Russian ruble falls to all-time low following economic sanctions
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The country narrowly avoided its first default since 1998 last week when $117 million (£88.89m) was due. Speculation had mounted that Russia may attempt to pay the dollar based debt in rubles, which would have counted as a technical default, after President Putin issued a decree for ‘unfriendly countries’ to only be paid in the struggling Russian currency. European investors have however confirmed they received the money due in US dollars. Russia is far from out of the woods though, with more bond payments due in the coming weeks and months.
Meanwhile its access to foreign currency has been severely compromised by sanctions which have frozen around half of the central bank’s $640 billion (£486.76bn) war chest.
On 21 March another payment of $66 million (£50m) is due, followed by payments of $102 million (£77.58m) on 28 March and $359 million (£273.04m) on 31 March.
A major test then comes on 4 April with a $2 billion (£1.52bn) payment due.
Monday’s payment will prove easier for Russia with a clause allowing repayment in rubles rather than dollars, avoiding the need to use up remaining reserves of foreign currency.
Many of the bonds issued after 2014 have this feature meaning some of Russia’s upcoming debts will be easier to pay than others.
In total Russia faces over $4.5 billion (£3.43bn) by the end of 2022 in bond payments though, with credit ratings agency Fitch so far downgrading Russia to a C rating, usually used when default is imminent.
Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset management said he believed the risks of default are now “significant”, adding that Russia had been “put on the backfoot” and hadn’t expected the level of sanctions seen, particularly those targeting the central bank.
Mr Ash warned the biggest hit would be to Russia in the event of a default.
He explained: “Default hurts Russians above everything and if they want to get continuing access to Chinese financing, the Chinese will be very reluctant to fund a country that’s in default.”
“And if they did fund Russia, that was in default, they would probably charge extortionate rates for that.”
While Russia still has some ability to make debt payments Mr Ash suggested it may use threats not to as a way of encouraging investors to lobby for more moderate sanctions.
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Russia’s finance ministry, central bank and wealth fund are all currently under sanctions with an exemption granted for US investors to still receive payments by the US Office of Foreign Assets Control, however this exemption is set to end on 25 May.
If sanctions still remain an extension could be quite likely though in order to protect US investors.
Christopher Granville, managing director of TS Lombard, told Reuters “Why would they want U.S. creditors to suffer?”
“Also the payments will hurt Russia by eating into their hard currency reserves.”
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