Two women walk past a currency exchange office screen displaying the exchange rates of US Dollar and Euro to Russian Rubles in Moscow, Russia, on April 1. Photo / AP
Two women walk past a currency exchange office screen displaying the exchange rates of US Dollar and Euro to Russian Rubles in Moscow, Russia, on April 1. Photo / AP
Russia is on the brink of a major default on its foreign debt which would send its economy spiralling and impact its invasion efforts – but it will also create further shock to the cost of living around the world.
Crippling economic sanctions have paralysed about half of Russia's US$640billion ($950 billion) foreign money, meaning it has been forced to pay out debts with its local currency rubles, rather than US dollars.
However, it is unlikely that investors would be able to convert the rubles into the dollar equivalent of the amount Russia was obligated to pay.
Russia has a 30-day grace period to make the payments before it will officially be in default on May 4.
Yet Russia has rejected any claims that it is headed towards default.
Instead, it has threatened legal action against any default outcome, with Finance Minister Anton Siluanov saying they would "sue" because they had "taken all the necessary steps to ensure that investors receive their payments".
But despite any looming legal challenge, Associate Professor Eliza Wu from the University of Sydney said if international rating agencies downgraded Russia to default status it would have long-term consequences, including stifling future economic growth.
Two women walk past a currency exchange office screen displaying the exchange rates of US Dollar and Euro to Russian Rubles in Moscow, Russia, on April 1. Photo / AP
"It would then be more difficult for the Russian government and all borrowers within the Russian Federation to access external debt markets, not only in the near term but also for many years afterwards," Dr Wu told news.com.au.
"This has been the experience with debt crises in the past ... It will be very hard for Russia to convince anyone to lend to them again in the foreseeable future. Future borrowings will come at a high cost."
All other borrowers within Russia would also be pulled down in their perceived creditworthiness by a default and the real economy will likely be hit hard, she added.
"It will take a long time for the Russian economy to come back from a sovereign default," Dr Wu said.
The default would further weaken the balance sheets of domestic Russian banks and restricts its banking sector's capacity to support the crashing Russian economy, but would also impact Europe, in particular, and make borrowing more expensive globally, she said.
US investment firm Fidelity has warned that the financial shocks from Russia's invasion of Ukraine and the economic sanctions are exacerbating global inflation pressures – which include food and petrol prices.
Andrew McCaffery, Global CIO at Fidelity International, said how long the invasion continues will influence economic outcomes across the world.
"The war in Ukraine has already caused significant economic damage, and it will continue to shape the near-term outlook for global economies, particularly Europe," he said.
"Outcomes over the coming quarter will be heavily influenced by the timeline to a resolution and the easing of trade disruptions.
"In the meantime, any hopes for a moderation in energy prices and supply-chain disruptions have been dashed. Together, these dynamics will continue to dampen growth and put upward pressure on already high inflation."
While rating agencies like Moody's and Standard & Poor's have a hefty influence on Russia's default issue, it is the creditors – the people who are owed the money – that will really determine what happens next.
Dr Wu said the financial sanctions are creating a serious currency mismatch for Russia right now.
"The Russian government is sanctioned from accessing the hard currencies like USDs that are needed to make their debt repayments. They are just doing what they can to slow things down right now," she said.
Russian President Vladimir Putin. Photo / AP
"It will largely depend on what the creditors are prepared to accept in the interim. Russian government might ask creditors to exchange their current bonds for new bonds that they will issue at lower value for instance. They may try to convince their creditors that they are willing to repay them but are prevented from doing so.
"They might try to make their case that they do have the capacity and willingness to repay their debt but current circumstances prevent them from doing so and they need more time."
But others believe Russia is already in the throes of a financial bloodbath.
"If Russia doesn't pay on time, doesn't pay in the currency in the contract, that's a default – it's crystal clear," Timothy Ash, a senior sovereign strategist at BlueBay Asset Management told The New York Times.
