Russia’s invasion of Ukraine has serious human and financial consequences.
Russia collectively borrowed about $ 480 billion; Some of these are sovereign loans – which the Russian government has borrowed from Russian investors in other currencies, including the dollar, the euro, the yuan, etc., from the ruble or other investors around the world. Some of those loans are corporate loans – what Russian companies have borrowed to raise money.
When Western investors think of potential Russian defaulters, they focus on a very small percentage: about $ 20 billion.
Distressed debt investors, such as Hans Hummus, CEO of Greelock Capital, insist that the amount is small and the initial default is already widely expected. If Russia defaults on some or all of its debt, the news is likely to exacerbate global market volatility, but in the long run, the biggest risk to the world economy and the US economy is the “unintended consequences of sanctions against Russia and its consequent supply chain problems.” He said.
“US inflation will not be affected by default in Russia. What is going to affect inflation in the United States is sanctions with a lining of supply chain problems,” Hume explained.
To the surprise of some investors, Russia paid its first interest on dollar-denominated loans earlier this week. As the experts point out, this is the first page of the first chapter of a long book.
Even in non-war times, a country defaulting on its debt is a process-heavy event; There are sharp differences between borrowers and lenders, and potential lawsuits and counter-lawsuits are usually filed in the country where most bonds have been issued. Generally, there are some types of price compromises. At the moment, most of Russia’s debt is trading between 0 .05 and 25 .25 per dollar, according to Charlie Robertson, chief global economist at Renaissance Capital.
During the war, there are countless additional casualties. Due to Western sanctions against Russia, the country is largely isolated from the global banking system. The US Treasury has offered Russia a repayment of its dollar-denominated debt by the end of May; It is unknown at this time what he will do after leaving the post.
There are also some loan agreements that Russia must repay in dollars or euros; Some investors think that Russia can pay the ruble, while the game is playing and it is locked outside the Western banking system. It is true that two-thirds of Russia’s 30 630 billion reserves have been frozen by the West, but if Russia pays rubles for certain bond deals, there will be an automatic default trigger. As Jay Newman recently wrote in The Wall Street Journal, “If Putin gives you money, I wish you luck in collecting it.”
Will a potential Russian loan default affect the average American’s 401K retirement plan? The unanimous answer is “no.”
The amount of Russian debt in the portfolio of American banks is very small. Bonds are in special emerging market funds and they are a small part of that fund. Additionally, American banks are reducing this small amount of exposure in order to comply with sanctions and avoid unnecessary risk.
Across the system, there are also serious stop gaps, some of which were established in 1998 after defaulting on Russia’s internal, ruble-defined debt, and hedge fund Long Term Capital Management was unveiled and sent to the world market shockwave. As a result of the 2007-2009 credit crunch, the US banking system has an additional number of guard rails. Theoretically, the American banking system is one of the most stable points in history.
Theoretically, a Russian defaulter would have the most serious consequences for Russia itself; The ruble has lost more than half of its value since the war began. According to Robin Brooks, chief economist at The Institute of International Finance, Russia’s GDP will shrink by -15% this year and some or all of the defaulters will make the number worse.
The real concern for the global economy is not the extent of Russia’s debt or when or how it repays some or all of that debt: it focuses on sanctions. Before the war, Russia and Ukraine exported about 25% of the world’s wheat. Russia and Ukraine were the top five exporters of a variety of seeds and cereals, from barley to maize to sunflower; Humans and animals take this product in different forms. According to RBC Capital Markets, Russia is also the largest exporter of fertilizers, so farming around the world without fertilizer components from Russia becomes more expensive.
In addition, Russia is one of the largest energy exporters in the world, which means even higher food prices among other costs, as truck drivers use diesel to transport groceries.