Russia and Belarus are in ‘default territory’, says World Bank official

Russia and Belarus are close to defaulting due to massive sanctions imposed on their economies by the United States and its allies during the Ukraine war, World Bank chief economist Carmen Reinhart told Reuters.

The threat of a Russian default on $40 billion worth of foreign bonds — which would be its first major default since the years following the 1917 Bolshevik revolution — has loomed over markets since a series of sanctions on Russia and Moscow’s countermeasures largely isolated the country from global financial markets.

“Both Russia and Belarus are in default territory,” Reinhart said in an interview. “They’re not classified by the agencies as a selective default yet, but they’re pretty close.”

On Tuesday, Fitch downgraded Russia’s sovereign rating by six notches from “B” to “C”, which put the country in even more “junk” territory, and said a default was imminent as sanctions and trade restrictions undermined their willingness to pay the debt.

Reinhart said the repercussions on the financial sector have been limited so far, but that risks could arise if European financial institutions are more exposed to Russian debt than is assumed.

Foreign investors hold about half of Russia’s hard currency sovereign bonds and Moscow is expected to pay $107 million in coupons on two bonds on March 16. Russian companies have just under $100 billion in international bonds outstanding.

Foreign banks have exposure of just over $121 billion to Russia, with much of it concentrated in European creditors, according to data from the Bank for International Settlements (BIS).

“I worry about what I don’t see,” Reinhart said. “Financial institutions are well capitalized, but balance sheets are often opaque… There’s the issue of Russian private sector defaults. You can’t be complacent.”

China also rapidly expanded its lending to Russia after the annexation of Crimea in 2014, she said.

DIFFICULT SITUATION IN UKRAINE

Analysts say Ukraine will also need debt relief this year in the wake of massive war-related spending and a hefty debt load worth $94.7 billion at the end of 2021, though the country has promised to repay its debt. debt in full and on time.

Reinhart said it was reasonable to expect Ukraine to seek cash flow relief and expressed confidence that creditors would be receptive given the current situation. Kiev could also miss a next coupon payment, at least during the grace period, without its credit rating suffering, she said.

“Ukraine has and will have open doors due to its very difficult financial situation,” she said. “You are not declared in default while you are still within the grace period.”

Ukraine’s sovereign debt includes $1.6 billion owed to Paris Club creditors and $4.9 billion to non-Paris Club creditors, mainly China, according to debt experts.