The risk of the Kremlin and its banks defaulting on their debts is higher than at any point since the invasion of Crimea as S&P cut Russia’s credit rating into junk territory and warned of more downgrades.
Investors have piled into credit default swaps on debt owed by the Russian government and its biggest lenders, with the cost of insurance seven times higher on sovereign bonds than at the start of 2022.
The surge meant it cost more than $900,000 a year to protect $10m of Russian government debt against default for five years after the invasion of Ukraine sparked a market rout.
Credit default swaps specifically on sovereign debt have rocketed to a post-financial crisis high.
Credit ratings agency S&P downgraded Russia’s sovereign debt from a BBB- rating to BB+ into junk territory on Saturday, saying the economic damage from sanctions “might be difficult to contain”.
Moody’s also warned it could cut Russia below investment grade with Moscow facing higher borrowing costs from being put into the group of riskier junk-rated countries. It means credit ratings agencies believe Russia is at higher risk of defaulting on its debt.
S&P said: “The sanctions announced to date could carry significant negative implications for the Russian banking sector’s ability to act as a financial intermediary for international trade.
“Apart from the immediate disruptions to economic activity that the sanctions could cause, second-round effects on domestic confidence could also be substantial.”
The invasion has caused turmoil for Russian assets with the rouble hitting record lows and Moscow’s stock market suffering one of the worst collapses in history on Thursday.
The conflict has prompted warnings of a new global economic shock, as China watches Ukraine for signals on what response an attack on Taiwan would meet.
Analysts have warned the West’s response to the invasion of Ukraine could be studied by China as it assesses whether it can risk seizing the nearby island by force.
Beijing considers Taiwan, officially called the Republic of China, to be a breakaway Chinese province and has stated an aim to regain control.
Analysts at Berenberg ranked a hypothetical Chinese attack on Taiwan as “the worst geopolitical risk”, with “much starker” implications for the global economy than the Ukraine invasion.
Economist Holger Schmieding warned the global recession risk would be very high if the US and China were drawn into a feud over Taiwan, saying a hot conflict is “not unthinkable”.
Taiwan, situated off China’s south-east coast, is a lynchpin of the United States’ geopolitical strategy in the Pacific region, and Washington has stated it will support Taiwan if the island is attacked.
Its leaders have stood in solidarity with the government in Kyiv. Lai Ching-te, Taiwan’s vice-president, last week said: “The principle of self-determination cannot be erased by brute force”.
