How Russia’s default would look like

6 April, 12:49 PM

Putin will need to think long and hard now whether he wants to avoid a formal default on external debt, which will have negative consequences for the Russian economy for years to come.

In reality, unless Putin withdraws from Ukraine it is hard to see Russia avoiding default here, unless it does something like transports planes of physical cash dollars or gold West, but even then it’s hard to see any international bank being willing to provide for settlement for bondholders to avoid default. And indeed whether international bondholders would want to accept settlement.

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Now people will say what does default matter? 

It matters because it will likely lock Russia out of international capital markets for years (decades) to come, and will complicate and increase the financing costs even where Russia seeks to secure financing from friendly nations such as China.

If it goes into default now, likely it will remain in default for years to come.

You might argue, well what about 1998, Russia went into default, devalued, etc, but had come out of default by 2000, and was back at investment grade by 2005/07. Yes, but that was with the cooperation of international capital markets, the IMF, rating agencies, etc. this time around Russia will remain an international pariah, as long as it remains in Ukraine, and likely while Putin remains at the helm in Moscow. There will be no IMF support, and how will Russia negotiate with bondholders to agree to a debt restructuring? How will it be able to come out of default? And the climb back up the ratings and the then moderation in financing costs will take years and years to come.

And as noted above, as long as Russia remains in default:

a) It will remain largely cut off from international capital markets for years to come;

b) If it can find investors willing to invest, they will lend only at exorbitant rates - very high double digits.

c) Even friendly lenders, like China, will be reluctant to lend, unless at extremely high rates, and I think will be nervous about getting caught up in secondary sanctions.

d) Even foreign direct investors will be reluctant to invest in 

Russia as they often benchmark country risk from country credit ratings which will remain at default settings now for years - actually ratings have been withdrawn.

e) This will impact both the sovereign’s ability to borrow but also corporates and banks. Russia inc will be marked down for years to come as an international financial market pariah.

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