The IMF says a Russian debt default is no longer ‘improbable’ after banks freeze half of Moscow’s foreign reserves

March 14, 2022, 7:55 AM UTC

A Russian sovereign default is no longer an “improbable event,” International Monetary Fund (IMF) managing director Kristalina Georgieva said on Sunday, as economic sanctions prevent the country from tapping into its war chest of foreign reserves and paying down outstanding debt.

“Russia has the money to service its debt, but cannot access it,” Georgieva said on CBS’s Face the Nation, as Russia risks defaulting on its debt this week.

Russia had built up approximately $640 billion in foreign reserves since it last invaded Ukraine, annexing Crimea in 2014 and suffering a slew of economic sanctions in retaliation. The Russian central bank could have used those reserves to prop up the value of the ruble and salvage its economy this month, after sanctions levied against Russia over its February invasion of Ukraine caused the currency to tank.

Yet Russian Finance Minister Anton Siluanov admitted Sunday on state television that U.S., European, and Japanese sanctions mean the central bank can no longer access about half of its foreign reserves. Siluanov said that, so long as sanctions against the country remain in effect, Russia would use rubles to pay back its debt—even if the debt is owed in foreign currency.

Russia is scheduled to pay $117 million on two dollar-denominated bonds on Wednesday. If the country doesn’t pay, it has a 30-day grace period to make a payment before it is technically in default. The bond does not allow Russia to pay its obligations in rubles, which means Russia’s promise to pay back debts in rubles would still trigger a default.

The international finance sector is bracing for such an event, which would mark Russia’s first default on debt since 1998, and its first on foreign-held debt since 1917. Fitch downgraded its rating for Russian government bonds to its second-lowest level last week, saying that a Russian debt default was “imminent.” Moody’s and S&P have also downgraded their ratings of Russian bonds to junk status.

Georgieva noted that banks only have $120 billion in exposure to Russia, which she called “not systemically relevant.” But a default could still cause significant pain to financial institutions with Russia exposure.

For example, U.S. fund manager Pacific Investment Management Co. (Pimco), according to the Financial Times, holds $1.5 billion in Russian sovereign debt and an additional $1.1 billion in credit default swaps—contracts that oblige Pimco to compensate other bondholders in the event that Russia defaults on its sovereign debt.

Russia can still access about half of its foreign reserves, which are held in currencies like the Chinese yuan or in assets like gold. Siluanov on Sunday expressed hope that Russia could expand its yuan holdings, which currently make up 13% of its total reserves, as China has so far said it would “not participate” in sanctions against Russia.

But Russia’s gold pile, which makes up about $130 billion of its reserves and is held in a vault in the Russian central bank, might be the next target of sanctions.

Last week, a bipartisan group of U.S. senators introduced a bill that would impose penalties on any U.S. entity that knowingly transacts with the Russian central bank’s gold, and would punish those who buy and sell gold in Russia. 

U.S. Sen. Angus King said the proposed sanctions would “further isolate Russia from the world’s economy and increase the difficulty of Putin’s increasingly costly military campaign.”

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