(Bloomberg) — The International Monetary Fund joined a growing chorus that’s warning of a risk that Russia will default on its debt obligations as the nation suffers a deep recession caused by sanctions in response to its invasion of Ukraine.
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A Russian default is no longer “an improbable event,” IMF Managing Director Kristalina Georgieva told reporters Thursday. “It’s not that Russia doesn’t have money, Russia cannot use this money,” she said, adding that unprecedented sanctions against the nation will make it difficult for the country to convert its IMF reserve assets, known as special drawing rights, into currency.
Fitch Ratings this week said a bond default by Russia is “imminent” as a result of measures ushered in since the war broke out. Trading on credit-default swaps, used to insure against non-payment, has skyrocketed and suggest that there’s a 71% chance of default within a year and 81% within five years.
Investors and traders have been trying understand whether credit-default swaps could be settled if Russia repays its foreign debt in rubles after President Vladimir Putin signed a decree over the weekend allowing the government and Russian companies to do so.
Russia has $117 million worth of coupons on dollar bonds coming due on March 16 that could eventually trigger swaps if paid in local currency.
While it’s too early to quantify the war’s damage and reconstruction costs for Ukraine, and the IMF will need to wait for the end of fighting to make an assessment, it’s already clear that they will be massive, Georgieva said.
Russia’s invasion has resulted in about $100 billion worth of Ukrainian assets and infrastructure being lost or destroyed, President Volodymyr Zelenskiy’s chief economic adviser, Oleg Ustenko, said earlier on Thursday.
The IMF on Wednesday announced $1.4 billion in emergency financing for Ukraine, which Georgieva said will be used to help pay salaries, pensions and fund basic services.
‘Deep Recession’
Russia is moving into a “deep recession,” with the ruble’s plunge driving up inflation and severely denting the purchasing power of the Russian population, Georgieva said.
Georgieva said that while IMF members are highly concerned about the war, there’s been no discussion at the board about suspending Russia’s membership at the fund. The country would need to be excluded on the basis of a violation of its economic obligations based on the IMF’s articles of agreement; to this point, the nation is meeting its obligations, she said.
The IMF doesn’t have any loan programs with Russia, and its Moscow office isn’t operational, nor does the institution have a representative in the Russian capital, Georgieva said.
The IMF is likely to cut its projection for global growth for this year when it presents the next update to its World Economic Outlook ahead of the lender’s spring meetings next month, Georgieva said. The fund had already cut its projection for 2022 to 4.4% in January as the Covid-19 pandemic enters its third year, citing weaker prospects for the U.S. and China along with persistent inflation.
The war will have global spillovers, including through higher commodity prices such as wheat, corn, metals and fertilizer, and an impact on real incomes via inflation, the IMF chief said. That’s particularly dangerous for families living in poverty, for whom food and fuel are a higher proportion of expenses, she said.
The pressure from higher oil and gas prices is likely to make financial conditions tighten faster and more than previously expected, a situation that’s particularly troubling for emerging markets, Georgieva said.
(Updates with more managing director comments on Russia in 10th paragraph.)
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