment research firm Edison Group, said it was difficult to gauge the Kremlin’s “end game”.
He added: “The typical stick that bondholders would use is to say: ‘Okay, if you default on this debt, you’ll trash your reputation, and you won’t be able to raise capital on international financial markets’.
“But Russia could turn around and say: ‘Well, we’re not gonna be able to do that, anyway’.”
Sanctions are expected to send the Russian economy into a steep contraction. The rouble has collapsed in value since the invasion and its stock market remains shut.
Speaking to journalists on Thursday evening, Ms Georgieva, of the IMF, said: “Unprecedented sanctions have led to abrupt contraction of the Russian economy, moving into a deep recession.
“We are mindful that massive currency depreciation is driving inflation up. It is denting severely the purchasing power and standard of living for a vast majority of the Russian population.
She added that global growth forecasts are likely to be cut next month as a result of the crisis.
Russian foreign minister Anton Siluanov said on Thursday that Russia would make debt payments to “unfriendly” nations – including the UK, US, Japan and EU – in roubles, even though they are due in dollars, in line with orders from Mr Putin.
The payments would only be converted to foreign currency if the West ends a freeze on the Kremlin’s $640bn foreign exchange warchest, Mr Siluanov said.
Rouble payment may prove unpalatable to western investors, who typically expect to be compensated in the same currency they used to buy the bonds, and could constitute a default.
Trading on credit-default swaps (CDS), which pay out on an event of default, implies a 71pc chance of a Russian default within the next 12 months, and 81pc in the next five years.
The Credit Derivatives Determinations Committee, which makes decisions on CDS rules, has held a series of crisis meetings to determine whether repayment in roubles would represent a failure to meet currency rules. It will meet again on Friday as officials struggle to reach a decision.
Patrick Ghali, co-founder of hedge fund advisory firm Sussex Partners, said that trying to capitalise on the “messy” situation was difficult.
“As the dust settles, I’m sure that there are going to be some people that are going to make money. There are going to be some opportunities to get something very, very cheap,” he said.