Is Russia Heading for A Sovereign Default

Trading and settlement on Moscow Stock exchange continues to be suspended till 8th March and given the unprecedented sanctions resulting from Ukrainian crises, it seems that suspension will continues. Announcement was first made website of the Moscow Stock Exchange, MOEX.com on February 24 and since then suspension is continuing.

Following the economic crises and with the intention to contain already shaking financial system   Russian Central Bank i.e. Bank of Russia has increased interest rate to 20% per annum . From the lows of 4.25% in March 2021, rate has increase nearly five times to 20% in March 2022. Before the invasion rate stood at  8.5% in beginning of February 2022.

Crises of such a magnitude was witnessed in 2014 when Russian Central Bank increased the rate from 9.5% to 17% following the Russian annexation of Crimea   

Russian rouble is continually tumbling and has lost over 40% since beginning of year. Sanctions imposed on Russia are unprecedented and unparallel. Russian financial systems have been plugged out of SWIFT messaging network. Majority of the Global corporations are severing its relations with the country and writing off Russian investments in their P&L. The key rate increase has been done with the intention of protecting citizens’ savings from depreciation.  As increase in rates will compensate for rising depreciation and inflation concerns. Measures will also support financial as well as price stability.

Governor Elvira Nabiullina of Bank of Russia earlier made a Statement   explaining the various measures being taken by Central Bank for maintain financial stability. Steps have been taken to put Capital control for stopping the flight of capital outside Russia. Banks have been exempted to make provision for mark to market losses in the financials. This includes exemption from booking fair value losses on investment and losses arises from currency risk due to re-measurement of Assets and Liabilities designated in foreign currency. Steps will artificially prevent deterioration of credit quality as well as help in maintaining required Capital Adequacy Ratios.

One of the important developments is the attempt by Russia to develop the alternative for SWIFT for restoring cross border payments. Governor Elvira Nabiullina has said that Russia is developing the financial messaging system (FMS) for allowing the participation of foreign participant for processing cross border payment.  Russian National Payment Card System will handle all payment card traffic within Russia. The sanctioned banks’ international payment systems cards will continue to work normally inside Russia.

The Bank of Russia has reduced the cost for people purchasing foreign currency through brokers from 30 percent to 12 percent, while the fee for legal entities has been set at 12 percent of the transaction amount.

Economic Sanctions may soon trigger wide spread defaults which may trigger insurance obligation of insurer and re-insurer. Keeping in view the prospective financial catastrophe, Russian Central Bank has increased Authorised Capital of its Insurance Subsidiary Russian National Reinsurance Company (RNRC) to 300 billion rubles from 71 billion rubles.

Moody’s and Standard & Poor’s have downgraded the country’s sovereign rating to junk and Russia. Russia has an estimated $33 billion in dollar-denominated sovereign debt and  about $135 billion of external liabilities. Default may have a spill over effect on Global Financial Systems. Billions of Dollars of Credit Default swaps are linked to Russian Payments. Freezing of overseas assets of Russia may propel global structural liquidity crises.

Bureau Galactik Views

Related articles