Russia, weighed down by sanctions, on the way to bankruptcy – Liberation

War between Ukraine and Russiacase

Rating agency Fitch has once again downgraded Moscow’s debt rating, assuming the risk of an “imminent” default by the Russian state.

One letter less and more worry. Ratings agency Fitch on Tuesday downgraded Russia’s debt rating again from “B” to “C” due to “events that further undermined Russia’s willingness to repay the public debt.” According to her, the risk of a default by the Kremlin “inevitable”, because of the massive sanctions imposed after the invasion of Ukraine, which weakened the Russian economy like never since the collapse of the USSR.

Following the exclusion of many Russian banks from the Swift system, the blocking of foreign exchange reserves by the Central Bank of the Russian Federation, aviation restrictions, the seizure of the assets of hundreds of oligarchs, an embargo on the export of electronic or aviation components, the United States and, to a lesser extent, the European Union announced an embargo on Russian gas and oil on Tuesday. A clear escalation of repression against Moscow. Moreover, this Wednesday morning, the EU introduced a new series of sanctions.

In early March, Fitch, along with other major agencies Standard & Poor’s and Moody’s, already placed its rating on Russia’s long-term debt in the category of countries that are likely to fail to repay. Judging by market levels, the probability of default in Russia now stands at 80% from 50% a week ago. However, the lower the credibility and rating, the less creditors will trust the country and the less it will be able to borrow money at reasonable rates.

The collapse of the ruble

To justify its decision, Fitch cites a presidential decree signed on March 5 that could allow Russia to reimburse certain countries’ creditors in rubles rather than foreign currency. The States concerned are those which have been placed as “hostile” Russian authorities on Monday. This list includes the countries of the European Union, Australia, Great Britain, Canada, Monaco, South Korea, the USA, Switzerland and Japan. However, with the start of the war, the ruble collapsed, losing more than two-thirds of its value.

“More generally, tougher sanctions and proposals that could restrict energy trade raise the likelihood of a Russian political reaction that includes at least selective default on its sovereign obligations.” notes Fitch. It is also possible that technical barriers, such as blocking money transfers, prevent debt repayment.

However, in recent days, some experts believed that a default could be avoided, since the sale of oil and gas at a good price made it possible to limit pumping. In his column for releasedOn Monday, Pierre-Yves Geoffard, a professor at the Paris School of Economics, recalled in particular that the sanctions imposed in 2014 on Russia after the invasion of Crimea certainly weakened the Russian economy without causing a collapse. And that even if the response is stronger today, the Kremlin still has significant partners, starting with China. However, sanctions announced by the West on Tuesday against Russian oil and gas imports could change the situation.

Moscow’s default will be the first since 1998. At the time, Russia was unable to repay its debt and was in the middle of a major financial crisis. Then inflation soared, and the economies of several other neighboring countries suffered.

“Serious blow,” the Kremlin admits

Asked about it last week, Kremlin spokesman Dmitry Peskov was rather vague. One “hostile economic environment” it’s necessary “minimize the consequences”, he explained, while assuring that Russia “remain standing”. Before half-wordly admitting that the risk of bankruptcy cannot be ruled out, Russia “serious blow” who puts it “honesty” The Prime Minister, for his part, repeated twenty years of Russian recipes: import substitution with local products and diversification of income sources.

The Moscow Stock Exchange, which has become a symbol of growing concern, was closed for several days with a possible reopening on Wednesday. The country’s central bank announced measures prohibiting foreigners from selling their Russian shares and withdrawing funds from the Russian financial market due to the outflow of foreign investment. It is also forbidden to leave Russia with more than $10,000 (€9,100) in cash.

Since the 2014 sanctions, the Kremlin has accumulated solid reserves to counter the sanctions. But Russian citizens, whose purchasing power has declined in eight years in a sluggish economy, are in a different situation. Especially since many finance their material well-being through loans, and nearly two-thirds of them have no savings, according to a 2021 Levada Institute survey.

“If you have loans or other debts to banks, you must quickly repay them. The crisis increases the risk of losing sources of income”, for example, financial adviser Sergei Leonidov insisted last week in an interview with RIA Novosti. The signs of the fragility of the economy and the economic future that everything predicts are very bleak.

Leave a Comment