Next week will be a much clearer picture of the cost of Russia’s invasion of Ukraine. There is a likely sovereign default, additional emergency central bank measures, and the possibility of a stock market crash if it reopens.
Moscow’s “special operation” in its former Soviet neighbour has cut Russia off-key financial markets worldwide by the West, triggering the worst economic crisis Russia has faced since 1991.
Wednesday could be another low. Two of its dollar-denominated bond obligations are due to be paid $117 million by the government. It has been signalling that it won’t, and if it does, it will be in roubles. This is tantamount to default.
Although technically it does have a 30-day grace period this is not important. It would be the Bolshevik revolution’s first international default over a century.
Roberto Sifon, a top analyst at S&P Global, stated that “Default is very imminent” and that Russia has been hit with the worst sovereign credit rating downgrade in history.
Gazprom and Rosneft, state-owned energy giants, have made international bond payments in recent times. There is still some hope that around $200 billion of unapproved government reserves might be available.
Wednesdays could also be very busy due to other reasons.
Russia’s Vedomosti financial paper reported that central bank and Moscow Exchange sources said this week that local bond and equity trading had been suspended. They could then resume.
It would be chaotic, at least for the short term. Russia’s major firms, which are also listed on New York and London markets, saw their international shares drop to almost zero during the crisis. They have since been stopped.
Jane Foley, a Rabobank currency strategist, stated that there are many financial institutions sitting on Russian assets they wish to get rid of.
They have no other choice than to sit on them. However, if they are allowed trade, selling could be very persistent.”
It won’t end there. Russian central bank has already increased interest rates by more than 9.5% to 20% and introduced capital controls to prevent a financial crisis and introduced capital controls to prevent a financial crisis.
JPMorgan, one of the largest western investment banks, now predicts that the economy will plummet 7% in 2022 due to a combination of bank run concerns, sanctions damage, and the immediate inflation surge triggered by a 40% drop in the rouble.
This compares to the 3% predicted growth for the year’s beginning. This also implies a peak to trough drop of approximately 12%. This would be more than the 10% plunge in 1998’s rouble crisis, 11% loss during the global financial meltdown, and the 9% slump caused by the COVID-19 pandemic.
Arthur Budaghyan (chief emerging-market strategist, BCA Research) stated that “The CBR might raise rates a little further, but that would be the safest assumption at the moment.”
However, the most important steps at this stage could be capital control measures to keep the financial system in check.
Budaghyan stated that it is important to ensure banks function and can process payments. Credit flow must also be maintained so the economy can at least function in some capacity.
