Russian sovereign bond payments were received by creditors last week, but the uncertainty for international investors continues, with payments totalling $2.5bln scheduled within the next two weeks.
As sanctions begin to bite and push up the cost of funding after Russia’s invasion of Ukraine, foreign investors face a fraught period ahead. S&P has cut the rating on Russian sovereign debt another notch, even deeper into junk territory, and considers it at a high risk of default.
“Russia’s remaining interest payments this month will keep investors anxious,’’ wrote strategists at Deutsche Bank AG (NYSE:DB), including Jim Reid. “A $447mln payment is due on March 31, followed by a $2bln payment as a bond comes due on April 4.”
Were Russia to fail to pay, it would mark the country’s first external bond default in more than a century. Although Russia has sufficient foreign currency to cover debt repayments, the freezing of the central bank’s assets has made payments more difficult. Some $150bn of foreign currency debt is owed by the government and Russian companies.
Clearly the Russia situation has fallout for corporates with pension funds, asset managers and others facing potential fallout. Franklin Resources Inc. has marked down its Russia bond holdings by more than half, Bloomberg News has reported, also citing Ashmore Group (LSE:ASHM) PLC, the emerging markets fund manager, as having major exposure to Russia.
But although a sovereign debt default would bring pain to some institutions, it’s unlikely to trigger a full-blown financial crisis, according to the International Monetary Fund.
That’s because the overall exposure of banks globally to Russia is about $120bn, which is not negligible but is “definitely not systemically relevant,’’ Kristalina Georgieva, IMF managing director said earlier this month.
What’s more, Britain’s lenders have fairly limited direct exposure to a sovereign debt default, says Joe Dickerson, an equities analyst at Jefferies in London.
“UK banks reduced their exposure following the Crimea situation,’’ said Dickerson. “The broader concern would be the ripple effect on the broader market, which is difficult to guage.’’