Russian debt default ‘imminent’, Fitch Ratings agency downgrades to junk

The agency today downgraded Russia’s sovereign rating by six points from “B” to “C”, moving it into junk territory, meaning there’s a bigger chance the government won’t be able to pay back its debts.

Fitch cited the decision by Russian President Vladimir Putin to allow certain foreign debts to be paid off in the plummeting rouble as a red flag. The decree allows entities in Russia to pay back debt in roubles if it is owed to a creditor from “countries that engage in hostile activities”.

That’s raised the spectre of Russia’s first default since 1998.

“More generally, the further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations,” ratings agency Fitch said.

Foreigners hold about $29 billion in Russian bonds. Russia is due to pay $107 million in coupons across two bonds on March 16.

Credit agency Moody’s has also slashed Russia’s sovereign rating to junk.

The alert was issued as the rouble sinks against the US dollar.

One dollar now buys 130 roubles, with the currency sinking by about 50 per cent since the invasion of Ukraine began on February 24.

And it could sink further.

“The combination of Western sanctions, the rising risk of default and the incentive to divest from rouble-denominated assets will likely further weigh on the currency,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, told Reuters.

Russia’s economy has been shattered by harsh economic sanctions imposed by the West in the wake of the Putin-led invasion of Ukraine.

Russian banks have been blocked from SWIFT, the global banking messaging system that enables transactions everywhere. Being kicked out means banks are unable to process payments with each other or overseas in any useful time frame.

The US and EU have also banned all transactions with Russia’s central bank. Canada, Japan and South Korea have announced a similar ban.

Russia’s media, oligarchs, retailers, industrial goods, airlines, transportation and financial sectors have all been targeted in sweeping sanctions.

And the US and UK have now announced Russian oil imports will be banned, considered by many as Russia’s last financial lifeline.

The MOEX Russia Index has been closed since February 25, with Russia’s central bank refusing to open the stock market. When it finally does reopen it will likely trigger a bloodbath as investors try to offload the toxic assets.

Russia’s key interest rate was doubled to 20 per cent on March 1 in an attempt to stem the contagion.

If Russia does default, it could push the country towards an economic crisis.

Companies pull out of Russia

It comes as major companies such as McDonald’s, Pepsi, Coca-Cola and Starbucks have joined in on a boycott of Russia, temporarily suspending their business in the country.

“Our hearts are with the people who are enduring unconscionable effects from these tragic events in Ukraine,” Coca-Cola said in a statement.

PepsiCo CEO Ramon Laguarta said the company would be suspending capital investments and all advertising and promotional activities in Russia along with stopping the sale of Pepsi products.

“As a food and beverage company, now more than ever we must stay true to the humanitarian aspect of our business,” Mr Laguarta said.

“That means we have a responsibility to continue to offer our other products in Russia, including daily essentials such as milk and other dairy offerings, baby formula and baby food.”

Starbucks CEO Kevin Johnson said the company would provide support to its nearly 2000 employees who live in Russia during the shutdown.

In announcing its Russia shutdown, McDonald’s said: “We cannot ignore the needless human suffering unfolding in Ukraine.”

– with Alexis Carey