Russia’s impending defaults will lead to an economic crisis worse than 1998
In just one week, Russian President Vladimir Putin has caused hundreds of deaths and wreaked havoc on the lives of millions. He also started the destruction of the Ukrainian and Russian economies. Turning Russia into a global economic pariah is a dubious achievement, and it will take years for the citizens of both countries to recover.
Sanctions are an economic seat
Russian President Vladimir Putin’s unprovoked invasion of Ukraine led to global economic sanctions equivalent to an economy seat. From the 21st of Februarythe United States imposed sanctions under Executive Order 14065 “prohibiting all new investment, trade and financing by U.S. nationals to, from or within the so-called Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) regions” in eastern Ukraine. Three days later, the United States imposed additional sanctions in the form of sweeping financial sanctions and strict export controls. And on Thursday, the U.S. government imposed “blocking sanctions on Russian defense entities, export controls targeting oil refining, a key source of revenue that sustains the Russian military, restrictions on Belarus to stifle its imports of goods technologies in response to his support for Putin’s war of choice,” and banned “Russian aircraft from entering and using US domestic airspace.” so far, thirty-five countries which include Australia, Canada, Japan, 27 European Union countries, New Zealand, Switzerland, Taiwan, United States and United Kingdom. imposed sanctions and export controls targeting Russia. Brazil, China, India, Mexico, Pakistan and South Africa have yet to impose sanctions.
Divestments are growing rapidly
The global private sector has also moved quickly to punish Russia. At the time of this writing, more than 30 international companies well-known companies of all sectors, including energy, and financial institutions had withdrawn from Russia. It all happened in five days. As leaders fear the legal and reputational repercussions of sanctions, many more will follow.
Deluge of demotions
This economic siege has caused a deluge of credit rating downgrades for Russian sovereign and corporate debt issuers. Every announcement of downgrades and even negative credit watch leads to impending default by sovereigns, corporates and financial institutions. Downgrades, not to mention defaults, increase the cost of borrowing for issuers. Even under normal circumstances, rising borrowing costs make it difficult for issuers to stay afloat. Now that’s next to impossible, as the Russian economy is besieged by sanctions and ever-increasing and intensifying divestments.
Friday, February 25and, S&P Global Ratings was the first rating agency to open the floodgates on Russian downgrades. In just one week, Russian sovereign debt in local and foreign currencies assessed fell from investment grade BBB- for CCC-, a level indicating that a fault is imminent. S&P also announced that it had also lowered its “transfer and convertibility rating from ‘BBB-‘ to ‘CCC-‘. Ratings remain on CreditWatch with negative implications. CreditWatch Negative means S&P could downgrade Russian debt even further.
On Tuesday, the Bank of Russia prohibited coupon payments to foreign holders of ruble-denominated bonds. The next important date to watch is March 16, when another Russian bond coupon payment is due.
Wednesday, fitch reviews downgraded on Russian ruler from BBB to Band this Friday, FitchRatings downgraded 100 Russian transmitters including 32 banks’ local and foreign subsidiaries and six government-related issuersas well as companies from consumer and health, house building, Assurance, natural resources, telecommunication, transportand utilities sectors.
Throughout the week, Moody’s Investor Services placed 16 financial institutions, more than 50 companies, sixteen municipalities, on a review for a possible downgrade. Moody’s downgraded the Russian sovereign from investment grade Baa3 to B3 and also downgraded the ratings from three Russian mortgage-backed securities (MBS).
AM Best also downgraded several Russian insurance and reinsurance companies this week. Furthermore, the rating agency specializing in insurance warned that the global insurance industry will remain under pressure in the near future due to the economic shocks of the invasion of Ukraine.
The economic crisis will be long and painful
Defaults will push Russia even faster into an economic crisis that will be much worse than the crisis of 1998. In the mid-1990s, Russia was an economy in transition from a planned economy and embroiled in a costly conflict in Chechnya . The overflow of Asian crisis and oil in the $10-25 range were the nails in the coffin for the Russian ruble. During this crisis, no government or company was shutting down the Russian economy.
Putin will be remembered for squandering the financial autarky that his administration, along with Russian businesses and financial institutions, had established since the 1998 crisis, but especially after the economic sanctions imposed due to the Russian invasion and of the annexation of Crimea in 2014. As Dr. Gian Maria Miles-Ferretti explained in his highly recommended Brookings Institution Blog“The scale and scope of the sanctions imposed in recent days – which go well beyond those adopted eight years ago – will impose very high costs on the Russian economy”.
Putin should have learned from the multiple banking and currency crises of the 1990s that it is impossible for central banks to defeat the power of power currency investors. With more than half of its foreign exchange reserves now frozen, the Bank of Russia is almost out of tools to support the ruble and stop a run on Russian banks. Even with the humanitarian and economic disaster that Putin is causing, it is unlikely that he will resign soon, because Anton Chekhov explained ‘any fool can face a crisis.’ Maybe, if we’re all lucky, “it’s this daily life” that will wear him out.
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