Debt deadline and central bank hikes threaten in Russia

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LONDON, March 11 (Reuters) – The cost of Russia’s invasion of Ukraine will become much clearer next week as a previously unthinkable sovereign default looms, further central bank emergency action is likely and a stock market crash is guaranteed when it reopens.

Moscow’s “special operation” in its former Soviet neighbor cut Russia off from key parts of global financial markets by the West and triggered its worst economic crisis since the fall of the Soviet Union in 1991.

Wednesday could mark another low. The government is to pay $117 million for two of its dollar-denominated bonds. But it has signaled it won’t, or if it does, it will be in rubles, which amounts to a default. Continue reading

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Technically, it has a 30-day grace period, but that’s a minor point. If it does, it would be the first international default since the Bolshevik revolution over a century ago.

“Default is imminent,” said Roberto Sifon, a top analyst at S&P Global, which just hit Russia with the world’s largest credit downgrade of any country. Continue reading

That state-owned energy giants Gazprom and Rosneft have made international bond payments in recent days, and that there are around $200 billion in unapproved state reserves, offers a glimmer of hope that may not materialize, although the odds are slim.

Default of Russia threatens

Wednesday could also be busy for other reasons.

Russian financial newspaper Vedomosti reported this week from central bank and Moscow stock exchange sources that suspended local stock and bond trading could resume by then.

It would be chaotic, at least in the short term. Russia’s big companies, which are also listed on the London and New York stock exchanges, saw these international stocks fall to virtually nothing when the crisis hit and have now been halted. Continue reading

“There are many financial institutions that are sitting on Russian assets that they want to get rid of but can’t,” said Rabobank currency strategist Jane Foley.

“You have no real choice but to sit on it. But that means that if they’re allowed to trade, the sales could be pretty stubborn.”

Ruble plummets as conflict sparks unprecedented sanctions

RECESSION

It won’t end there. Russia’s central bank is due to meet Friday after already more than doubling interest rates to 20% and imposing sweeping capital controls to try to prevent a full-blown financial crisis. Continue reading

Western investment banks like JPMorgan now expect the economy to contract by 7% this year, owing to a combination of bank run worries, sanctions damage and the immediate surge in inflation caused by a 40% plunge in the ruble .

This compares to forecasts of 3% growth earlier in the year. It also means a peak-to-trough plunge of about 12%, which would be larger than the 10% plunge seen in the 1998 ruble crisis, the 11% lost during the global financial crisis, and the 9% plunge in the COVID-19 Pandemic .

“The CBR could hike rates a bit more, that would be the safest assumption right now,” said Arthur Budaghyan, chief emerging markets strategist at BCA Research.

However, the more important steps in this phase could be further capital control measures to try to keep the financial system under control.

“It’s much more important to ensure that the banks can function, continue processing payments and keep credit flowing into the economy so that it can function at least in some way,” Budaghyan said.

The Russian stock market crashes much more than in other crises
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Reporting by Marc Jones; Editing by David Gregorio

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