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What would happen if Russia defaults on its debt?

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A man walks in front of Moscow's International Business Centre (Moskva City) complex in Moscow on March 11, 2022. -

Russia's economic isolationism may largely insulate global markets should Russia default on its debts. AFP via Getty Images

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Wednesday is the due date for two payments from Russia on its sovereign debt. The World Bank’s chief economist recently said Russia was “square in default territory” and “mighty close” to not paying its bills. What happens if those bills don’t get paid?

Just like the United States, the Russian government sells bonds — for the same reason any country does.

“If you’d like to expand a social program or you’d like to increase defense spending and you don’t have the money sitting on hand, which most places don’t, then you would go to the market and issue, in our country, treasuries,” said Tim Mahedy, chief economist at KPMG.

In Russia, they’re called OFZs. And Russia doesn’t issue a lot of them.

“You wouldn’t look at Russia and think, ‘Man, that’s something I should really be concerned with,’” Mahedy said.

The amount Russia owes to its bondholders comes to about 15% of its gross domestic product. By comparison, the U.S. owes around 100% of GDP worth of debt. So Russia would be in good shape financially to pay its debt — except for two problems.

“One, the magnitude of the sanctions,” said Roberto Sifon, chief analytical officer for sovereign debt at S&P Global Ratings. Sanctions this massive, freezing Russia’s central bank assets, make it mighty hard to make payments.

Problem No. 2: It’s not even clear Russia wants to pay on its debts. 

“One of the first measures they took was to forbid the transfer of debt payment to foreign investors,” Sifon said.

Russia said it could pay its debt in rubles, but rubles would be useless to foreign investors. They’re worth pennies on the dollar, and these days you can’t really convert them to dollars. S&P, as well as Moody’s Investors Service and Fitch, have downgraded Russian debt; Fitch said default was imminent.

So what if Russia defaults?

“The immediate consequences for Russia are not very significant,” said Elina Ribakova, deputy chief economist at the Institute of International Finance. “However, the long-term implications are severe.”

Basically, who’s going to trust Russia to pay its debts in the future if it defaults now?

“Once you have defaulted on your debt, it takes a long time for foreign investors to come back because they’re worried. They remember that episode,” she said.

The door to raising money from the world will be shut for a long time — and it is a mighty big door. 

It took Argentina 15 years to regain access to the world’s investors after it defaulted in 2001. Russia may also have to pay very high interest rates just to get financing, and that can drive up interest rates in the rest of the country, which limits economic growth. As for the effects of a default on the rest of the world?

“In terms of impact of global markets, I don’t think it will be a significant impact,” Ribakova said.

Russia has been isolating itself from the rest of the world financially for years, so the rest of the world is also insulated from Russia, she said. Most of Russia’s debt — roughly 80%, according to the Wall Street Journal — is owed to investors inside Russia. About $60 billion is owed to investors in the rest of the world, Ribakova said. 

Some bondholders would get stung, including big-name investment firms, but the overall exposure is pretty low.

“The amount of Russian assets held by U.S. banks across border exposures is less than Poland, half of Sweden, one-fifth of Italy and one-fiftieth of the U.K.,” Mahedy said.

But there is a catch — and it’s cruel. Some developing countries could easily pay a severe price for Russia’s default.

“If you start to see investors get very nervous about Russia or default, that can spread to some of these countries that have nothing to do with this,” Mahedy said. “Just out of a pure flight to safety where people don’t understand what’s going on in the world … they can pull money out of developing countries almost overnight.”

And that risks currency devaluation and can even usher in a recession.

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