When it comes to the economic and financial impact of the Russia-Ukraine war, most of the discussion in domestic media has focused on the negative effects in the U.S. That’s certainly understandable, but Russia isn’t being spared either, of course.
That was illustrated starkly Tuesday, when Fitch Ratings lowered its rating on Russia’s long-term foreign currency debt to C, “reflect[ing] Fitch's view that a sovereign default is imminent.” The “C” rating is third lowest rating on Fitch’s scale. The rating was lowered from “B”.
So why did the ratings agency act?
“The further ratcheting up of sanctions and proposals that could limit trade in energy increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations,” Fitch said.
“To a lesser extent, the risk of imposition of technical barriers to servicing debt, including through the direct blocking of transfer of funds or through clearing and settlement systems have also risen somewhat since our last review [March 2].”
Furthermore, a decree from Russian President Vladimir Putin last weekend “could potentially force a redenomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries,” Fitch said.
“In addition, the application of Central Bank of Russia regulation has restricted the transfer of local-currency OFZ [government] debt coupons to non-residents since late last week.”
Also last week, J.P. Morgan offered a bleak forecast for the country’s economy, predicting “a collapse in Russian GDP.” A report from the bank’s economists, led by Bruce Kasman, said, “The sanctions will hit their mark on the Russian economy, which now looks headed for a deep recession.”
They forecast an 11% plunge in GDP from peak to trough, similar to the economy’s plight in the 1998 debt crisis.
“Sanctions undermine the two pillars promoting stability—the ‘fortress’ foreign exchange reserves of the Central Bank of Russia and Russia’s current account surplus,” the economists said.
Russia has about $643 billion of currency reserves, but about half of that is in foreign banks, inaccessible to Russian authorities. The current account measures a country’s trade in goods and services and capital transfers.
